Entity information:

• Entity registrant name: HORIZON PHARMA PLC
• CIK: 0001492426
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1492426/000156459018003661/0001564590-18-003661-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1492426/000156459018003661/hznp-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1492426/000156459018003661/hznp-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001492426
• Generator: Donnelley Financial Solutions
• Total assets: 4,166,092,000
• Income tax expense (benefit): -102,749,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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NOTE 22 – INCOME TAXES

The Company’s (loss) income before benefit for income taxes by jurisdiction for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):

 

 

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

 

 

Total benefit for income taxes was $102.7 million, $61.3 million and $172.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. The current tax provision of $15.8 million for the year ended December 31, 2017 was primarily attributable to U.S. state income tax liabilities and U.S. federal alternative minimum tax liability. The deferred tax benefit of $118.6 million recognized during the year ended December 31, 2017, was primarily due to a provisional $74.9 million net benefit recorded following the enactment of the Tax Act, which net benefit included a $134.2 million tax benefit from the revaluation of the Company’s U.S. net deferred tax liability based on the new U.S. federal tax rate of 21 percent, partially offset by the write-off of a $59.2 million deferred tax asset related to the Company’s U.S. interest expense carryforwards and the U.S. deferred tax benefit incurred on U.S. pre-tax losses.

 

A reconciliation between the Irish income tax statutory rate to the Company’s effective tax rate for 2017, 2016 and 2015 is as follows (in thousands):

 

 

The overall effective income tax rate for 2017 of 20.0% was a higher benefit rate than the Irish statutory rate of 12.5% primarily due to a provisional $74.9 million net benefit recorded following the enactment of the Tax Act, which net benefit included a $134.2 million tax benefit from the revaluation of the Company’s U.S. net deferred tax liability based on the new U.S. federal tax rate of 21 percent, partially offset by the write-off of a $59.2 million deferred tax asset related to the Company’s U.S. interest expense carryforwards. The higher 2017 benefit rate was also attributable to losses incurred in higher tax rate jurisdictions, the benefit realized on the notional interest deduction of $27.0 million, tax charges on intragroup profits of $8.9 million, U.S. federal and state tax credits of $3.6 million and $2.3 million due to a decrease in the U.S. state effective tax rate. These benefits to income taxes are partially offset by non-deductible IPR&D expenses of $51.1 million recorded in connection with the acquisition of River Vision, non-deductible share-based compensation expenses of $26.8 million, including the write-off of $16.4 million of deferred tax assets related to previously recognized share-based compensation expense related to PSUs that expired unvested in December 2017, and an increase in uncertain tax positions of $5.0 million.

 

The overall effective income tax rate for 2016 of 26.9% was a higher benefit rate than the Irish statutory rate of 12.5% primarily due to the benefit realized on the notional interest deduction, the benefit realized from a change in U.S. state effective tax rate, and changes in valuation allowances. These benefits to income taxes were partially offset by an increase in share-based compensation not deductible for tax purposes and an increase in U.S. state income taxes.

 

The overall effective income tax rate for 2015 of 129.8% was a higher benefit rate than the Irish statutory rate of 12.5% primarily due to the release of valuation allowances in the United States following the acquisition of Hyperion in 2015, the benefit realized on the foreign rate differential and the benefit realized on the notional interest deduction.

The decrease in the effective income tax rate in 2017 compared to that in 2016 was primarily due to non-deductible IPR&D expenses of $51.1 million recorded in connection with the acquisition of River Vision, an increase in non-deductible share-based compensation of $19.7 million primarily due to the write-off of $16.4 million of deferred tax assets related to previously recognized share-based compensation expense related to PSUs that expired unvested in December 2017, a $14.9 million decrease in benefit from the change in U.S. state effective tax rate, an $11.0 million decrease in the tax charges of intragroup profit, an $8.1 million decrease in the benefit realized on the notional interest deduction and a $4.7 million decrease in the changes in valuation allowances, partially offset by the provisional $74.9 million net impact of the Tax Act on deferred taxes.  

