Income Taxes
The Company files its U.S. and Irish income tax returns and income taxes are presented in the Consolidated Financial Statements using the asset and liability method prescribed by the accounting guidance for income taxes.
Income (loss) before provision for income taxes by country for each of the fiscal periods presented is summarized as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Ireland | | $ | (162,865 | ) | | $ | (164,797 | ) | | $ | (83,009 | ) |
Switzerland | | 480 |
| | — |
| | — |
|
U.S. | | 4,782 |
| | 5,833 |
| | 3,098 |
|
Loss before provision for income taxes | | $ | (157,603 | ) | | $ | (158,964 | ) | | $ | (79,911 | ) |
Components of the provision for income taxes for each of the fiscal periods presented consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
U.S. Federal | | $ | (2,478 | ) | | $ | 4,464 |
| | $ | 1,663 |
|
U.S. State | | 1 |
| | 1 |
| | 1 |
|
Switzerland | | 306 |
| | — |
| | — |
|
Ireland | | 5 |
| | — |
| | — |
|
Total current provision | | $ | (2,166 | ) | | $ | 4,465 |
| | $ | 1,664 |
|
Deferred: | | | | | | |
U.S. Federal | | $ | (2,200 | ) | | $ | (3,321 | ) | | $ | (963 | ) |
U.S. State | | — |
| | — |
| | — |
|
Switzerland | | — |
| | — |
| | — |
|
Ireland | | — |
| | — |
| | — |
|
Total deferred benefit | | (2,200 | ) | | (3,321 | ) | | $ | (963 | ) |
Total provision for income taxes | | $ | (4,366 | ) | | $ | 1,144 |
| | $ | 701 |
|
The Company adopted ASU 2016-09 on January 1, 2017. Pursuant to the adoption of ASU 2016-09, tax attributes previously tracked off balance sheet have been recorded as deferred tax assets, offset by a valuation allowance. In addition, the Company has reversed its non-current tax liability of $98,000, with the offsetting entry recorded to retained earnings pursuant to the adoption of this ASU. Further, year-to-date excess benefits of stock compensation have been recorded as a benefit to the tax provision. For the year ended December 31, 2017, the Company recorded excess tax benefits of $5.3 million, which were recorded as part of its income tax provision in the Consolidated Statements of Operations. The Company's income tax expense will continue to be impacted by fluctuations in stock price between the grant dates and the exercise dates of its option awards.
The provision for income taxes differs from the statutory tax rate of 12.5% applicable to Ireland primarily due to Irish net operating losses for which a tax provision benefit is not recognized, U.S. income taxed at different rates, and excess tax benefits from stock options. Following is a reconciliation between income taxes computed at the Irish statutory tax rate and the provision for income taxes for each of the fiscal periods presented (in thousands):
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Taxes at the Irish statutory tax rate of 12.5% | | $ | (19,700 | ) | | $ | (19,870 | ) | | $ | (9,989 | ) |
Income tax at rates other than applicable statutory rate | | 678 |
| | 813 |
| | 446 |
|
Change in valuation allowance | | 28,967 |
| | 25,200 |
| | 12,594 |
|
Share-based payments | | (8,242 | ) | | 422 |
| | 214 |
|
Tax credits | | (5,857 | ) | | (5,384 | ) | | (2,712 | ) |
Other | | (212 | ) | | (37 | ) | | 148 |
|
Provision for (benefit from) income taxes | | $ | (4,366 | ) | | $ | 1,144 |
| | $ | 701 |
|
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “TCJA”) was signed into law. It contains many significant changes to the U.S. income tax laws. The TCJA is effective in the first quarter of 2018 and, among other things, lowers the Company’s U.S. federal income tax rate from 34% to 21%. Accordingly, the Company has recorded a provision tax benefit of $0.4 million related to the remeasurement of its U.S. deferred tax assets to reflect the lower statutory tax rate. Due to the repeal of alternative minimum taxes, the Company anticipates that its future U.S. taxes will decrease due to its ability to use additional tax credits previously limited by the alternative minimum tax. However, the Company also expects an increase to its taxable income due to additional limitations imposed by the TCJA on the deductibility of compensation of certain of its executive officers.
As of December 31, 2017, the Company has not completed its accounting for the tax effects of the TCJA, but recorded a provisional net tax benefit based on the Company's best estimates. The provisional amounts incorporate assumptions made based upon the Company's current interpretation of the TCJA and are subject to revision as the Company receives and interprets any additional clarification and implementation guidance issued by the U.S. Treasury Department, U.S. Internal Revenue Service (the “IRS”) and other standard-setting bodies. Any adjustments to the provisional amounts recorded will be included as an adjustment to the provision for income taxes. Adjustments may materially impact the Company's provision for income taxes and effective tax rate in the period in which the adjustments are made. The Company anticipates its accounting for the tax effects of the TCJA will be completed in 2018.
