Income Taxes
The Company recorded an income tax benefit of $6.0 million on a pre-tax loss of $443.1 million for the year ended December 31, 2017. The tax benefit recognized for the year ended December 31, 2017 primarily relates to the net loss incurred by the Company's German subsidiary.
In connection with the Celgene Collaboration Agreement and 2015 Celgene SPA, the Company does not expect that the $849.8 million in consideration allocable to the sale of the Company’s shares and future rights to purchase shares of common stock of the Company under the 2015 Celgene SPA will result in gain or loss in accordance with the IRC. The Company determined that the $150.2 million consideration allocable to the upfront payment for the Celgene Collaboration Agreement is fully taxable, partially in 2015, with the remainder in 2016. In connection with the Celgene CD19 License, the Company determined that the $50.0 million option exercise fee is fully taxable, partially in 2016, with the remainder in 2017.
Loss before income taxes is attributable to the following tax jurisdictions (in thousands): |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 426,738 |
| | $ | 245,156 |
| | $ | 236,028 |
|
Foreign | 16,369 |
| | 11,081 |
| | 6,108 |
|
Loss before income taxes | $ | 443,107 |
| | $ | 256,237 |
| | $ | 242,136 |
|
The components of the benefit for income taxes are as follows (in thousands): |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
United States | $ | (15 | ) | | $ | 40 |
| | $ | — |
|
Total current | (15 | ) | | 40 |
| | — |
|
Deferred: | | | | | |
United States | $ | 1,036 |
| | $ | 6,985 |
| | $ | 1,100 |
|
Foreign | 4,980 |
| | 3,632 |
| | 1,660 |
|
Total deferred | 6,016 |
| | 10,617 |
| | 2,760 |
|
Benefit for income taxes | $ | 6,001 |
| | $ | 10,657 |
| | $ | 2,760 |
|
The Tax Cuts and Jobs Act ("U.S. Tax Act") was enacted on December 22, 2017. In accordance with SEC SAB No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118") the Company's accounting for the impact of the U.S. Tax Act represents reasonable estimates based on its analysis to date and is considered to be provisional and subject to revision as further regulatory guidance related to the U.S. Tax Act is expected to be issued in 2018, which may result in changes to the Company's current estimate. Any revisions to the estimate impacts of the U.S. Tax Act will be recorded no later than the fourth quarter of 2018.
The U.S. Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% beginning in 2018. The impact of the U.S. Tax Act for the Company is a $146.5 million reduction in the Company's net deferred tax asset to reflect the new statutory rate. The rate adjustment to the deferred tax assets, a discrete item for the quarter, is fully offset by a decrease in the valuation allowance so there is no rate impact to the Company.
Starting in 2018, companies may be subject to global intangible low tax income ("GILTI") which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations as well as the base erosion anti-abuse tax ("BEAT") under the U.S. Tax Act. GILTI will be effectively taxed at a tax rate of 10.5%. Due to the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into a company’s measurement of its deferred taxes under SAB 118. The Company has not yet made an election with respect to GILTI. The Company will continue to review the GILTI and BEAT rules to determine their applicability to the Company as the rules become effective.
As of December 31, 2017 and 2016, the Company had U.S. federal net operating loss ("NOL") carryforwards of approximately $476.6 million and $249.4 million, respectively, which are available to reduce future taxable income. The Company also had U.S. federal and state tax credits of $85.5 million and $34.2 million as of December 31, 2017 and 2016, respectively, which may be used to offset future tax liabilities. The NOL and tax credit carryforwards will begin to expire in 2033. The NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The Company undertook a formal IRC Section 382 study in 2016. Based on this study, the Company concluded that it has experienced such "ownership changes" but its ability to use its U.S. NOLs and tax credit carryforwards is not subject to a material annual limitation. However, subsequent ownership changes may further affect the limitation in future years. The Company also has German NOL carryforwards of $30.2 million and $13.4 million as of December 31, 2017 and 2016, respectively, which have an indefinite carryforward period.
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows: |
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory tax | 35.0 | % | | 35.0 | % | | 35.0 | % |
Foreign tax rate differential | (0.1 | ) | | (0.1 | ) | | (0.1 | ) |
Valuation allowance | (6.3 | ) | | (35.1 | ) | | (36.2 | ) |
Tax credits | 7.5 |
| | 5.5 |
| | 3.8 |
|
Impact of U.S. Tax Act | (33.1 | ) | | — |
| | — |
|
Other | (1.6 | ) | | (1.1 | ) | | (1.4 | ) |
Total | 1.4 | % | | 4.2 | % | | 1.1 | % |
The principal components of the Company’s net deferred tax liabilities are as follows (in thousands): |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 110,403 |
| | $ | 85,154 |
|
Tax credit carryforwards | 85,480 |
| | 34,243 |
|
Acquired technology | 44,795 |
| | 61,866 |
|
Success payments | 34,457 |
| | 34,804 |
|
Stock compensation | 14,362 |
| | 12,803 |
|
Deferred revenue | 25,683 |
| | 45,770 |
|
Other | 9,723 |
| | 7,649 |
|
Gross deferred tax assets | 324,903 |
| | 282,289 |
|
Valuation allowance | (306,545 | ) | | (271,635 | ) |
Deferred tax assets, net of valuation allowance | 18,358 |
| | 10,654 |
|
Deferred tax liabilities: | | | |
Acquired technology | (11,679 | ) | | (10,218 | ) |
Other | (7,282 | ) | | (5,588 | ) |
Deferred tax liabilities | (18,961 | ) | | (15,806 | ) |
Net deferred tax liabilities | $ | (603 | ) | | $ | (5,152 | ) |
The Company adopted ASU 2016-09 in 2017. As a result, the net operating loss deferred tax asset increased by $7.1 million as a result of the inclusion of the net operating losses related to excess tax benefits. The increase in the deferred tax asset was offset by a full valuation allowance.
The valuation allowance relates primarily to net U.S. deferred tax assets from operating losses, research and development tax credit carryforwards, amounts paid and accrued to enter into various agreements for which the tax treatment requires capitalization and amortization, success-based payments that are accrued but not yet paid for tax purposes, and deferred revenue associated with the Celgene Collaboration Agreement. The Company’s deferred tax liability relates primarily to acquired technology.
The Company maintains a full valuation allowance on its net U.S. deferred tax assets. The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. In its evaluation, the Company considered its cumulative loss in recent years and its forecasted losses in the near-term as significant negative evidence. Based upon a review of the four sources of income identified within ASC 740, Accounting for Income Taxes, the Company determined that the negative evidence outweighed the positive evidence and a full valuation allowance on its U.S. net deferred tax assets will be maintained. The Company will continue to assess the realizability of its deferred tax assets going forward and will adjust the valuation allowance as needed. Increases in the valuation allowance were $34.9 million and $88.0 million for the years ended December 31, 2017 and 2016, respectively. The Company has determined that it is more-likely-than-not that it will realize the benefit of the losses for its German subsidiary and has not recorded a valuation allowance against the German deferred tax assets.
The Company determines its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more-likely-than-not to be sustained upon examination by the relevant income tax authorities. The Company is generally subject to examination by the U.S. federal and local income tax authorities for all tax years in which a loss carryforward is available and is subject to examination in Germany for four years. The examination by the U.S. federal and local income tax authorities of the Company's German subsidiary for the years ended December 31, 2013 through December 31, 2015 closed with no material adjustments.
The Company applies judgment in the determination of the consolidated financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. As of December 31, 2017 and 2016, the Company's uncertain tax positions were immaterial.