The decrease in the effective income tax rate in 2016 compared to 2015 was primarily due to the one-time benefit recognized in 2015 for the release in valuation allowance.  

The Company accounts for income taxes based upon an asset and liability approach. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for future deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for future taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of tax rate changes on deferred tax assets and liabilities is recognized in the period in which the change is enacted.

The tax effects of the temporary differences, tax credits and net operating losses that give rise to significant portions of deferred tax assets and liabilities, before jurisdictional netting, are as follows (in thousands):

 

 

The Tax Act was enacted in December 2017. On December 22, 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the date of enactment for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, the Company reflected the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 was complete. To the extent that the Company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, the Company recorded a provisional estimate in the consolidated financial statements. As of December 31, 2017, the Company has not completed its accounting for the effects of the Tax Act. However, the Company has made reasonable estimates of the effects on its income tax provision with respect to certain items, primarily the revaluation of its existing U.S. deferred tax balances and the write-off of its U.S. deferred tax assets resulting from interest expense carryforwards under Section 163(j) of the Internal Revenue Code. In other cases, the Company has not been able to make reasonable estimates and continues to account for those items based on its existing accounting under the provisions of the tax laws that were in effect prior to enactment. The Company recognized a net income tax benefit of $74.9 million for the year ended December 31, 2017, associated with the items it could reasonably estimate. This benefit reflects the revaluation of its U.S. net deferred tax liability based on the U.S. federal tax rate of 21 percent, partially offset by the write-off of the deferred tax asset related to its U.S. interest expense carryforwards. The Company is still analyzing the Tax Act and refining its calculations and the results of this analysis could potentially impact the provisional amounts recorded in 2017 and would be reflected in the 2018 income tax provision.

 

No provision has been made for income taxes on undistributed earnings of subsidiaries because it is the Company’s intention to indefinitely reinvest outside of Ireland undistributed earnings of its subsidiaries. In the event of the distribution of those earnings to Ireland in the form of dividends, a sale of the subsidiaries, or certain other transactions, the Company may be liable for income taxes in Ireland. The unremitted earnings of the Company as of December 31, 2017, were $339.2 million, and the Company estimates that it would incur no additional income tax on unremitted earnings were they to be remitted to Ireland.  

 

As of December 31, 2017, the Company had net operating loss carryforwards of approximately $114.4 million for U.S. federal, $307.4 million for various U.S. states and $149.3 million for non-U.S. losses. These net operating losses include net operating losses acquired in the acquisition of River Vision during the second quarter of 2017 and are available to reduce future taxable income, if any, in the jurisdiction in which the net operating losses have been generated. Net operating loss carryforwards for U.S. federal income tax purposes that were generated prior to January 1, 2018, have a twenty-year carryforward life and the earliest layers will begin to expire in 2020. Under the Tax Act, U.S. federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such net operating losses is limited. U.S. state net operating losses started to expire in 2016 for the earliest net operating loss layers. It is uncertain if and to what extent various U.S. states will conform to the Tax Act. Net operating loss carryovers in Switzerland have a seven-year carryforward life and started to expire in 2016 due to lack of sufficient taxable income to fully absorb the available carryover loss. Irish net operating losses may be carried forward indefinitely and therefore have no expiration. Utilization of the U.S. net operating loss carryforwards may be subject to annual limitations as prescribed by federal and state statutory provisions. The imposition of the annual limitations may result in a portion of the net operating loss carryforwards expiring unused.

Utilization of certain net operating loss and tax credit carryforwards in the United States is subject to an annual limitation due to ownership change limitations provided by Sections 382 and 383 of the Internal Revenue Code. The Company is limited under the annual limitation of $7.7 million from the year 2018 until 2028 on certain net operating losses generated before an August 2, 2012 ownership change. We continue to carry forward the annual limitation related to Hyperion of $50.0 million resulting from the last ownership change in 2014 as well as the annual limitation related to Raptor of $0.2 million from the year 2018 until 2028 for the ownership change which occurred in 2009. Further, the net operating losses acquired with River Vision are subject to an annual limitation of $12.5 million from 2018 through 2020. The U.S. federal net operating loss carryforward limitation is cumulative such that any use of the carryforwards below the limitation in a particular tax year will result in a corresponding increase in the limitation for the subsequent tax year.

