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Income Taxes
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The components of income before the income tax provision (benefit) and equity in loss of investees were as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Ireland
$
77,476

 
$
179,570

 
$
233,785

United States
271,440

 
312,904

 
285,420

Other
92,201

 
39,972

 
(83,272
)
Total
$
441,117

 
$
532,446

 
$
435,933

The following table sets forth the details of the income tax provision (benefit) (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Current
 
 
 
 
 
Ireland
$
28,045

 
$
26,420

 
$
29,748

United States
135,608

 
140,061

 
116,301

Other
14,198

 
9,918

 
28,708

Total current tax expense
177,851

 
176,399

 
174,757

Deferred, exclusive of other components below
 
 
 
 
 
Ireland
(19,709
)
 
(7,776
)
 
(6,655
)
United States
(27,559
)
 
(9,120
)
 
332

Other
(19,108
)
 
(13,720
)
 
(40,532
)
Total deferred, exclusive of other components
(66,376
)
 
(30,616
)
 
(46,855
)
Deferred, change in tax rates
 
 
 
 
 
United States
(155,679
)
 
109

 
294

Other
(3,536
)
 
(10,656
)
 
(21,797
)
Total deferred, change in tax rates
(159,215
)
 
(10,547
)
 
(21,503
)
Total deferred tax benefit
(225,591
)
 
(41,163
)
 
(68,358
)
Total income tax provision (benefit)
$
(47,740
)
 
$
135,236

 
$
106,399


On December 22, 2017, the U.S. Tax Cuts and Jobs Act, or U.S. Tax Act, was signed into law.  The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a modified territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and changing the rules which determine whether a U.S. person is a U.S. shareholder of a controlled foreign corporation, or CFC, for 2017 and onwards. The U.S. Tax Act reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the U.S. Tax Act, we remeasured our ending net deferred tax liabilities as of December 31, 2017 and recognized a $155.1 million tax benefit in our consolidated statement of income in 2017.
The U.S. Tax Act provided for a one-time transition tax on the mandatory deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017 and also changed the rules which determine whether a U.S. person is a U.S. shareholder of a CFC for 2017 and onwards. In relation to these changes, we recognized a provisional $6.3 million of income tax expense in our consolidated statement of income in 2017, which is composed of state current tax expense and deferred tax expense.
While the U.S. Tax Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income, or GILTI, provisions and the base-erosion and anti-abuse tax, or BEAT, provisions. The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Additional analysis is required to determine the application of GILTI for us and no estimate for this has been recorded or policy election made regarding the recognition of GILTI as of and for the year ended December 31, 2017.
The BEAT provisions in the U.S. Tax Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. We have not yet fully determined the application of BEAT for us, and it is not effective until 2018. There was no tax impact of BEAT recorded in our consolidated financial statements in 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Act. We have recognized the provisional tax impact related to the one-time transition tax on foreign earnings (including the recognition of a provisional valuation allowance), changes to the rules regarding the deductibility of certain executive compensation (including the recognition of a related provisional deferred tax asset of $7.5 million) and changes to the rules which determine whether a U.S. person is a U.S. shareholder of a CFC, and included these amounts in our consolidated financial statements in 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the U.S. Tax Act. The accounting is expected to be complete when the 2017 U.S. corporate income return is filed in 2018.
Our income tax benefit was $47.7 million in 2017, and our income tax provision was $135.2 million and $106.4 million in 2016 and 2015, respectively, related to tax arising on income in Ireland, the U.S. and certain other foreign jurisdictions, certain unrecognized tax benefits and various expenses not deductible for income tax purposes. The income tax benefit in 2017 included a provisional net benefit of $148.8 million relating to the impact of the recently enacted U.S Tax Act.
The effective tax rates for 2017, 2016 and 2015 were (10.8)%, 25.4% and 24.4%, respectively. The effective tax rate for 2017 excluding the impact of the U.S. Tax Act was 22.9%. The effective tax rates for 2017 (excluding the impact of the U.S. Tax Act), 2016 and 2015 were higher than the Irish statutory rate of 12.5%, primarily due to income taxable at a rate higher than the Irish statutory rate, unrecognized tax benefits, and various expenses not deductible for income tax purposes, partially offset by originating tax credits, the release of reserves related to unrecognized tax benefits from the expiration of a statute of limitation and the release of a valuation allowance held against certain foreign net operating losses, or NOLs. The decrease in the effective tax rate in 2017 (excluding the impact of the U.S. Tax Act) compared to 2016 was primarily due to the release of a valuation allowance held against certain foreign NOLs and the release of reserves related to unrecognized tax benefits upon the expiration of a statute of limitation, partially offset by a reduction in deductions available in relation to subsidiary equity. The increase in the effective tax rate in 2016 compared to 2015 was primarily due to a decrease in the impact of the reduction in tax rates in certain jurisdictions and a decrease in originating tax credits, partially offset by changes in income mix among the various jurisdictions in which we operate. We are currently paying taxes in Ireland, the U.S. and certain other foreign jurisdictions where we have operations and either all NOLs have been utilized, or are restricted as a result of the Azur Merger.
The reconciliation between the statutory income tax rate applied to income before income tax provision (benefit) and equity in loss of investees and our effective income tax rate was as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Statutory income tax rate
12.5
 %
 
