15. Income Taxes

 

We are subject to U.S. federal, state and foreign income tax.  The geographical components of income (loss) before income taxes consisted of the following (in thousands):

 

 

The income tax provision consists of the following current and deferred tax (benefit) expense amounts (in thousands):

 

 

A reconciliation of the U.S. federal statutory income tax rate to our effective tax rate is provided below:

 

 

The significant components of our deferred tax assets and liabilities are as follows (in thousands):

 

 

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current corporate federal income tax rate to 21% from 35%. The rate reduction is effective January 1, 2018. We believe the Act will cause us to revalue our deferred tax assets and liabilities to the lower federal tax rate. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense.

 

Pursuant to the SEC Staff Accounting Bulletin ("SAB") No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), we may select one of three scenarios to determine a reasonable estimate arising from the Tax Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. We were able to provide a reasonable estimate for the revaluation of deferred taxes by recording a net tax provision of $162.2 million in the period ending December 31, 2017, which is offset by a change in valuation allowance with no net impact to tax expense. Other impacts of the Act including, but not limited to, provisional transition tax, expensing of qualified property and interest limitations are not expected to have a material impact to our financial statement presentation or disclosures. The final impact of the Act may be different from the provisional amounts reported due to changes in interpretations and assumptions of the current guidance available as well as the issuance of new regulatory guidance in the future. We anticipate the full financial impact will be determined at the time our 2017 U.S. corporate income tax return is filed in 2018.

   

The realization of deferred tax assets is dependent upon a number of factors including future earnings, the timing and amount of which is uncertain. A valuation allowance was established for the net deferred tax asset balance due to management’s belief that the realization of these assets is not likely to occur in the foreseeable future. We recorded a net decrease to the valuation allowance of $28.3 million for the year ended December 31, 2017, due to the revaluation of our net deferred tax assets resulting from the reduction to the corporate federal tax rate to 21% offset by the growth in net operating losses and credit carryforwards during the year. The increase of $143.3 million recorded to our valuation allowance during the year ended December 31, 2016 was due primarily to the increase in net operating loss and tax credit carryforwards.

 

In addition, the Company recognizes tax benefits if it is more likely than not to be sustained under audit by the relevant taxing authority based on technical merits. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained during audit. If the threshold is met, the tax benefit is measured and recognized at the largest amount above the greater than 50% likelihood threshold at time of settlement. The balance of unrecognized tax benefits at December 31, 2017 of $24.5 million, if recognized, would not impact the Company’s effective tax rate as long as they remain subject to a full valuation allowance. The following table summarizes the gross amounts of unrecognized tax benefits (in thousands):

 

 

As of December 31, 2017, we had approximately $1.0 billion, $1.2 billion and $0.4 million of U.S. federal, state and foreign net operating loss carryforwards, respectively. The U.S. federal net operating losses will expire from 2029 to 2037 if not utilized and the U.S state net operating losses will expire from 2024 to 2037 if not utilized.  We have research and development and orphan drug tax credit carryforwards of $245.1 million that will expire from 2029 through 2037 if not utilized.

 

We believe that a change in ownership as defined under Section 382 of the U.S. Internal Revenue Code occurred as a result of our public offering of common stock completed in April 2012. Future utilization of the federal net operating losses (“NOL”) and tax credit carryforwards accumulated from inception to the change in ownership date will be subject to annual limitations to offset future taxable income. At this time, we do not believe this limitation will prevent the utilization of the federal NOL or credit carryforward prior to expiration. It is possible that a change in ownership will occur in the future, which will limit the NOL amounts generated since the last estimated change. Our federal and state income taxes for the period from inception to December 31, 2017 remain open to an audit. Our foreign subsidiaries are also subject to tax audits by tax authorities in the jurisdictions where they operate for the periods from December 31, 2011 to December 31, 2017.

 

We may be assessed interest and penalties related to the settlement of tax positions and such amounts will be recognized within income tax expense when assessed. To date, no interest and penalties have been recognized.