NOTE 18 — Income Taxes
The TCJA makes significant changes to the U.S. taxation of our domestic and international operations. Our 2017 consolidated financial statements reflect a provisional estimate of the impacts of the TCJA, as changes in tax law should be accounted for in the period of enactment. The TCJA enacted many significant changes including, but not limited to:
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|
• |
A mandatory deemed repatriation tax on the accumulated, untaxed post-1986 earnings and profits of certain non-U.S. subsidiaries (“toll charge”), payable over eight years; |
|
|
• |
A decrease in the U.S. Federal Corporate income tax rate from 35% to 21% beginning in years after December 31, 2017; |
|
|
• |
An additional U.S. tax on the earnings of certain non-U.S. subsidiaries which are considered Global Intangible Low Taxed Income (“GILTI”) at a tax rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits; |
|
|
• |
A limitation on the deduction of interest expense to 30% of adjusted taxable income (EBITDA equivalent) for our U.S. subsidiaries for years beginning after December 31, 2017; and |
|
|
• |
The introduction of a 5% (10% post 2018) minimum tax referred to as the “Base Erosion Anti-Abuse Tax” which requires our U.S. subsidiaries to determine taxable income without regard to tax deductions for payments to affiliates beginning in years after December 31, 2017. |
As part of the enactment of the TCJA, the Company recorded in the fourth quarter of 2017 a provisional deferred tax benefit of $2,340.4 million related to the change in Federal Corporate tax rates applicable to our deferred tax liabilities, and $1,260.0 million related to the net reversal of prior amounts accrued for taxes on unremitted earnings of certain subsidiaries. The Company also recorded a provisional income tax expense of $728.1 million related to the tax on the deemed repatriation of the deferred foreign earnings of certain non-U.S. subsidiaries (toll charge). The toll charge is payable over eight years and therefore we recorded $58.2 million in current and $669.8 million in non-current tax liabilities.
The provisional estimates recorded in the 2017 consolidated financial statements are based on all available information and the Company’s initial analysis and current interpretation of the legislation under the TCJA as of the time of the filing of the Company’s Form 10-K. These estimates represent amounts for which our accounting is incomplete, but a reasonable estimate could be determined. Given the complexity of the TCJA, the proximity of the enactment date to the Company’s year end, anticipated guidance from the U.S. Treasury, and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board, the amounts recorded in the December 31, 2017 consolidated financial statements related to the TCJA are provisional in nature and may be adjusted during 2018. Recent Securities and Exchange Commission (“SEC”) guidance provides for a measurement period for up to one year from the enactment date of the TCJA for which adjustments to provisional amounts may be recorded as a component of tax expense or benefit in the period the adjustment is determined.
The Company recorded a provisional tax expense for its toll charge based on a reasonable estimate of the tax due on the mandatory deemed repatriation of untaxed post-1986 Earnings and Profits (“E&P”) of certain non-U.S. subsidiaries. Calculating this liability involved the consideration of multiple impacting factors. Those factors include estimating the December 31, 2017 ending E&P balances of certain of the Company’s non-U.S. subsidiaries, determining which portion of that E&P was held in cash and non-cash equivalents or other assets at different prescribed measurement dates, reviewing and confirming non- U.S. taxes that would have been previously paid on those earnings, estimating other U.S. income inclusions to be considered in the E&P balances and assessing the potential impact of currently recorded uncertain tax positions. The estimated nature of these factors and their potentially significant impact on the toll charge led to the liability being recorded as a provisional amount. The final toll charge liability amount cannot be determined until the 2018 financial results of certain non-U.S. subsidiaries are finalized, the review of historical E&P and related tax data is complete and all current and future guidance from the IRS, U.S. Treasury, SEC or FASB is issued and evaluated.
