| Income Taxes | Income Taxes Earnings Before Income Taxes and Components of Income Tax Expense The U.S. and non-U.S. components of income (loss) from continuing operations before income taxes and our income tax provision (benefit) from continuing operations are as follows (in thousands): Year Ended December 31, 2017 Year Ended December 31, 2016 Transitional Period April 25, 2015 to December 31, 2015 Fiscal Year Ended April 24, 2015 Income (loss) from continuing operations before income taxes: UK and Non-United States $ 71,980 $ (36,997 ) $ (27,491 ) $ 2,020 United States 49,158 62,663 1,493 87,274 $ 121,138 $ 25,666 $ (25,998 ) $ 89,294 Total income tax provision (benefit) from continuing operations consisted of the following: Current: UK and Non-United States $ 12,771 $ 13,876 $ 2,454 $ 1,065 United States 26,743 19,706 23,544 21,104 $ 39,514 $ 33,582 $ 25,998 $ 22,169 Deferred: UK and Non-United States $ (4,140 ) $ (28,607 ) $ (18,690 ) $ 834 United States 14,580 138 (20,809 ) 8,443 $ 10,440 $ (28,469 ) $ (39,499 ) $ 9,277 Total provision for income tax expense (benefit) from continuing operations $ 49,954 $ 5,113 $ (13,501 ) $ 31,446 Effective Income Tax Rate Reconciliation The following is a reconciliation of the statutory income tax rate to our effective income tax rate expressed as a percentage of income from continuing operations before income taxes: Year Ended December 31, 2017 Year Ended December 31, 2016 Transitional Period April 25, 2015 to December 31, 2015 Fiscal Year Ended April 24, 2015 Statutory tax rate at U.S. Rate — % — % — % 35.0 % Statutory tax rate at U.K. Rate 19.0 20.0 19.1 — Effect of changes in tax rate (19.9 ) (0.2 ) (12.9 ) — Deferred tax valuation allowance 10.6 5.1 12.6 — Transaction costs (1) 2.0 10.2 (20.9 ) — Sale of Intellectual Property 44.3 17.6 — — U.S. state and local tax provision, net of federal benefit 1.2 7.9 — 2.7 Foreign tax rate differential 10.7 101.5 37.5 1.5 Notional interest deduction (13.5 ) (68.4 ) 12.0 — U.S. Subpart F 1.5 7.9 (7.6 ) Research and development tax credits (1.6 ) (4.0 ) 6.0 (2.1 ) Distribution of subsidiary earnings (0.3 ) (55.1 ) — — Reserve for uncertain tax positions 1.2 8.4 — — Domestic manufacturing deduction (1.8 ) (2.8 ) 3.0 — Tax on UK CFC interest pick-up — 1.3 — — Write-off/impairment of investments (14.8 ) (30.3 ) (0.9 ) — Other, net 2.6 0.8 4.0 (1.9 ) Effective tax rate 41.2 % 19.9 % 51.9 % 35.2 % (1) Included in transitional period April 25, 2015 to December 31, 2015 is the reversal of the deferred tax asset established during the fiscal year ended April 24, 2015 based on the assumption that these otherwise non-deductible transaction costs would be deductible if the business combination was not consummated. Because the transaction was ultimately consummated, the deferred tax asset was reversed as a non-deductible transaction cost in the amount of $2.3 million . U.S. Tax Reform On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”). The Act, which is also commonly referred to as “U.S. tax reform”, significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% commencing in 2018. In addition, the Act created a one-time mandatory tax, a toll charge, on previously deferred foreign earnings of non-U.S. subsidiaries controlled by a U.S. corporation, or in our case, a non-U.S. subsidiary controlled by one of our U.S. subsidiaries. We recorded no toll charge for the year ended December 31, 2017 as we had no previously deferred foreign earnings of U.S. controlled foreign subsidiaries as of the measurement dates. As a result of the Act, we recorded a non-cash net charge of $27.5 million during the fourth quarter of 2017, which is included in “Income tax expense (benefit)” in the consolidated statement of (loss) income. This amount primarily consists of two components: (i) $12.8 million relating to the impairment of foreign tax credits, and (ii) a net $14.7 million charge resulting from the remeasurement of our deferred tax assets and liabilities in the U.S. based on a change in the corporate income tax rate. Further regulations and notices and state conformity could be issued as a result of U.S. tax reform covering various issues that may affect our tax position including, but not limited to, an increase in the corporate state tax rate and elimination of the interest deduction. The content of any future legislation, the timing for regulations, notices, and state conformity, and the reporting periods that would be impacted cannot be determined at this time. Although we believe the net charge of $27.5 million is a reasonable estimate of the impact of the income tax effects of the Act on us as of December 31, 2017 , the estimate is provisional. Once we finalize certain tax positions for our 2017 U.S. consolidated tax return, we will be able to conclude whether any further adjustments to our tax positions are required. Deferred Income Tax Assets and Liabilities Significant components of our deferred tax assets and liabilities, including amounts related to discontinued operations, are as follows, (in thousands): December 31, 2017 December 31, 2016 Deferred tax assets: Net operating loss carryforwards $ 132,615 $ 131,904 Tax credit carryforwards 18,585 17,242 Deferred compensation 4,697 6,521 Accruals and reserves 27,146 28,520 Inventory 2,759 4,441 Investments 3,858 — Other 3,310 10,306 Gross deferred tax assets 192,970 198,934 Valuation allowance (93,333 ) (36,277 ) Total deferred tax assets 99,637 162,657 