At December 31, 2017, the Company had $56.6 million and $6.2 million of U.S. federal and state income tax credits, respectively, to reduce future tax liabilities. These tax credits include the tax credits acquired in the acquisition of River Vision. The federal income tax credits consisted primarily of orphan drug credits, research and development credits and alternative minimum tax credits. The U.S. state income tax credits consisted primarily of California research and development credits and the Illinois Economic Development for a Growing Economy (“EDGE”) tax credits. Both the U.S. federal orphan drug credits and research and development credits have a twenty-year carryforward life. The U.S. federal orphan drug credits and the U.S. federal research and development credits will both begin to expire in 2030. The U.S. federal alternative minimum tax credits and California research and development credits have indefinite lives and therefore are not subject to expiration. The EDGE credits have a five-year carryforward life following the year of generation and will begin to expire in 2019.

As the Company’s share price was lower than $31.58 for the twenty trading days ended December 23, 2017, a portion of outstanding PSUs expired unvested and $16.4 million of deferred tax assets related to previously recognized share-based compensation expense related to the expired PSUs was written off to income tax expense. Additionally, in relation to the remaining outstanding PSUs, if our share price is lower than $32.70 and $33.86 for the twenty trading days ending March 22, 2018 and June 22, 2018, respectively, approximately $9.3 million and $8.4 million, respectively, of deferred tax assets at December 31, 2017, related to previously recognized share-based compensation expense related to these PSUs will be charged to income tax expense.

A reconciliation of the beginning and ending amounts of valuation allowances for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):

 

 

Deferred tax valuation allowances decreased by $6.9 million during the year ended December 31, 2017, increased by $1.2 million during the year ended December 31, 2016 and decreased by $80.2 million during the year ended December 31, 2015. For the year ended December 31, 2017, the decrease in valuation allowances resulted primarily from the Chiesi divestiture and the release of valuation allowances related to expired net operating losses in certain jurisdictions, partially offset by the increase resulting from current year activity.

The Company is required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accounts for the uncertainty in income taxes by utilizing a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken, or are expected to be taken, on an income tax return. The changes in the Company's uncertain income tax positions for the years ended December 31, 2017, 2016 and 2015, excluding interest and penalties, consisted of the following (in thousands):

 

 

For the year ended December 31, 2017, the increase in uncertain tax positions primarily resulted from the additional federal orphan drug credits generated during the year and the uncertain tax position resulting from certain state nexus exposures. In the Company’s consolidated balance sheet, uncertain tax positions of $6.4 million were included in other long-term liabilities and an additional $17.0 million was offset against deferred tax assets.

 

At December 31, 2017, penalties of $0.2 million and interest of $1.3 million are included in the balance of the uncertain tax positions and penalties of $0.1 million and interest of $0.6 million were included in the balance of uncertain tax positions at December 31, 2016. The Company classifies interest and penalties with respect to income tax liabilities as a component of income tax expense. The Company assessed that its liability for uncertain tax positions will not significantly change within the next twelve months. If these uncertain tax positions are released, the impact on the Company’s tax provision would be a benefit of $24.9 million, including interest and penalties.

The Company files income tax returns in Ireland, in the United States for federal and various states, as well as in certain other jurisdictions. At December 31, 2017, all open tax years in U.S. federal and certain state jurisdictions date back to 2006 due to the taxing authorities’ ability to adjust operating loss carryforwards. In Ireland, the statute of limitations expires five years from the end of the tax year or four years from the time a tax return is filed, whichever is later. Therefore the earliest year open to examination is 2013 with the lapse of statute occurring in 2018. No changes in settled tax years have occurred to date. On December 29, 2017, the Company received a letter from the U.S. Internal Revenue Service for commencement of a federal income tax examination for the tax year ended December 31, 2015. As of the filing of this Annual Report on Form 10-K, the Company does not currently anticipate material changes from the originally filed U.S. federal tax return for the 2015 year.