(15) INCOME TAXES
The provision for (benefit from) income taxes is based on loss before income taxes as follows:
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. Source |
|
$ |
(19,461 |
) |
|
$ |
10,696 |
|
|
$ |
182,215 |
|
|
Non-U.S. Source |
|
|
(16,414 |
) |
|
|
(841,746 |
) |
|
|
(336,939 |
) |
|
Loss before income taxes |
|
$ |
(35,875 |
) |
|
$ |
(831,050 |
) |
|
$ |
(154,724 |
) |
The U.S. and foreign components of the provision for (benefit from) income taxes are as follows:
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Provision for current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
29,848 |
|
|
$ |
22,239 |
|
|
$ |
84,743 |
|
|
State and local |
|
|
2,880 |
|
|
|
1,418 |
|
|
|
5,323 |
|
|
Foreign |
|
|
3,975 |
|
|
|
3,557 |
|
|
|
3,836 |
|
|
|
|
|
36,703 |
|
|
|
27,214 |
|
|
|
93,902 |
|
|
Provision for (benefit from) deferred income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
12,446 |
|
|
|
(78,428 |
) |
|
|
(17,741 |
) |
|
State and local |
|
|
32,336 |
|
|
|
(6,012 |
) |
|
|
(8,770 |
) |
|
Foreign |
|
|
(318 |
) |
|
|
(143,614 |
) |
|
|
(50,316 |
) |
|
|
|
|
44,464 |
|
|
|
(228,054 |
) |
|
|
(76,827 |
) |
|
Provision for (benefit from) income taxes |
|
$ |
81,167 |
|
|
$ |
(200,840 |
) |
|
$ |
17,075 |
|
On December 22, 2017, the bill known as the Tax Cuts and Jobs Act (the 2017 Tax Act) was signed into law. The new law has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21% and the elimination or reduction of certain domestic deductions and credits, including a 50% reduction in the orphan drug credit benefit. The 2017 Tax Act changed U.S. international taxation from a worldwide basis to a modified territorial system that includes base erosion prevention measures on foreign earnings. This will result in the Company’s foreign subsidiaries being subject to U.S. taxation in the future. These changes are effective in 2018. Changes to tax laws and tax rates are required to be accounted for in the period of the enactment, therefore the Company’s tax expense for the year ended December, 31, 2017 included the impact of the 2017 Tax Act. The Company’s deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when these temporary differences are expected to be realized or settled. The Company recorded a provisional expense of $42.3 million related to the 2017 Tax Act, which included $33.1 million for the re-measurement of the net deferred tax assets at the lower enacted corporate tax rate and $9.2 million related to the increased limitations on executive compensation. The Company also assessed the impact of the 2017 Tax Act on its financial projections and concluded that is more likely than not that certain of its state tax credits will not be utilized in the foreseeable future, and recognized $41.4 million of income tax expense during the fourth quarter of 2017 to establish a valuation allowance against those state tax credits. These credits do not expire, however, the Company projects that it will be generating more credits than it will utilize on an annual basis. The 2017 Tax Act also includes a one-time mandatory deemed repatriation toll tax on accumulated earnings of our foreign subsidiaries that did not impact the Company due to a net deficit in these foreign subsidiaries.
The incremental net income tax expense recognized as a result of the 2017 Tax Act was an estimate and the measurement of deferred tax assets is subject to further analysis and potential correlative adjustments as developing interpretations and guidance from the U.S. Treasury Department, the IRS, and other standard setting bodies provide additional clarifications of the provisions of the 2017 Tax Act. Updated guidance and regulations could result in changes to this estimate during 2018 when the analysis is complete. The Company has not yet elected an accounting method regarding whether to record deferred tax assets and liabilities for expected amounts of Global Intangible Low-Taxed Income (GILTI) inclusions or whether to treat such amounts as a period cost.
For the year ended December 31, 2016, the Company’s Dutch operations had a book net loss of $539.2 million, which included the impairment of the Kyndrisa IPR&D assets and a resulting deferred tax benefit of $143.5 million associated with the reversal of the deferred tax liability of such IPR&D assets.