Significant components of the Company’s net deferred tax assets as of December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating losses | | $ | 67,653 |
| | $ | 47,218 |
|
Tax credits | | 16,308 |
| | 4,937 |
|
Accruals | | 1,285 |
| | 1,322 |
|
Share-based compensation | | 7,444 |
| | 8,966 |
|
Gross deferred tax assets | | 92,690 |
| | 62,443 |
|
Valuation allowance | | (83,972 | ) | | (56,382 | ) |
Net deferred tax assets | | 8,718 |
| | 6,061 |
|
Deferred tax liability: | | | | |
Fixed Assets | | (605 | ) | | (148 | ) |
Net deferred tax assets | | $ | 8,113 |
| | $ | 5,913 |
|
The Company's deferred tax assets are composed primarily of its Irish subsidiaries' net operating loss carryovers, state net operating loss carryforwards available to reduce future taxable income of the Company's U.S. subsidiary, federal and state tax credit carryforwards, share-based compensation and other temporary differences. The Company maintains a valuation allowance against certain U.S. federal and state and Irish deferred tax assets. Each reporting period, the Company evaluates the need for a valuation allowance on its deferred tax assets by jurisdiction.
Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, especially the uncertainties surrounding the realization of deferred tax assets through future taxable income, the Company believes it is not yet more likely than not that the deferred tax assets will be fully realizable. Accordingly, the Company has provided a valuation allowance of $84.0 million against its deferred tax assets as of December 31, 2017 primarily in relation to deferred tax assets arising from tax credits and net operating losses. The deferred tax assets recognized net of the valuation allowance, $8.1 million as of December 31, 2017, consist of U.S. federal temporary differences. Due to consistent U.S. operating income, the Company expects to realize such deferred tax assets. The net increase of $27.6 million in the valuation allowance during the year ended December 31, 2017 was primarily due to net operating losses of the Company's Irish entities, and to a lesser extent from U.S. federal and state tax credits.
As of December 31, 2017, certain of the Company's Irish entities had trading loss carryovers of $497.7 million and non-trading loss carryovers of $10.7 million, each of which can be carried forward indefinitely but are limited to the same trade/trades. In addition, as of December 31, 2017, the Company had state net operating loss carryforwards of approximately $46.4 million, which are available to reduce future taxable income for the Company's U.S. subsidiary, if any. If not utilized, the state net operating loss carryforward begins expiring in 2032.
The Company also has federal and California research and development credit carryforwards of $11.8 million and $8.8 million, respectively, at December 31, 2017. The federal research and development credit carryforwards will expire starting in 2035 if not utilized. The California tax credits can be carried forward indefinitely.
Cumulative unremitted earnings of the Company’s U.S. and Swiss subsidiaries total approximately $20.4 million and $0.5 million, respectively at December 31, 2017. The Company's U.S. and Swiss subsidiaries' cash balances at December 31, 2017 are committed for their working capital needs. No taxes have been provided for the unremitted earnings as any tax basis differences relating to investments in these overseas subsidiaries are considered to be permanent in duration. Unremitted earnings may be subject to withholding taxes (potentially at 5% in the U.S. and 5% in Switzerland) and Irish taxes (potentially at a rate of 12.5%) if they were to be distributed as dividends. However, Ireland allows a credit against Irish taxes for U.S. and Swiss taxes withheld and as of December 31, 2017 the Company's current year net operating losses in Ireland are sufficient to offset any potential dividend income received from its overseas subsidiaries.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Gross Unrecognized Tax Benefits at January 1 | $ | 2,406 |
| | $ | 1,061 |
|
Additions for tax positions taken in the current year | 1,464 |
| | 1,346 |
|
Additions for tax positions taken in the prior year | 398 |
| | — |
|
Reductions for tax positions taken in the prior year | — |
| | (1 | ) |
Gross Unrecognized Tax Benefits at December 31 | $ | 4,268 |
| | $ | 2,406 |
|
If recognized, none of the Company's unrecognized tax benefits as of December 31, 2017 would reduce its annual effective tax rate, primarily due to corresponding adjustments to its deferred tax valuation allowance. As of December 31, 2017, the Company has not recorded a liability for potential interest or penalties. The Company also does not expect its unrecognized tax benefits to change significantly over the next 12 months.
The tax years 2013 to 2017 remain subject to examination by the U.S taxing authorities and the tax years 2012 to 2017 remain subject to examination by the Irish taxing authorities.