The Company recorded a provisional deferred tax benefit related to the net reversal of prior amounts accrued for taxes on unremitted earnings of certain non-U.S. subsidiaries. The Company had a previously recorded deferred tax liability balance for non-U.S. earnings that were not permanently reinvested. As a result of the TCJA and specifically the accrual of mandatory tax on the deemed repatriation of the same non-U.S. earnings (toll charge), the previously recorded deferred tax liability was no longer necessary and was reversed in the fourth quarter of 2017. Additionally, a deferred tax liability was recorded for the estimated taxes that would become due on the repatriation of those earnings. The calculation of this deferred tax liability is dependent on the finalization of the December 31, 2017 ending E&P balances of certain subsidiaries.
The Company recorded a provisional deferred tax benefit related to the change in Federal Corporate income tax rate applicable to our deferred tax liabilities. We remeasured the net deferred tax liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the TCJA and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The Company also recognizes that some of these balances are based on reasonable estimates and assumptions and could be adjusted as a result of refining our estimates upon the filing of the 2017 U.S. Federal income tax return.
Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the TCJA and the application of ASC 740 and are considering if deferred tax amounts should be recorded for this provision. Our accounting policies depend, in part, on analyzing our global income to determine whether we expect material tax liabilities resulting from the application of this provision, and, if so, whether and when to record related current and deferred income taxes and whether such amounts can be reasonably estimated. Anticipated further guidance from the IRS will also clarify the manner in which the GILTI tax is computed. For these reasons, we have not recorded a deferred tax expense or benefit relating to potential GILTI tax in our 2017 consolidated financial statements and have not made a policy election regarding whether to record deferred taxes on GILTI or account for the GILTI entirely as a period cost.
For the years ended December 31, 2017, 2016 and 2015, foreign losses before taxes were $9,247.4 million, $1,502.8 million and $4,291.7 million, respectively.
The Company’s (benefit)/provision for income taxes consisted of the following ($ in millions):
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|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current (benefit) / provision: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
763.1 |
|
|
$ |
(17.5 |
) |
|
$ |
14.4 |
|
|
U.S. state |
|
|
(54.8 |
) |
|
|
- |
|
|
|
9.7 |
|
|
Non-U.S. |
|
|
410.0 |
|
|
|
166.2 |
|
|
|
225.6 |
|
|
Total current (benefit) / provision |
|
|
1,118.3 |
|
|
|
148.7 |
|
|
|
249.7 |
|
|
Deferred (benefit) / provision: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
(6,911.9 |
) |
|
|
(1,218.5 |
) |
|
|
(1,370.2 |
) |
|
U.S. state |
|
|
(252.3 |
) |
|
|
(132.1 |
) |
|
|
(58.7 |
) |
|
Non-U.S. |
|
|
(624.5 |
) |
|
|
(695.1 |
) |
|
|
(426.7 |
) |
|
Total deferred (benefit) / provision |
|
|
(7,788.7 |
) |
|
|
(2,045.7 |
) |
|
|
(1,855.6 |
) |
|
Total (benefit) / provision for income taxes |
|
$ |
(6,670.4 |
) |
|
$ |
(1,897.0 |
) |
|
$ |
(1,605.9 |
) |
The reconciliations for the years ended December 31, 2017, 2016 and 2015 between the statutory Irish income tax rate for Allergan plc and the effective income tax rates were as follows:
|
|
|
Allergan plc |
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|||||||||
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Statutory rate |
|
|
(12.5 |
)% |
|
|
(12.5 |
)% |
|
|
(12.5 |
)% |
|
Earnings subject to U.S. taxes (1) (2) |
|
|
(17.8 |
)% |
|
|
(37.5 |
)% |
|
|
(18.6 |
)% |
|
Earnings subject to rates different than the statutory rate (1)(2) |
|
|
2.5 |
% |
|
|
(18.3 |
)% |
|
|
(2.2 |
)% |
|
Impact of tax reform (3) |
|
|
(27.2 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Tax reserves and audit outcomes |
|
|
0.4 |
% |
|
|
(0.7 |
)% |
|
|
0.3 |
% |
|
Non-deductible expenses |
|
|
0.2 |
% |
|
|
3.1 |
% |
|
|
1.3 |
% |
|
Impact of acquisitions and reorganizations (4) |
|
|
(9.3 |
)% |
|
|
3.1 |
% |
|
|
4.0 |
% |
|
Tax credits and U.S. manufacturing deduction |
|
|
(1.5 |
)% |
|
|
(3.1 |
)% |
|
|
(0.5 |
)% |
|
Rate changes (5) |
|
|
(1.2 |
)% |
|
|
(7.4 |
)% |
|
|
0.0 |
% |
|
Valuation allowances (6) |
|
|
2.2 |
% |
|
|
6.5 |
% |
|
|
(6.5 |
)% |
|
Other |
|
|
0.0 |
% |
|
|
(0.2 |
)% |
|
|
(0.6 |
)% |
|
Effective income tax rate |
|
|
(64.2 |
)% |
|
|
(67.0 |
)% |
|
|
(35.3 |
)% |
|
|
(1) |
The benefit to the 2017 effective tax rate was lower as compared to 2016 due to proportionately fewer losses in jurisdictions with tax rates higher than the Irish statutory rate. |
|
|
(2) |
In 2017, the Company recorded amortization expense of $7.20 billion and impairment charges of $8.65 billion, including Teva Share Activity. A significant portion of these amounts were incurred in jurisdictions with tax rates higher than the Irish statutory rate resulting in a net $1,262.2 million favorable impact on the 2017 effective tax rate. |
|
|
(3) |
As part of the enactment of the TCJA, the Company recorded a provisional net deferred tax benefit of $2.8 billion related to the change in tax rates applicable to our deferred tax liabilities, the net reversal of amounts previously accrued for taxes on unremitted earnings of certain non-U.S. subsidiaries and the tax on the deemed repatriation of the Deferred Foreign Earnings of certain non-U.S. subsidiaries (toll charge). These provisional amounts will be finalized in 2018 or upon the finalization of the 2018 financial results. |
|
|
(4) |
In 2017, the Company recorded a tax benefit of $895.3 million for deferred taxes related to basis differences in investments expected to reverse at tax rates different than were initially recorded. This resulted in a more favorable impact on the effective tax rate as compared to 2016. |
|
|
(5) |
As a result of changes in tax rates applied to the Company’s deferred tax liabilities in France and U.S. states, the Company recorded a benefit of $128.1 million. |
|
|
(6) |
In 2017, the Company recorded a valuation allowance of $230.1 million related to capital losses and foreign tax credit carryforwards not expected to be realized. The amount was mostly offset by benefits recorded in 2017 for these capital losses and foreign tax credits. |
The reconciliations for the years ended December 31, 2017, 2016 and 2015 between the statutory Bermuda income tax rate for Warner Chilcott Limited and the effective income tax rates were as follows:
|
|
|
Warner Chilcott Limited (1) |
|
|||||||||
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Statutory rate |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Earnings subject to U.S. taxes |
|
|
(27.9 |
)% |
|
|
(58.4 |
)% |
|
|
(29.5 |
)% |
|
Earnings subject to rates different than the statutory rate |
|
|
(0.4 |
)% |
|
|
(11.9 |
)% |
|
|
(5.0 |
)% |
|
Impact of tax reform |
|
|
(27.7 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Tax reserves and audit outcomes |
|
|
0.5 |
% |
|
|
(0.7 |
)% |
|
|
0.3 |
% |
|
Non-deductible expenses |
|
|
0.2 |
% |
|
|
3.2 |
% |
|
|
1.3 |
% |
|
Impact of acquisitions and reorganizations |
|
|
(9.5 |
)% |
|
|
3.2 |
% |
|
|
4.1 |
% |
|
Tax credits and U.S. manufacturing deduction |
