11. Income taxes

For the years ended December 31, 2017, 2016 and 2015, the components of loss before income taxes were as follows (in thousands):

 

The components of income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands):

 

With the exception of the newly formed U.S. Entity, we have incurred net operating losses since inception.  For the Ireland and Swedish operations, we have not reflected any benefit of net operating loss carryforwards (NOLs) in the accompanying financial statements. Strongbridge US, Inc, as a result of the intercompany service agreements, was in taxable income and determined they were able to recognize all deferred tax assets in 2016. In 2017, Strongbridge US, Inc. generated book loss as the Company decided this entity will market and commercialize certain products.  As such, given the expenses incurred, it is not more likely than not to recognize all deferred tax assets which results in the company establishing a full valuation allowance against its deferred tax assets.

Deferred taxes are recognized for temporary differences between the bases of assets and liabilities for financial statement and income tax purposes. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands):

 

We have evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets. Based on our history of operating losses in Ireland and Sweden and also the current year operating losses in the U.S., we have concluded that it is more likely than not that the benefit of our deferred tax assets will not be realized. The valuation allowance increased by approximately $7.6 million and $3.6 million during the years ended December 31, 2017 and 2016, respectively, due primarily to net operating losses.

The Company’s effective income tax rate differs from the ultimate parent company, Strongbridge Biopharma plc, Irish domestic statutory rate of 12.5% for the year ended December 31, 2017, 2016 and 2015.

 

At December 31, 2017, we had approximately $56.0 million of Swedish NOLs and approximately $2.3 million of Ireland NOLs, which have an indefinite life, and approximately $53.4 million of U.S. federal and $51.3 million of state NOLs, which begin to expire in 2031.  Through December 31, 2015 we operated through a permanent establishment in both Sweden and the United States. Relief is granted by way of crediting the U.S. tax against the Swedish tax. This tax credit can never exceed the Swedish tax on the income. Since the tax rate is higher in the United States than in Sweden, the Swedish taxable carryforward losses of $56.0 million can only generate a tax benefit if income is derived from sources other than the permanent establishment in the United States. Beginning January 1, 2016, the US operations that were not part of BioPancreate Inc occurred in a newly formed US corporation. There were no operating losses generated during 2016 in the U.S. except for a minor state NOL at BioPancreate.

At December 31, 2017, we had $8.9 million of U.S. federal orphan drug tax credit carryforwards, which begin to expire in 2032, and $84,000 of U.S. federal research and development tax credit carryforwards, which begin to expire in 2031. The orphan drug credit carryforward is attributable to the permanent establishment of the Swedish entity within the U.S.

Utilization of the NOLs may be subject to limitations under Swedish tax regulations or U.S. Internal Revenue Code Section 382 if there is a greater than 50% ownership change as determined under applicable regulations.

The Company files income tax returns in Sweden, the U.K., the United States, and various states within the United States.   In the normal course of business, the Company is subject to examination by federal, state and foreign jurisdictions, where applicable. The Company’s tax years are still open under statute from inception to present.  All open years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods.