| Income Taxes | NOTE 21 – INCOME TAXES The Company’s loss before benefit for income taxes by jurisdiction for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):
For the Years Ended December 31,
2018
2017
2016
Ireland
$
(10,944
)
$
(16,956
)
$
(27,955
)
United States
(176,837
)
(271,102
)
(165,476
)
Other foreign
68,635
(216,276
)
(33,383
)
Loss before benefit for income taxes
$
(119,146
)
$
(504,334
)
$
(226,814
) The components of the benefit for income taxes were as follows for the years ended December 31, 2018, 2017 and 2016 (in thousands):
For the Years Ended December 31,
2018
2017
2016
Current provision (benefit)
Ireland
$
(245
)
$
2,922
$
1,187
U.S. – Federal and State
42,791
12,085
10,491
Other foreign
843
831
679
Total current provision
43,389
15,838
12,357
Deferred (benefit) provision
Ireland
$
(14,184
)
$
(6,294
)
$
(2,054
)
U.S. – Federal and State
(62,995
)
(120,111
)
(69,073
)
Other foreign
(11,169
)
7,818
(2,481
)
Total deferred benefit
(88,348
)
(118,587
)
(73,608
)
Total benefit for income taxes
$
(44,959
)
$
(102,749
)
$
(61,251
) Total benefit for income taxes was $45.0 million, $102.7 million and $61.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. The current tax provision of $43.4 million for the year ended December 31, 2018 was primarily attributable to the U.S. federal tax liability arising on U.S. taxable income generated from an intra-company transfer of an asset other than inventory. Due to the restrictions imposed by Section 7874 of the Code, the Company could not utilize its tax attributes such as net operating losses and tax credits to reduce its U.S. federal tax liability below the minimum tax required under Section 7874, therefore the Company recorded a provision of $45.8 million on the transfer. The deferred tax benefit of $88.3 million recognized during the year ended December 31, 2018, was primarily due to a $37.4 million tax benefit recorded as a measurement period adjustment in SAB 118 to reinstate the deferred tax asset related to our U.S. interest expense carryforwards under Section 163(j) of the Internal Revenue Code to reflect the guidance issued by the U.S. Treasury Department and the U.S. Internal Revenue Service in Notice 2018-28, the mix of income and losses incurred in various tax jurisdictions of $35.3 million, $11.2 million of tax benefit recognized on intra-company inventory transfers and $4.4 million of tax credits generated during the year. A reconciliation between the Irish statutory income tax rate to the Company’s effective tax rate for 2018, 2017 and 2016 is as follows (in thousands):
For the Years Ended December 31,
2018
2017
2016
Irish income tax at statutory rate (12.5%)
$
(14,893
)
$
(63,042
)
$
(28,352
)
Foreign tax rate differential
13,221
(10,923
)
(2,051
)
Liquidation of foreign partnership
(42,689
)
—
—
Write-off and reinstatement of U.S. deferred tax asset related to interest expense carryforwards due to the Tax Act
(37,392
)
59,243
—
Notional interest deduction
(24,455
)
(27,020
)
(35,075
)
Intra-company inventory transfers
(11,169
)
(8,888
)
2,154
U.S. state income taxes
(6,515
)
214
8,579
U.S. federal and state tax credits
(4,405
)
(3,608
)
(3,613
)
Change in valuation allowances
(1,115
)
(1,378
)
(6,117
)
Impact of the Tax Act on deferred taxes
—
(134,182
)
—
Non-deductible in-process research and development costs
—
51,148
—
Uncertain tax positions
2,456
4,976
2,837
Disallowed interest
3,023
2,990
2,620
Disqualified compensation expense
4,831
1,305
2,555
Change in U.S. state effective tax rate
8,103
(2,329
)
(17,246
)
Share-based compensation
21,383
26,811
7,125
Intra-company asset transfers
45,780
—
—
Other, net
(1,123
)
1,934
5,333
Benefit for income taxes
$
(44,959
)
$
(102,749
)
$
(61,251
)
Effective income tax rate
37.7
%
20.4
%
27.0