|
|
(1.5 |
)% |
|
|
(3.2 |
)% |
|
|
(0.5 |
)% |
|
Rate changes |
|
|
(1.3 |
)% |
|
|
(7.6 |
)% |
|
|
0.0 |
% |
|
Valuation allowances |
|
|
2.3 |
% |
|
|
6.7 |
% |
|
|
(6.7 |
)% |
|
Other |
|
|
(0.2 |
)% |
|
|
(0.1 |
)% |
|
|
(0.4 |
)% |
|
Effective income tax rate |
|
|
(65.5 |
)% |
|
|
(68.8 |
)% |
|
|
(36.4 |
)% |
|
|
(1) |
The rate reconciliation for Bermuda is largely consistent with the Irish effective tax rate reconciliations presented above. |
Deferred tax assets and liabilities are measured based on the difference between the financial statement and tax basis of assets and liabilities at the applicable tax rates. The significant components of the Company’s net deferred tax assets and liabilities consisted of the following (in millions):
|
|
|
Years Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Benefits from net operating and capital losses and tax credit carryforwards |
|
$ |
1,005.3 |
|
|
$ |
702.0 |
|
|
Differences in financial statement and tax accounting for: |
|
|
|
|
|
|
|
|
|
Inventories, receivables and accruals |
|
|
263.5 |
|
|
|
433.6 |
|
|
Basis differences in investments |
|
|
1,088.7 |
|
|
|
- |
|
|
Share-based and other compensation |
|
|
315.4 |
|
|
|
530.1 |
|
|
Other |
|
|
20.4 |
|
|
|
64.0 |
|
|
Total deferred tax asset, gross |
|
$ |
2,693.3 |
|
|
$ |
1,729.7 |
|
|
Less: Valuation allowance |
|
|
(403.8 |
) |
|
|
(183.9 |
) |
|
Total deferred tax asset, net |
|
$ |
2,289.5 |
|
|
$ |
1,545.8 |
|
|
Differences in financial statement and tax accounting for: |
|
|
|
|
|
|
|
|
|
Property, equipment and intangible assets |
|
|
(7,519.1 |
) |
|
|
(12,419.6 |
) |
|
Outside basis differences |
|
|
(731.4 |
) |
|
|
(1,793.7 |
) |
|
Other |
|
|
(72.3 |
) |
|
|
(68.3 |
) |
|
Total deferred tax liabilities |
|
$ |
(8,322.8 |
) |
|
$ |
(14,281.6 |
) |
|
Total deferred taxes |
|
$ |
(6,033.3 |
) |
|
$ |
(12,735.8 |
) |
During the years ended December 31, 2017 and 2016, respectively, the Company recorded deferred tax liabilities of approximately $799.4 million and $604.9 million related to acquired entities.
During the year ended December 31, 2017, the Company’s net deferred tax liability decreased by $6,702.5 million. This was predominately the result of intangible amortization and impairments and the provisional impact of the TCJA.
The Company had the following carryforward tax attributes at December 31, 2017:
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|
• |
$824.4 million of U.S. federal net operating losses (“NOL”) and other tax attributes which begin to expire in 2019; |
|
|
• |
$368.3 million of U.S. tax credits which begin to expire in 2018; |
|
|
• |
$3,205.0 million of U.S. state NOLs which begin to expire in 2018; |
|
|
• |
$27.4 million non-U.S. NOLs which begin to expire in 2018 and $1,910.4 million non-U.S. NOLs which are not subject to expiration. |
Net operating loss and tax credit carryforwards of $824.4 million and $253.4 million, respectively, are subject to an annual limitation under Internal Revenue Code Section 382. The U.S. state NOLs increased by $2,146.0 million due to the expected utilization of previously unrecognized state loss carryforwards as a result of the TCJA. This was fully offset by a corresponding increase in the deferred tax liabilities for unremitted earnings.
During the year ended December 31, 2017, the Company established a valuation allowance of $230.1 million related to U.S. foreign tax credit carryforwards and capital losses. As of December 31, 2017, a valuation allowance balance of $403.8 million is recorded due to the uncertainty of realizing tax credits ($223.3 million), net operating losses ($118.7 million), capital loss carryforwards ($58.2 million) and other deferred tax assets ($3.6 million).
