Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the Code including, but not limited to, reducing the U.S. federal corporate income tax rate and requiring a one-time transition tax on certain unrepatriated earnings of non-U.S. corporate subsidiaries of large U.S. shareholders that may electively be paid over eight years. While the Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, ASC 740 requires the Company to remeasure its deferred tax balances in 2017 in accordance with the 2018 rate reduction.
The Tax Act also puts in place new tax laws that will impact our taxable income beginning in 2018, which include, but are not limited to (1) creating a Base Erosion Anti-Abuse Tax (“BEAT”), which is a new minimum tax, (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries (the “participation exemption”), (3) a new provision designed to tax currently global intangible low-taxed income (“GILTI”) earned by non-U.S. corporate subsidiaries of large U.S. shareholders, which allows for the possibility of utilizing foreign tax credits (foreign tax credits are limited to 80% of foreign taxes paid that are properly attributable to GILTI and are segregated into a separate basket, with no carryforward or carryback permitted for excess foreign tax credits) and a deduction generally equal to 50 percent of GILTI (37.5 percent for tax years beginning after December 31, 2025) to offset the income tax liability, (4) a provision limiting the amount of deductible interest expense in the U.S., (5) the repeal of the domestic manufacturing deduction, (6) limitations on the deductibility of certain executive compensation, and (7) limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability.
Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. In accordance with SAB 118, the Company must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete.
To the extent that the accounting for certain income tax effects of the Tax Act is incomplete, a company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. If a company cannot determine a provisional estimate to be included in the financial statements, then the company should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If a company is unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined.
The Company has recorded a provisional net tax charge of $128.6 million related to the Tax Act in the year ended December 31, 2017. This net charge primarily consists of a net expense of $15.0 million due to the remeasurement of our net deferred tax accounts to reflect the U.S. federal corporate income tax rate reduction to 21% and a net expense for the transition tax of $113.6 million. While we are able to make a reasonable estimate of the impact of the reduction in corporate tax rate, we are continuing to analyze the temporary differences that existed on the date of enactment, and the temporary differences originating in the current fiscal year.
The transition tax is a 2017 tax on the previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. In order to determine the amount of the transition tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to the retained earnings of the subsidiary, but requires other adjustments to conform to the Code. We are able to make a reasonable estimate of the transition tax and recorded a provisional transition tax obligation of $113.6 million which the Company expects to elect to pay, net of certain tax attributes and credit carryforwards, over eight years beginning in 2018. This amount is presented in other long-term liabilities. However, we are awaiting further interpretative guidance, along with continuing to assess available tax methods and elections, and continuing to gather additional information to more precisely compute the amount of the transition tax.
The Tax Act includes a provision designed to currently tax GILTI earned by non-U.S. corporate subsidiaries of large U.S. shareholders starting in 2018. The Company has elected, as permitted in FASB Staff Q&A - Topic 740 - No. 5, to treat any future GILTI tax liabilities as period costs and will expense those liabilities in the period incurred. The Company therefore will not record deferred taxes associated with the GILTI provision of the Tax Act.
As of December 31, 2017, the Company’s practice and intention was to reinvest the earnings in our non-U.S. subsidiaries outside of the U.S., and no U.S. deferred income taxes or foreign withholding taxes were recorded. The transition tax noted above will result in the previously untaxed foreign earnings being included in the federal and state 2017 taxable income. We are currently analyzing our global working capital requirements and the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent, which include local country withholding tax and potential U.S. state taxation. For these reasons, we are not yet able to reasonably estimate the effect of this provision of the Tax Act and have not recorded any withholding or state tax liabilities.
The Company is also analyzing other provisions of the Tax Act that come into effect for tax years starting in 2018 to determine if these items would impact the effective tax rate. These provisions include BEAT, the participation exemption, the treatment of amounts in accumulated other comprehensive income, the new provision that could limit the amount of deductible interest expense in the U.S., and the limitations on the deductibility of certain executive compensation.
The income tax provision (benefit) consisted of the following components:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2017 | | 2016 | | 2015 |
U.S. Federal: | | | | | |
Current | $ | 39.5 |
| | $ | 86.8 |
| | $ | 13.7 |
|
Deferred | 28.2 |
| | (303.8 | ) | | (35.8 | ) |
| 67.7 |
| | (217.0 | ) | | (22.1 | ) |
U.S. State: | | | | | |
Current | 3.9 |
| | 13.8 |
| | 8.1 |
|
Deferred | (0.6 | ) | | (14.8 | ) | | (11.9 | ) |
| 3.3 |
| | (1.0 | ) | | (3.8 | ) |
Non-U.S.: | | | | | |
Current | 275.0 |
| | 150.6 |
| | 161.8 |
|
Deferred | (139.0 | ) | | (290.9 | ) | | (68.2 | ) |
| 136.0 |
| | (140.3 | ) | | 93.6 |
|
Income tax provision | $ | 207.0 |
| | $ | (358.3 | ) | | $ | 67.7 |
|
Earnings before income taxes and noncontrolling interest: | | | | | |
United Kingdom | $ | 89.7 |
| | $ | (129.4 | ) | | $ | (189.6 | ) |
United States | (414.5 | ) | | (187.4 | ) | | 474.4 |
|
Foreign - Other | 1,227.8 |
| | 438.5 |
| | 630.6 |
|
Total earnings before income taxes and noncontrolling interest | $ | 903.0 |
| | $ | 121.7 |
| | $ | 915.4 |
|
For all periods presented, the allocation of earnings before income taxes and noncontrolling interest between U.S. and non-U.S. operations includes intercompany interest allocations between certain domestic and foreign subsidiaries. These amounts are eliminated on a consolidated basis.