% The overall effective income tax rate for 2018 of 37.7% was a higher benefit rate than the Irish statutory rate of 12.5% primarily due to a $42.7 million U.S. federal tax benefit and $7.9 million U.S. state tax benefit was recorded with respect to the liquidation of a foreign partnership, a $37.4 million tax benefit resulting from a measurement period adjustment under SAB 118 to reinstate the deferred tax asset related to our U.S. interest expense carryforwards under Section 163(j) of the Internal Revenue Code to reflect the guidance issued by the U.S. Treasury Department and the U.S. Internal Revenue Service in Notice 2018-28, a $24.5 million tax benefit on the Company’s notional interest deduction and a $11.2 million tax benefit recognized on intra-company inventory transfers. These tax benefits are partially offset by tax expense of $45.8 million on an intra-company transfer of asset other than inventory, a tax expense of $21.4 million on non-deductible share-based compensation expenses, which includes the previously recognized share-based compensation expense relating to PSUs which was charged to income tax expense during the year ended December 31, 2018, of $23.3 million, a tax expense of $13.2 million on the income earned in higher tax rate jurisdictions and a tax expense of $8.1 million resulting from the remeasurement of net U.S. deferred tax liabilities attributable to state legislation as enacted during the current year. The overall effective income tax rate for 2017 of 20.4% 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 revised 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, a tax benefit recognized on intra-company inventory transfers 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 27.0% 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 increase in the effective income tax rate in 2018 compared to that in 2017 was primarily due to a tax benefit of $42.7 million U.S. federal and $7.9 million U.S. state tax benefit generated on the liquidation of a foreign partnership during the year ended December 31, 2018, a tax benefit of $37.4 million recorded during the year ended December 31, 2018, as a measurement period adjustment under SAB 118, to reinstate the deferred tax asset related to our U.S. interest expense carryforwards under Section 163(j) of the Internal Revenue Code to reflect the guidance issued by the U.S. Treasury Department and the U.S. Internal Revenue Service in Notice 2018-28, and a non-deductible IPR&D expenses of $51.1 million recorded during the year ended December 31, 2017, recorded in connection with the acquisition of River Vision. 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 movement related to intra-company inventory transfers, 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 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):
As of December 31,
2018
2017
Deferred tax assets:
Net operating loss carryforwards
$
51,264
$
65,650
Intercompany interest
52,605
—
U.S. federal and state credits
43,786
35,465
Accrued compensation
40,942
46,420
Contingent royalties
30,321
33,436
Accruals and reserves
12,381
11,089
Capital loss carryforwards
3,139
2,796
Alternative minimum tax credit
2,816
13,972
Other
1,004
2,259
Total deferred tax assets
238,258
211,087
Valuation allowance
(26,472
)
(25,650
)
Deferred tax assets, net of valuation allowance
$
211,786
$
185,437
Deferred tax liabilities:
Intangible assets
$
283,473
$
315,970
Debt discount
18,795
23,372
Inventories
—
570
Total deferred tax liabilities
302,268
339,912
Net deferred income tax liability
$
90,482
$
154,475
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 provided 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 However, the Company had 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). 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. On April 2, 2018, the U.S. Treasury Department and the U.S. Internal Revenue Service issued Notice 2018-28 (“the Notice”) which provides guidance for computing the business interest expense limitation under the Tax Act and clarifies the treatment of interest disallowed and carried forward under Section 163(j), prior to enactment of the Tax Act. In accordance with the measurement period provisions under SAB 118 and the guidance in the Notice the Company reinstated the deferred tax asset related to its U.S. interest expense carryforwards under Section 163(j) based on the revised U.S. federal tax rate of 21 percent plus applicable state tax rates. The impact of the deferred tax asset reinstatement in accordance with SAB 118 was a $37.4 million increase to the Company’s benefit for income taxes and a corresponding decrease to the U.S. group net deferred tax liability position. The impact of this reinstatement has been recognized as a discrete tax adjustment during the year ended December 31, 2018 and resulted in a 31.4% increase in the Company’s effective tax rate during the period. In the fourth quarter of 2018, the Company completed our analysis to determine the effect of the Tax Act and recorded immaterial adjustments as of December 31, 2018 which related to return to provision adjustments which impacted the U.S. net deferred tax liabilities. 