Deferred tax liabilities: Gain on sale of intellectual property (75,624 ) (136,117 ) Investments (3,135 ) (12,553 ) Property, equipment & intangible assets (137,031 ) (164,090 ) Other (1,181 ) (16,421 ) Gross deferred tax liabilities: (216,971 ) (329,181 ) Total deferred tax (liabilities) assets, net $ (117,334 ) $ (166,524 ) Reported in the consolidated balance sheet as (after valuation allowance and jurisdictional netting): Net deferred tax asset $ 14,076 $ 6,017 Deferred tax liability (131,410 ) (172,541 ) Net deferred tax (liabilities) assets $ (117,334 ) $ (166,524 ) Refer to “Note 4. Discontinued Operations” for the amounts of deferred tax assets and liabilities included in the above schedule related to discontinued operations. Valuation allowance related to discontinued operations included in the schedule above was $48.7 million and $26.8 million for the years ended December 31, 2017 and December 31, 2016 , respectively. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. We utilized $2.5 million and $5.3 million of U.S. capital loss carryforward for the years ended December 31, 2017 and December 31, 2016 , respectively. We have $12.8 million of foreign tax credits in the U.S., $3.4 million of U.S. State tax credits and $2.4 million of other credits. Net Operating Loss Carryforwards We had the following net operating loss (“NOL”) carryforwards as of December 31, 2017 , which can be used to reduce our income tax payable in future years (in thousands): Region Gross Amount Gross Amount With Expiration Starting Expiration Europe $ 153,350 $ 141,774 $ 11,576 2022 South America 14,815 14,815 — n/a U.S. Federal 134,415 — 134,415 2021 U.S. State 106,555 — 106,555 2018 Far East 12,174 — 12,174 2018 As of December 31, 2017 , we had a valuation allowance of $93.3 million , which includes $48.7 million related to discontinued operations and $44.6 million primarily related to net operating losses in certain jurisdictions and U.S. foreign tax credits. As of December 31, 2016 , we had a valuation allowance of $51.5 million , primarily related to net operating losses acquired in the Merger. As a result of the business combination during the transitional period April 25, 2015 to December 31, 2015 , the historic NOL’s of Sorin U.S. are limited by IRC section 382. The annual limitation is approximately $14.2 million , which is sufficient to absorb the U.S. net operating losses prior to their expiration. Thus no additional valuation allowance has been recorded. In 2016, we consolidated certain of our intangible assets into an entity organized under the laws of England and Wales. Because the intangible assets were sold and purchased inter-company, the tax expense on the inter-company gain was deferred, and will be amortized to current income tax expense in the consolidated statement of net (loss) income over an eight year period, which represents the estimated useful life of the intangible assets that were consolidated into the U.K. entity. Approximately $19.4 million and $11.6 million were amortized to current income tax expense during the year ended December 31, 2017 and December 31, 2016 , respectively. The amount of tax to be paid over the eight years is not fixed and we remeasured the unamortized balance on December 22, 2017 as a result of U.S. tax reform. The tax asset is included in ‘Prepaid expenses and other current assets’ and ‘Other assets’ in the consolidated balance sheet as of December 31, 2017, in the amount of $12.6 million and $68.1 million , respectively. The cash taxes expected to be paid on the inter-company gain were remeasured on December 22, 2017 as a result of U.S. tax reform and is recorded as a deferred tax liability and reclassified to income taxes payable as cash taxes become payable. As of December 31, 2017 , the current income tax payable and the deferred income tax liability associated with the intercompany gain was $19.4 million and $75.6 million , respectively. A significant portion of the net deferred tax liability worldwide included above relates to the tax effect of the step-up in value of the assets acquired in the combination with Sorin. Refer to “Note 3. Business Combinations” for additional information. No provision has been made for income taxes on undistributed earnings of foreign subsidiaries as of December 31, 2017 because it is our intention to indefinitely reinvest undistributed earnings of our foreign subsidiaries. In the event of the distribution of those earnings in the form of dividends, a sale of the subsidiaries, or certain other transactions, we may be liable for income taxes. There should be no material tax liability on future distributions as most jurisdictions with undistributed earnings have various participation exemptions / no withholding tax. As of December 31, 2017 , it was not practicable to determine the amount of the deferred income tax liability related to those investments. Uncertain Income Tax Positions The following is a roll-forward of our total gross unrecognized tax benefit (in thousands): Year Ended December 31, 2017 Year Ended December 31, 2016 Balance at beginning of year $ 22,374 $ 20,224 Tax positions related to current year 324 — Tax positions related to prior year 1,153 2,548 Impact of foreign currency exchange rates 2,286 (398 ) Balance at end of year $ 26,137 $ 22,374 Unrecognized tax benefits of $12.2 million and $10.7 million at December 31, 2017 and 2016, respectively, included in the table above are presented in the balance sheet as a reduction to the related deferred tax assets for net operating loss carryforwards. Accrued interest and penalties totaled $8.0 million and $6.3 million as of December 31, 2017 and 2016, respectively, and were included in Other long-term liabilities on our consolidated balance sheets. During the fiscal year ended April 24, 2015, based upon our review and rework of certain prior-year R&D tax credits, we believe that the credits are more likely than not to be sustained upon examination and as a result we released the reserve against these R&D tax credits. Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of our tax positions in order to determine the appropriateness of our reserves for uncertain tax positions. However, there can be no assurance that we will accurately predict the outcome of these audits and the actual outcome of an audit could have a material impact on our consolidated results of income, financial position or cash flows. If all of our unrecognized tax benefits as of December 31, 2017 were recognized, $22.8 million would impact our effective tax rate. We are unable to estimate the amount of change in the majority of our unrecognized tax benefits over the next 12 months. Refer to “Note 12. Commitments and Contingencies” for additional information regarding the status of current tax litigation. We record accrued interest and penalties related to unrecognized tax benefits in ‘Interest expense’ and ‘Foreign exchange and other gains (losses)’, respectively, in the consolidated statements of income (loss). On October 26, 2017, the European Commission (“EC”) announced that an investigation will be opened with respect to the UK’s controlled foreign company (“CFC”) rules. The CFC rules under investigation provide certain tax exceptions to entities controlled by UK parent companies that are subject to lower tax rates if the activities being undertaken by the CFC relate to financing. The EC is investigating whether the exemption is a breach of EU State Aid rules. The investigation is in its early stages and is unlikely to be completed within the next twelve months with an appeal process likely to follow. It is unclear as to whether the UK will be part of the EU once a decision has been finalized due to Brexit and what impact, if any, Brexit will have on the outcome of the investigation or the enforceability of a decision. Due to the many uncertainties related to this matter, including the preliminary state of the investigation, the pending Brexit negotiations and political environment and the unknown outcome of the investigation and resulting appeals, no uncertain tax position reserve has been recognized related to this matter and we are unable to reasonably estimate the potential liability for this matter. LivaNova PLC is domiciled and resident in the UK. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries, and the income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary. As a result of the changes in the overall level of our income, the deployment of various tax strategies and the changes in tax laws, our consolidated effective income tax rate may vary from one reporting period to another. The major jurisdictions where we are subject to income tax examinations are as follows: Jurisdiction Earliest Year Open U.S. - federal and state 1992 Italy 2012 Germany 2010 England and Wales 2013 Canada 2013 In April 2016, the U.S. Internal Revenue Service (“IRS”) and U.S. Treasury Department issued new rules that materially change the manner in which the determination is made as to whether the U.S. anti-inversion rules under Section 7874 will apply. The new rules have the effect of linking with the Mergers certain future acquisitions of U.S. businesses made in exchange for LivaNova equity, and such linkage may impact LivaNova’s ability to engage in particular acquisition strategies. For example, the new temporary regulations would impact certain acquisitions of U.S. companies in an exchange for stock in LivaNova during the 36 month period beginning October 19, 2015 by excluding from the Section 7874 calculations the portion of shares of LivaNova that are allocable to the legacy Cyberonics shareholders. This new rule would generally have the effect of increasing the otherwise applicable Section 7874 fraction with respect to future acquisitions of a U.S. business, thereby increasing the risk that such acquisition could cause LivaNova to be treated as a U.S. corporation for U.S. federal income tax purposes. On October 13, 2016, the U.S. IRS and U.S. Treasury Department released final and temporary regulations under section 385. In response to comments, the final regulations significantly narrow the scope of the proposed regulations previously issued on April 4, 2016. Like the proposed regulations, the final regulations establish extensive documentation requirements that must be satisfied for a debt instrument to constitute debt for U.S. federal tax purposes and re-characterizes a debt instrument as stock if the instrument is issued in one of a number of specified transactions. Moreover, while these new rules are not retroactive, they will impact our future intercompany transactions and our ability to engage in future restructuring. Executive Order 13789, issued in April 2017, ordered the US Treasury to examine tax regulations for excessive cost, complexity or whether such regulation exceeded IRS’s statutory authority, which included IRC Sec. 385. |