Temporary differences and carryforwards that result in deferred tax assets and liabilities were as follows:
|
| | | | | | | |
(In millions) | December 31, 2017 | | December 31, 2016 |
Deferred tax assets: | | | |
Employee benefits | $ | 215.0 |
| | $ | 265.2 |
|
Litigation reserves | 45.3 |
| | 239.9 |
|
Accounts receivable allowances | 251.7 |
| | 396.0 |
|
Tax credit and loss carryforwards | 849.9 |
| | 634.0 |
|
Interest expense | 151.7 |
| | 51.2 |
|
Intangible assets | 114.9 |
| | 96.7 |
|
Other | 212.4 |
| | 232.3 |
|
| 1,840.9 |
| | 1,915.3 |
|
Less: Valuation allowance | (662.8 | ) | | (460.7 | ) |
Total deferred tax assets | 1,178.1 |
| | 1,454.6 |
|
Deferred tax liabilities: | | | |
Plant and equipment | 120.7 |
| | 183.9 |
|
Intangible assets and goodwill | 2,538.2 |
| | 2,601.6 |
|
Other | 34.8 |
| | 42.3 |
|
Total deferred tax liabilities | 2,693.7 |
| | 2,827.8 |
|
Deferred tax liabilities, net | $ | (1,515.6 | ) | | $ | (1,373.2 | ) |
For those foreign subsidiaries whose investments are permanent in duration, income and foreign withholding taxes have not been provided on the amount by which the investment in those subsidiaries, as recorded for financial reporting, exceeds the tax basis. This amount may become taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of such temporary differences is approximately $431.0 million at December 31, 2017. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable as such determination involves material uncertainties about the potential extent and timing of any distributions, the availability and complexity of calculating foreign tax credits, and the potential indirect tax consequences of such distributions, including withholding taxes. No deferred taxes have been recorded on the instances whereby the Company’s investment in foreign subsidiaries is currently greater for tax purposes than for U.S. GAAP purposes, as management has no current plans that would cause that temporary difference to reverse in the foreseeable future.
Prior to the EPD Transaction, the statutory income tax rate applicable to Mylan Inc. in the U.S. was 35%. Since the EPD Transaction the statutory income tax rate applicable to Mylan N.V. in the United Kingdom (the “U.K.”) has been 19% for the year ended December 31, 2017 and 20% for the years ending December 31, 2016 and 2015, respectively. A reconciliation of the statutory tax rate to the effective tax rate is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory tax rate | 19.0 | % | | 20.0 | % | | 20.0 | % |
| | | | | |
United States Operations | | | | | |
Clean energy and research credits | (10.1 | )% | | (85.9 | )% | | (13.0 | )% |
U.S. rate differential | 7.4 | % | | (36.9 | )% | | 4.6 | % |
| | | | | |
Tax Act - transition tax | 6.8 | % | | — | % | | — | % |
Tax Act - deferred tax rate change | 1.6 | % | | — | % | | — | % |
State income taxes and credits | (0.6 | )% | | (8.1 | )% | | (0.6 | )% |
Valuation allowance | 10.3 | % | | 4.4 | % | | 0.6 | % |
Other U.S. items | 1.2 | % | | 3.5 | % | | — | % |
Other Foreign Operations | | | | | |
Luxembourg | (10.7 | )% | | (54.1 | )% | | 1.7 | % |
Luxembourg — U.S. Branch | — | % | | (28.8 | )% | | (11.2 | )% |
Gibraltar | (6.5 | )% | | (49.2 | )% | | (4.9 | )% |
India | (0.5 | )% | | (13.0 | )% | | (0.6 | )% |
Ireland | (2.1 | )% | | (7.3 | )% | | (1.9 | )% |
Other | 0.6 | % | | (5.2 | )% | | 1.7 | % |
Uncertain tax positions | (0.9 | )% | | 0.8 | % | | (0.3 | )% |
Valuation allowance | 3.9 | % | | 79.9 | % | | 6.5 | % |
Merger of foreign subsidiaries | — | % | | (123.5 | )% | | — | % |
Other foreign items | 3.5 | % | | 9.0 | % | | 4.8 | % |
Effective tax rate | 22.9 | % | | (294.4 | )% | | 7.4 | % |
The Company’s jurisdictional location of earnings is a component of the effective tax rate each year, and the rate impact of this component is also influenced by the level of such earnings as compared to the Company’s total earnings. The jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business and as a result of the extent and location of other income and expense items, such as internal restructurings, and gains and losses on strategic business decisions.