At December 31, 2017, Allergan plc (the Irish parent) is permanently reinvested in $9,358.1 million of earnings of its non-Irish subsidiaries and therefore has not provided deferred income taxes on these undistributed earnings. These amounts are intended to be indefinitely reinvested in non-Irish operations and would not be subject to significant taxes if amounts were distributed to Allergan plc.
The Company has previously recorded deferred tax liabilities for specific pre-acquisition earnings of certain subsidiaries owned by entities incorporated in the U.S. As a result of the TCJA, these previously recorded deferred tax liabilities were no longer necessary and were reversed in the fourth quarter of 2017. Provisionally, the Company has recorded deferred tax liabilities of $345.5 million related to earnings of subsidiaries owned by entities incorporated in the U.S. This deferred tax liability represents the provisional estimated tax cost of a full repatriation of these earnings. The U.S. subsidiaries of Allergan plc are no longer permanently reinvested in the earnings of their non-U.S. subsidiaries as the provisions of the TCJA will allow these earnings to be remitted to the U.S. without any significant incremental tax cost. The calculation of the deferred tax liability is dependent on the finalization of the E&P balances of certain subsidiaries.
Accounting for Uncertainty in Income Taxes
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at the beginning of the year |
|
$ |
811.2 |
|
|
$ |
781.7 |
|
|
$ |
712.2 |
|
|
Increases for current year tax positions |
|
|
10.1 |
|
|
|
100.7 |
|
|
|
41.2 |
|
|
Increases for prior year tax positions |
|
|
69.2 |
|
|
|
40.5 |
|
|
|
19.7 |
|
|
Increases due to acquisitions |
|
|
19.8 |
|
|
|
0.0 |
|
|
|
115.5 |
|
|
Decreases for prior year tax positions |
|
|
(38.7 |
) |
|
|
(77.9 |
) |
|
|
(41.4 |
) |
|
Settlements |
|
|
(21.7 |
) |
|
|
(30.8 |
) |
|
|
(60.6 |
) |
|
Lapse of applicable statute of limitations |
|
|
(2.9 |
) |
|
|
(2.9 |
) |
|
|
(3.2 |
) |
|
Foreign exchange |
|
|
3.3 |
|
|
|
(0.1 |
) |
|
|
(1.7 |
) |
|
Balance at the end of the year |
|
$ |
850.3 |
|
|
$ |
811.2 |
|
|
$ |
781.7 |
|
If these benefits were subsequently recognized, $754.0 million would favorably impact the Company’s effective tax rate.
The Company's continuing policy is to recognize interest and penalties related to uncertain tax positions in tax expense. During the years ended December 31, 2017, 2016 and 2015, the company recognized approximately $45.8 million, $2.0 million and $(0.5) million in interest and penalties, respectively. At December 31, 2017, 2016 and 2015, the Company had accrued $113.7 million (net of tax benefit of $25.9 million), $65.3 million (net of tax benefit of $35.4 million) and $63.3 million (net of tax benefit of $34.2 million) of interest and penalties related to uncertain tax positions, respectively. Although the company cannot determine the impact with certainty based on specific factors, it is reasonably possible that the unrecognized tax benefits may change by up to approximately $150.0 million within the next twelve months due to the resolution of certain tax examinations.
The Company conducts business globally and, as a result, it files federal, state and foreign tax returns. The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for amounts it believes are in accordance with the accounting standard, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations with tax authorities, identification of new issues and issuance of new legislation, regulations or case law.
The Company has several concurrent audits open and pending with the Internal Revenue Service (“IRS”) as set forth below:
|
IRS Audits |
|
Taxable Years |
|
Allergan W.C. Holding Inc. f/k/a Actavis W.C. Holding Inc. |
|
2013 and 2014 |
|
Warner Chilcott Corporation |
|
2010, 2011, 2012 and 2013 |
|
Forest Laboratories, Inc. |
|
2010, 2011, 2012, 2013 and 2014 |
|
Allergan, Inc. |
|
2009, 2010, 2011, 2012, 2013, 2014 and 3/7/2015 |
|
LifeCell Corporation |
|
2014 |