14. INCOME TAXES

The Company’s provision (benefit) for income taxes is comprised of the following:

 

The income tax provision in 2017 and 2015 and the income tax benefit in 2016 was primarily due to U.S. federal and state taxes. The unfavorable change in income taxes in 2017, as compared to 2016, was primarily due to the enactment of the Tax Cuts and Jobs Act (the “Act” or “Tax Reform”) and an increase in income earned in the U.S., partially offset by the recognition of excess tax benefits related to share-based compensation. The favorable change in income taxes in 2016, as compared to 2015, was primarily due to a reduction in income earned in the U.S. A $4.2 million and $28.6 million benefit was recorded to additional paid‑in capital in the years ended December 31, 2016 and 2015, respectively, with a corresponding reduction to current taxes payable. This was primarily due to the utilization of current year tax benefits and NOL carryforwards derived from the exercise of employee stock options and vesting of restricted stock units.

Tax Reform was enacted in December 2017. The Company is primarily subject to the business related provisions outlined in Subtitle C to the Act, as well as the international tax provisions for inbound transactions outlined in Subtitle D, Part II, to the Act. The Company recorded a $21.5 million discrete tax expense in the quarter ended December 31, 2017 to account for the reduction in the U.S. federal tax rate from 35% to 21%. The Act also removes the exception for performance based compensation in §162(m) of the Internal Revenue Code (the “Code”) on a prospective basis. Performance based compensation provided pursuant to a written binding agreement entered into prior to November 2, 2017 will continue to be deductible provided no significant modification is made. The Company believes that performance based compensation, provided prior to November 2, 2017, was provided pursuant to written binding agreements and will be deductible. As of December 31, 2017, the Company has a deferred tax asset of $13.3 million for this item, which is recorded as a provisional amount. If the Company’s position is not sustained, then it would record a deferred tax expense for part or all of this amount. The accounting for this item is incomplete and may change as the Company’s interpretation of the provisions of the Act evolve, additional information becomes available or interpretive guidance is issued by the U.S. Treasury. The final determination will be completed no later than one year from the enactment of the Act.  

No provision for income tax has been provided on undistributed earnings of the Company's foreign subsidiaries because such earnings may be repatriated to Ireland without incurring any tax liability. Cumulative unremitted earnings of overseas subsidiaries totaled approximately $160.3 million at December 31, 2017.

The distribution of the Company’s loss before the provision (benefit) for income taxes by geographical area consisted of the following:

 

The components of the Company’s net deferred tax assets (liabilities) were as follows:

 

In March 2016, the FASB issued guidance as part of its simplification initiative that involves several aspects of the accounting for share-based payment transactions including the requirement that all future excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement. On January 1, 2017, the Company adopted this standard on a modified retrospective basis, which resulted in a $57.8 million increase to its deferred tax assets, a $3.7 million decrease in liabilities and a $61.5 million favorable cumulative-effect adjustment to accumulated deficit due to the change in the accounting treatment of excess tax benefits.

The activity in the valuation allowance associated with deferred taxes consisted of the following:

(1)The additions in each of the periods presented relate primarily to Irish NOL’s.

 

At December 31, 2017, the Company maintained a valuation allowance of $9.4 million against certain U.S. state deferred tax assets and $163.4 million against certain Irish deferred tax assets as the Company has determined that it is more-likely-than-not that these net deferred tax assets will not be realized. If the Company demonstrates consistent profitability in the future, the evaluation of the recoverability of these deferred tax assets could change and the remaining valuation allowances could be released in part or in whole. If the Company incurs losses in the U.S. in the future, or experiences significant excess tax benefits arising from the future exercise of stock options and/or the vesting of RSUs, the evaluation of the recoverability of the U.S. deferred tax assets could change and a valuation allowance against the U.S. deferred tax assets may be required in part or in whole.

As of December 31, 2017, the Company had $1.2 billion of Irish NOL carryforwards, $5.9 million of state NOL carryforwards, $57.5 million of federal R&D credits, $10.0 million of alternative minimum tax (“AMT”) credits and $11.9 million of state tax credits which will either expire on various dates through 2037 or can be carried forward indefinitely. These loss and credit carryforwards are available to reduce certain future Irish and foreign taxable income and tax and, in the case of the alternative minimum tax credits, may be refundable. These loss and credit carryforwards are subject to review and possible adjustment by the appropriate taxing authorities. These loss and credit carryforwards, which may be utilized in a future period, may be subject to limitations based upon changes in the ownership of the Company's ordinary shares.

In addition to deferred tax assets and liabilities, the Company recorded deferred charges related to certain intercompany asset transfers. Deferred charges are included in the following accounts:

 

The Company will adopt ASU 2016-16 effective January 1, 2018 requiring an unfavorable cumulative-effect adjustment of $0.9 million recorded to accumulated deficit to write-off the unamortized deferred tax charge at December 31, 2017. In addition, the Company will record a $17.8 million deferred tax asset to take account of certain basis differences on intangible assets, with a corresponding adjustment to valuation allowance.

A reconciliation of the Company’s statutory tax rate to its effective tax rate is as follows:

(1)Represents a $21.5 million deferred tax expense recorded as a discrete item during the three months ended December 31, 2017, as a result of the reduction in the U.S. federal tax rate from 35% to 21%  .

(2)Represents income or losses of non-Irish subsidiaries, including U.S. subsidiaries, subject to tax at a rate other than the Irish statutory rate.

(3)Intercompany amounts include cross-territory eliminations, the pre-tax effect of which has been eliminated in arriving at the Company's consolidated loss before taxes.

(4)Represents income or losses of Irish companies subject to tax at a rate other than the Irish statutory rate.

(5)Other permanent items include, but are not limited to, non-deductible meals and entertainment expenses, non-deductible lobbying expenses and non-deductible compensation of senior officers of the Company.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

The unrecognized tax benefits at December 31, 2017, if recognized, would affect the Company's effective tax rate. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. The Company has elected to include interest and penalties related to uncertain tax positions as a component of its provision for taxes. For the years ended December 31, 2017, 2016 and 2015, the Company's accrued interest and penalties related to uncertain tax positions were not material.

The Company’s major taxing jurisdictions include Ireland and the U.S. (federal and state). These jurisdictions have varying statutes of limitations. In the U.S., the 2014 through 2017 fiscal years remain subject to examination by the respective tax authorities. In Ireland, the years 2013 to 2017 remain subject to examination by the Irish tax authorities. Additionally, because of the Company’s Irish and U.S. loss carryforwards and credit carryforwards, certain tax returns from fiscal years 1999 onward may also be examined. These years generally remain open for three to four years after the loss carryforwards and credit carryforwards have been utilized.

During 2017, the IRS completed its examination of the year ended December 31, 2014 for Alkermes U.S. Holdings, Inc. without any material adjustments. The State of New York concluded their examination of Alkermes U.S. Holdings, Inc. for the years ended December 31, 2015 and 2014 and the nine months ended December 31, 2013, without any material adjustment. The years ended December 31, 2015 and 2014 for Alkermes U.S. Holdings, Inc. are currently under examination by the State of Illinois.