The following is a reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate expressed as a percentage of loss before income taxes:
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State and local taxes |
|
|
(20.3 |
)% |
|
|
0.4 |
% |
|
|
(2.2 |
)% |
|
Orphan Drug & General Business Credit |
|
|
93.9 |
% |
|
|
7.5 |
% |
|
|
34.8 |
% |
|
Stock compensation expense |
|
|
19.1 |
% |
|
|
4.6 |
% |
|
|
(2.8 |
)% |
|
Changes in the fair value of contingent acquisition consideration payable |
|
|
(3.1 |
)% |
|
|
0.9 |
% |
|
|
0.2 |
% |
|
Subpart F income |
|
|
(84.1 |
)% |
|
|
— |
% |
|
|
(8.4 |
)% |
|
Foreign tax rate differential |
|
|
(26.2 |
)% |
|
|
(18.6 |
)% |
|
|
(46.2 |
)% |
|
Section 162(m) limitation |
|
|
(26.5 |
)% |
|
|
(5.4 |
)% |
|
|
(1.3 |
)% |
|
Tax Cuts and Jobs Act of 2017 |
|
|
(118.0 |
)% |
|
|
— |
% |
|
|
— |
% |
|
Other |
|
|
1.9 |
% |
|
|
0.3 |
% |
|
|
(1.6 |
)% |
|
Valuation allowance/deferred benefit |
|
|
(97.9 |
)% |
|
|
(0.5 |
)% |
|
|
(18.5 |
)% |
|
Effective income tax rate |
|
|
(226.2 |
)% |
|
|
24.2 |
% |
|
|
(11.0 |
)% |
The significant components of the Company’s net deferred tax assets are as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Net deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
48,374 |
|
|
$ |
49,787 |
|
|
Tax credit carryforwards |
|
|
384,381 |
|
|
|
352,535 |
|
|
Accrued expenses, reserves, and prepaids |
|
|
54,565 |
|
|
|
77,904 |
|
|
Intangible assets |
|
|
17,556 |
|
|
|
26,751 |
|
|
Stock-based compensation |
|
|
31,371 |
|
|
|
47,713 |
|
|
Inventory |
|
|
13,206 |
|
|
|
15,581 |
|
|
Impairment |
|
|
2,609 |
|
|
|
5,017 |
|
|
Other |
|
|
2,358 |
|
|
|
1,519 |
|
|
Valuation allowance |
|
|
(111,001 |
) |
|
|
(73,037 |
) |
|
Total deferred tax assets |
|
|
443,419 |
|
|
|
503,770 |
|
|
|
|
|
|
|
|
|
|
|
|
Joint venture basis difference |
|
|
(1,229 |
) |
|
|
(1,714 |
) |
|
Acquired intangibles |
|
|
(3,332 |
) |
|
|
(8,773 |
) |
|
Convertible notes discount |
|
|
(10,100 |
) |
|
|
(24,394 |
) |
|
Property, plant and equipment |
|
|
(29,663 |
) |
|
|
(22,103 |
) |
|
Total deferred tax liabilities |
|
|
(44,324 |
) |
|
|
(56,984 |
) |
|
Net deferred tax assets |
|
$ |
399,095 |
|
|
$ |
446,786 |
|
In 2017, the increase in the valuation allowance was primarily due to the state tax credits discussed above. The incremental expense was partially offset by a reduction in the valuation allowance related to fully valued assets that expired in 2017.
As of December 31, 2017, the Company had the following net operating loss and tax credit carryforwards, which if not utilized, will expire as follows (dollars in thousands):
|
Type |
|
Amount |
|
|
Year |
|
|
Federal net operating loss carryforwards |
|
$ |
15,554 |
|
|
2028 – 2033 |
|
Federal R&D and orphan drug credit carryforwards |
|
$ |
403,828 |
|
|
2030 – 2037 |
|
State net operating loss carryforwards |
|
$ |
108,133 |
|
|
2019 – 2036 |
|
Dutch net operating loss carryforwards |
|
$ |
145,150 |
|
|
2020 – 2025 |
The $9.5 million of Irish net operating losses and $83.7 million of state research credit carryovers will carry forward indefinitely.
The Company’s net operating losses and credits could be subject to annual limitations due to ownership change limitations provided by IRC Section 382 and similar state provisions. An annual limitation could result in the expiration of net operating losses and tax credit carryforward before utilization. There are limitations on the tax attributes of acquired entities however, the Company does not believe the limitations will have a material impact on the utilization of the net operating losses or tax credits.
The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Balance at beginning of period |
|
$ |
103,210 |
|
|
$ |
86,731 |
|
|
Additions based on tax positions related to the current year |
|
|
11,042 |
|
|
|
15,982 |
|
|
(Deletions) Additions for tax positions of prior years |
|
|
(766 |
) |
|
497 |
|
|
|
Balance at end of period |
|
$ |
113,486 |
|
|
$ |
103,210 |
|
Included in the balance of unrecognized tax benefits at December 31, 2017 are potential benefits of $113.5 million that, if recognized, would affect the effective tax rate. The Company’s policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items in the income tax expense. The total amount of accrued interest and penalties was not significant as of December 31, 2017.
The Company files income tax returns in the U.S. and various foreign jurisdictions. The U.S. and foreign jurisdictions have statute of limitations ranging from three to five years. However, carryforward tax attributes that were generated in 2014 and earlier may still be adjusted upon examination by tax authorities. Currently, the Company is under audit by the Internal Revenue Service for the year 2014.
U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This excess totaled approximately $10.7 million as of December 31, 2017, which will be indefinitely reinvested; deferred income taxes have not been provided on such foreign earnings.