12.5
 %
 
12.5
 %
Impact of U.S. Tax Act
(33.7
)%
 
 %
 
 %
Foreign income tax rate differential
20.3
 %
 
16.7
 %
 
19.1
 %
Financing costs
(5.6
)%
 
(2.9
)%
 
(0.4
)%
Change in unrecognized tax benefits
2.8
 %
 
3.3
 %
 
3.6
 %
Change in valuation allowance
(2.8
)%
 
(0.1
)%
 
(0.6
)%
Non-deductible compensation
2.6
 %
 
1.8
 %
 
1.9
 %
Research and other tax credits
(2.6
)%
 
(2.8
)%
 
(3.8
)%
Change in estimates
(2.1
)%
 
 %
 
(1.0
)%
Excess tax benefits from share-based compensation
(1.5
)%
 
(1.5
)%
 
 %
Deduction on subsidiary equity
(0.7
)%
 
(2.4
)%
 
(2.7
)%
Change in tax rate
(0.4
)%
 
(1.8
)%
 
(4.5
)%
Acquisition-related costs
 %
 
2.1
 %
 
 %
Other
0.4
 %
 
0.5
 %
 
0.3
 %
Effective income tax rate
(10.8
)%
 
25.4
 %
 
24.4
 %

Significant components of our net deferred tax assets/(liabilities) were as follows (in thousands): 
 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$
125,966

 
$
202,758

Tax credit carryforwards
130,782

 
114,192

Intangible assets
23,536

 
15,965

Share-based compensation
23,128

 
27,522

Accruals
45,088

 
49,187

Other
92,968

 
56,739

Total deferred tax assets
441,468

 
466,363

Valuation allowance
(52,144
)
 
(53,184
)
Net deferred tax assets
389,324

 
413,179

Deferred tax liabilities:
 
 
 
Acquired intangible assets
(655,347
)
 
(910,460
)
Other
(82,890
)
 
(44,392
)
Total deferred tax liabilities
(738,237
)
 
(954,852
)
Net deferred tax liabilities
$
(348,913
)
 
$
(541,673
)

The net change in valuation allowance was a decrease of $1.0 million in 2017 and an increase of $19.2 million and $4.3 million in 2016 and 2015, respectively.
The following table presents the breakdown between deferred tax assets and liabilities (in thousands):
 
Year Ended December 31,
 
2017
 
2016
Deferred tax assets
$
34,559

 
$
15,060

Deferred tax liabilities
(383,472
)
 
(556,733
)
Net deferred tax liabilities
$
(348,913
)
 
$
(541,673
)