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, 2018, were $164.4 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, 2018, the Company had net operating loss carryforwards of approximately $77.3 million for U.S. federal, $25.1 million for various U.S. states and $113.1 million for non-U.S. losses. 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 2031. 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 to 80% of the current year’s taxable income. It is uncertain if and to what extent various U.S. states will conform to the Tax Act. U.S. state net operating losses will start to expire in 2019 for the earliest net operating loss layers to the extent there is not sufficient state taxable income to utilize those net operating loss carryovers. Net operating loss carryovers in Switzerland have a seven-year carryforward life and will start to expire in 2019 to the extent there is not sufficient taxable income to utilize those net operating loss carryovers. 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 2019 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 for the ownership change which occurred in 2009. Further, the net operating losses acquired with River Vision are subject to an annual limitation of $2.6 million. The U.S. federal net operating loss carryforward and U.S. federal tax credit 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, 2018, the Company had $54.5 million and $8.0 million of U.S. federal and state income tax credits, respectively, to reduce future tax liabilities. 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. A reconciliation of the beginning and ending amounts of valuation allowances for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):
Valuation allowances at December 31, 2015
$
(31,310
)
Increase for 2016 activity
(14,636
)
Release of valuation allowances
15,056
Additions to valuation allowances due to acquisitions
(1,642
)
Valuation allowances at December 31, 2016
$
(32,532
)
Increase for 2017 activity
(6,835
)
Release of valuation allowances
5,313
Decreases to valuation allowances due to divestiture
8,404
Valuation allowances at December 31, 2017
$
(25,650
)
Increase for 2018 activity
(3,328
)
Release of valuation allowances
2,506
Valuation allowances at December 31, 2018
$
(26,472
) Deferred tax valuation allowances increased by $0.8 million during the year ended December 31, 2018, decreased by $6.9 million during the year ended December 31, 2017 and increased by $1.2 million during the year ended December 31, 2016. For the year ended December 31, 2018, the increase in valuation allowances resulted primarily from additional U.S. state net operating losses and state tax credits which are unlikely to be realized in the foreseeable future. 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, 2018, 2017 and 2016, excluding interest and penalties, consisted of the following (in thousands):
For the Years Ended
December 31,
2018
2017
2016
Beginning balance – uncertain tax positions
$
23,404
$
17,747
$
9,812
Tax positions in the year:
Additions
1,899
2,451
471
Acquired uncertain tax positions
—
—
5,362
Tax positions related to prior years:
Additions
1,531
4,145
2,102
Settlements and lapses
(528
)
(939
)
—
Ending balance – uncertain tax positions
$
26,306
$
23,404
$
17,747
For the year ended December 31, 2018, the increase in uncertain tax positions was attributable primarily to the additional U.S. 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 $10.2 million were included in other long-term liabilities, $2.4 million were included in accrued expenses and an additional $15.9 million was offset against deferred tax assets. At December 31, 2018, penalties of $0.2 million and interest of $2.0 million are included in the balance of the uncertain tax positions and penalties of $0.2 million and interest of $1.3 million were included in the balance of uncertain tax positions at December 31, 2017. 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 $28.5 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, 2018, 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 2014 with the lapse of statute occurring in 2019. No changes in settled tax years have occurred to date. We are currently under examination by the U.S. Internal Revenue Service 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. |