During 2016, the Company merged its wholly owned subsidiary, Jai Pharma Limited, into Mylan Laboratories Limited. The merger resulted in the recognition of a deferred tax asset of approximately $150 million for the tax deductible goodwill in excess of the book goodwill with a corresponding benefit to income tax provision for the year ended December 31, 2016.
Valuation Allowance
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2017, a valuation allowance has been applied to certain foreign and state deferred tax assets in the amount of $662.8 million.
Net Operating Losses
As of December 31, 2017, the Company has U.S. federal net operating loss carryforwards of $51.0 million, and U.S. state income tax loss carryforwards of approximately $2.70 billion. The Company also has non-U.S. net operating loss carryforwards of approximately $1.90 billion, of which $1.20 billion can be carried forward indefinitely, with the remaining $727.0 million expiring in years 2018 through 2037. Most of the net operating losses have a full valuation allowance. The Company also has $74.0 million of foreign deductible attributes that can be carried forward indefinitely.
The Company has $80.3 million of foreign capital loss carryforwards expiring in 2019 through 2022. A full valuation allowance is recorded against these losses. The Company also has $111.5 million of U.S. and foreign credit carryovers, expiring in various amounts through 2036.
Tax Examinations
The Company is subject to income taxes and tax audits in many jurisdictions. A certain degree of estimation is thus required in recording the assets and liabilities related to income taxes. Tax audits and examinations can involve complex issues, interpretations, and judgments and the resolution of matters that may span multiple years, particularly if subject to litigations or negotiation.
Although the Company believes that adequate provisions have been made for these uncertain tax positions, the Company’s assessment of uncertain tax positions is based on estimates and assumptions that the Company believes are reasonable but the estimates for unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variations from such estimates could materially affect the Company’s financial condition, results of operations or cash flows in the period of resolution, settlement or when the statues of limitations expire.
Mylan is subject to ongoing U.S. Internal Revenue Service (“IRS”) examinations and is a voluntary participant in the IRS Compliance Assurance Process. The years 2015 and 2016 are the open years under examination. The years 2012, 2013 and 2014 have one issue open, and a Tax Court petition has been filed regarding the matter and trial has tentatively been scheduled for June, 2018. The years 2007 through 2011 had one issue open and were scheduled for U.S. Tax Court proceedings in 2017. The matter was settled with the IRS in May, 2017 and was executed by the Tax Court judge in January, 2018. The resolution of this matter will be recorded in the financial statements in 2018.
The Company’s major state taxing jurisdictions remain open from fiscal year 2007 through 2017, with several state audits currently in progress. The Company’s major international taxing jurisdictions remain open from 2011 through 2017, some of which are indemnified by Strides Arcolab for tax assessments.
Accounting for Uncertainty in Income Taxes
The impact of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained.
As of December 31, 2017 and 2016, the Company’s Consolidated Balance Sheets reflect net liabilities for unrecognized tax benefits of $185.7 million and $190.9 million, of which $138.4 million and $146.0 million, respectively, would affect the Company’s effective tax rate if recognized. Accrued interest and penalties included in the Consolidated Balance Sheets were $90.9 million and $79.8 million as of December 31, 2017 and 2016, respectively. For the years ended December 31, 2017, 2016 and 2015, Mylan recognized $11.1 million, $6.9 million and $0.8 million, respectively, for interest expense related to uncertain tax positions. Interest expense and penalties related to income taxes are included in the tax provision.
A reconciliation of the unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2017 | | 2016 | | 2015 |
Unrecognized tax benefit — beginning of year | $ | 190.9 |
| | $ | 174.1 |
| | $ | 191.2 |
|
Additions for current year tax positions | 4.4 |
| | 2.1 |
| | 1.2 |
|
Additions for prior year tax positions | 5.5 |
| | — |
| | — |
|
Reductions for prior year tax positions | (0.8 | ) | | (1.8 | ) | | (9.0 | ) |
Settlements | (0.4 | ) | | — |
| | (1.5 | ) |
Reductions due to expirations of statute of limitations | (13.9 | ) | | (7.7 | ) | | (7.8 | ) |
Addition due to acquisition | — |
| | 24.2 |
| | — |
|
Unrecognized tax benefit — end of year | $ | 185.7 |
| | $ | 190.9 |
| | $ | 174.1 |
|
The Company believes that it is reasonably possible that the amount of unrecognized tax benefits will decrease in the next twelve months by approximately $100.0 million, involving federal and state audits and settlements, resolution of a Tax Court matter, and expirations of certain state, federal, and foreign statutes of limitations. The Company does not anticipate significant increases to the reserve within the next twelve months.