As of December 31, 2017, we had NOL carryforwards and tax credit carryforwards for U.S. federal income tax purposes of approximately $388.8 million and $117.6 million, respectively, available to reduce future income subject to income taxes. The NOL carryforwards are inclusive of $93.4 million from the EUSA Acquisition in 2012 and $213.6 million from the Celator Acquisition in 2016. The federal NOL carryforwards will expire, if not utilized, in the tax years 2018 to 2035, and the federal tax credits will expire, if not utilized, in the tax years 2018 to 2037, with the exception of alternative minimum tax credits, which have no expiration date. In addition, we had approximately $124.4 million of NOL carryforwards and $10.5 million of tax credit carryforwards as of December 31, 2017 available to reduce future taxable income for state income tax purposes. The state NOL carryforwards will expire, if not utilized, in the tax years 2018 to 2034. In addition, as of December 31, 2017, there were NOL carryforwards for income tax purposes of approximately $84.0 million and $59.0 million available to reduce future income subject to income taxes in Luxembourg and the United Kingdom, respectively. The NOLs generated in Luxembourg and the United Kingdom have no expiration period. We also had excess foreign tax credits, as of December 31, 2017, of $4.6 million, which may only be utilized against certain sources of income.  The excess foreign tax credits have no expiration period.
Utilization of certain of our NOL and tax credit carryforwards in the U.S. is subject to an annual limitation due to the ownership change limitations provided by Sections 382 and 383 of the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of certain NOLs and tax credits before future utilization. We currently estimate that we have an annual limitation on the utilization of certain acquired federal NOLs and credits of $410.6 million, before tax effect, for 2018, $30.7 million, before tax effect, for 2019 and a combined total of $311.0 million, before tax effect, for 2020 to 2032. In addition, as a result of the Azur Merger, until 2022 we are subject to certain limitations under the Internal Revenue Code in relation to the utilization of U.S. NOLs to offset U.S. taxable income resulting from certain transactions.
Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. Our valuation allowance was $52.1 million and $53.2 million as of December 31, 2017 and 2016, respectively, for certain Irish, U.S. (federal and state) and foreign deferred tax assets which we maintain until sufficient positive evidence exists to support reversal. During 2017, as part of the overall change in valuation allowance, we recognized a net income tax benefit of $6.6 million relating to the net release of a valuation allowance against certain deferred tax assets primarily associated with NOLs, partially offset by the creation of a provisional valuation allowance of $5.9 million against certain deferred tax assets primarily associated with excess foreign tax credits generated during the year as a result of the U.S. Tax Act. The $6.6 million net income tax benefit includes a benefit of $9.1 million relating to the utilization of NOL carryforwards against which a valuation allowance was carried. During 2016, as part of the overall change in valuation allowance, we recognized a net income tax expense of $17.9 million relating to the creation of a valuation allowance against certain deferred tax assets primarily associated with NOLs recognized during the year, partially offset by a release of a valuation allowance due to the impact of the reduction of tax rates in certain jurisdictions and utilization of certain deferred tax assets primarily associated with NOLs. During 2015, as part of the overall change in valuation allowance, we recognized a net income tax expense of $2.4 million relating to the creation of a valuation allowance against certain deferred tax assets primarily associated with NOLs arising during the year, partially offset by a release of a valuation allowance due to the impact of the reduction of tax rates in certain jurisdictions on certain deferred tax assets primarily associated with NOLs. We periodically evaluate the likelihood of the realization of deferred tax assets and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of tax audits and the regulatory approval of products currently under development. Realization of substantially all the deferred tax assets is dependent on future book income.
Temporary differences related to foreign subsidiaries that are considered indefinitely reinvested totaled approximately $1.7 billion and $1.2 billion as of December 31, 2017 and 2016, respectively. 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, subject to an adjustment, if any, for foreign tax credits and foreign withholding taxes payable to certain foreign tax authorities. As of December 31, 2017, it was not practicable to determine the amount of the unrecognized deferred tax liability related to these earnings. 
We are 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. As a result, we have recorded an unrecognized tax benefit for certain tax benefits which we judge may not be sustained upon examination.
A reconciliation of our gross unrecognized tax benefits follows (in thousands):
 
December 31,
 
2017
 
2016
 
2015
Balance at the beginning of the year
$
90,910

 
$
66,385

 
$
40,802

Increases related to current year tax positions
27,875

 
26,873

 
23,664

Increases related to prior year tax positions
1,620

 
1,191

 
2,833

Decreases related to prior year tax positions
(1,075
)
 
(255
)
 
(646
)
Lapse of the applicable statute of limitations
(13,168
)
 
(3,284
)
 
(268
)
Balance at the end of the year
$
106,162

 
$
90,910

 
$
66,385


The unrecognized tax benefits were included in other non-current liabilities and deferred tax assets, net, in our consolidated balance sheets. Interest related to our unrecognized tax benefits is recorded in the income tax provision in our consolidated statements of income. As of December 31, 2017 and 2016, our accrued interest and penalties related to unrecognized tax benefits were not significant. Included in the balance of unrecognized tax benefits were potential benefits of $73.5 million and $61.0 million at December 31, 2017 and 2016, respectively, that, if recognized, would affect the effective tax rate on income.
We file income tax returns in multiple tax jurisdictions, the most significant of which are Ireland, the U.S. (both at the federal level and in various state jurisdictions), Italy and France. These jurisdictions have statute of limitations ranging from three to five years. However, in the U.S. (at the federal level and in most states), carryforward tax attributes that were generated in 2013 and earlier may still be adjusted upon examination by the tax authorities. Certain of our subsidiaries are currently under examination by the French tax authorities for the years ended December 31, 2012 and 2013. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. In December 2015, we received proposed tax assessment notices from the French tax authorities for 2012 and 2013 relating to certain transfer pricing adjustments. The notices propose additional French tax of approximately $45.9 million, including interest and penalties through the date of the assessment, translated at the foreign exchange rate at December 31, 2017. We disagree with the proposed assessment and are contesting it vigorously.