INCOME TAXES

Pre-tax income (loss) and the (benefit) provision for income taxes from continuing operations are summarized as follows (in millions):



	Year Ended						Six Months Ended			Year Ended
	December 31, 2017			December 31, 2016			December 31, 2015			June 27, 2015
Pre-tax income (loss):
Ireland	$	(454.0	)	$	(3,624.1	)	$	(310.2	)	$	(792.8	)
Other	734.1			(1,224.2		)	319.1			1,053.1
Total pre-tax income (loss)	280.1			(4,848.3		)	8.9			260.3
(Benefit) provision for income taxes:
Current:
Ireland	(8.1		)	0.3			1.6			(2.2		)
United States - federal	96.4			93.0			58.9			77.2
United States - state	4.0			0.7			3.0			6.8
Other foreign	46.1			26.7			53.0			67.4
Subtotal	138.4			120.7			116.5			149.2
Deferred (credit):
Ireland	13.1			(549.4		)	(23.1		)	11.1
United States - federal	6.8			(7.6		)	(34.4		)	(19.9		)
United States - state	1.0			(5.1		)	(3.3		)	(0.8		)
Other foreign	1.2			(394.1		)	(89.3		)	(15.4		)
Subtotal	22.1			(956.2		)	(150.1		)	(25.0		)
Total (benefit) provision for income taxes	$	160.5		$	(835.5	)	$	(33.6	)	$	124.2

A reconciliation of the provision based on the Federal statutory income tax rate to our effective income tax rate is as follows:



	Year Ended				Six Months Ended		Year Ended
	December 31, 2017		December 31, 2016		December 31, 2015		June 27, 2015

Provision at statutory rate	12.5	%	12.5	%	12.5	%	12.5	%
Ireland tax on non-trading differences	(47.7	)	(0.4	)	(207.4	)	(9.9	)
Expenses not deductible for tax purposes/deductions not expensed for book, net	63.4		(0.7	)	394.0		14.7
Goodwill impairment not deductible for tax purposes	—		(2.8	)	—		—
U.S. Operations:
State income taxes, net of federal benefit	(1.4	)	0.1		38.4		(1.0	)
Research and development credit	(0.6	)	—		(13.2	)	(0.7	)
Other	(5.8	)	0.4		112.3		4.8
Tax Law Change - US	5.4		—		—		—
Tax Law Change - Belgium	(3.2	)	—		—		—
Other foreign differences (earnings taxed at other than applicable statutory rate)	(22.7	)	3.3		(647.2	)	(16.1	)
Intangible impairment differences	(3.0	)	4.8		(397.6	)	—
Worldwide operations:
Valuation allowance changes	17.8		0.8		249.3		25.7
Change in unrecognized taxes	25.3		(0.8	)	82.7		17.7
Withholding taxes	17.3		—		—		—
Effective income tax rate	57.3	%	17.2	%	(376.2	)%	47.7	%

We have provided for income taxes for certain earnings of certain foreign subsidiaries that have not been deemed to be permanently reinvested. No further provision has been made for income taxes on remaining undistributed earnings of foreign subsidiaries of approximately $6.3 billion at December 31, 2017, since it is our intention to indefinitely reinvest undistributed earnings of our foreign subsidiaries. Due to the complexity of the legal entity structure and the complexity of the tax laws in various jurisdictions, we believe it is not practicable to estimate, within any reasonable range, the additional income taxes that may be payable on the remittance of such undistributed earnings.

Deferred income taxes arise from temporary differences between the financial reporting and the tax reporting basis of assets and liabilities and operating loss and tax credit carryforwards for tax purposes. The components of our net deferred income tax asset (liability) were as follows:



	December 31, 2017			December 31, 2016			December 31, 2015
Deferred income tax asset (liability):
Depreciation and amortization	$	(457.8	)	$	(765.2	)	$	(1,550.6	)
Inventory basis differences	21.3			27.4			22.8
Accrued liabilities	87.9			68.5			50.8
Allowance for doubtful accounts	1.5			1.7			1.3
Research and development	58.9			61.7			63.7
Loss and credit carryforwards	292.5			292.4			244.2
Share-based compensation	16.2			18.1			20.6
Foreign tax credit	—			10.6			10.6
Federal benefit of unrecognized tax positions	17.0			24.3			22.8
Interest carryforwards	30.5			435.3			334.6
Other, net	28.2			3.0			14.7
Subtotal	$	96.2		$	177.8		$	(764.5	)
Valuation allowance	(407.7		)	(495.6		)	(536.8		)
Net deferred income tax asset (liability):	$	(311.5	)	$	(317.8	)	$	(1,301.3	)

The above amounts are classified on the Consolidated Balance Sheets as follows (in millions):



	December 31, 2017			December 31, 2016			December 31, 2015
Assets	$	10.4		$	72.1		$	71.4
Liabilities	(321.9		)	(389.9		)	(1,372.7		)
Net deferred income tax (liability) asset	$	(311.5	)	$	(317.8	)	$	(1,301.3	)

At December 31, 2017, we had gross carryforwards as follows:



	December 31, 2017
	Gross Carryforwards⁽¹⁾		Gross Valuation Allowances
U.S. state net operating losses	$	248.5	$	203.6
Worldwide federal net operating losses excluding U.S. states	$	1,389.0	$	861.6
Worldwide federal capital losses	$	22.0	$	22.0
U.S. federal credits	$	82.6	$	82.6
U.S. state credits	$	71.9	$	71.9
Interest carryforwards	$	478.8	$	127.0

⁽¹⁾ Utilization of such carryforwards within the applicable statutory periods is uncertain.

In 2017, we recorded income tax expense related to valuation allowances of $10.3 million in Ireland. In addition, we released valuation allowances of $42.4 million and $55.8 million for Omega and the U.S. and other jurisdictions, respectively, resulting in a tax benefit.

U.S. federal credit carryforwards of $28.2 million, $37.2 million and $167.8 million expire through 2022, 2025 and 2027, respectively, with the remaining U.S. credits having no expiration. U.S. state net operating loss carryforwards expire through 2037, and U.S. state credit carryforwards expire through 2032. Of the non-U.S. net operating loss carryforwards, $1.8 million, $20.3 million, $0.9 million, and $0.1 million expire through 2019, 2022, 2024 and 2025, respectively, while the remaining amounts of non U.S. net operating loss carryforwards and non-U.S. capital loss carryforwards have no expiration. The valuation allowances for these net operating loss carryforwards are adjusted annually, as necessary. After application of the valuation allowances, as described above, we anticipate no significant limitations will apply with respect to the realization of our net deferred income tax assets.

The following table summarizes the activity related to amounts recorded for uncertain tax positions, excluding interest and penalties (in millions):



	Unrecognized Tax Benefits
Balance at June 27, 2015	$	324.0
Additions:
Positions related to the current year	22.9
Reductions:
Positions related to prior years	(43.5		)
Settlements with taxing authorities	(15.3		)
Balance at December 31, 2015	288.1
Additions:
Positions related to the current year	45.5
Positions related to prior years	8.6
Reductions:
Settlements with taxing authorities	(2.4		)
Lapse of statutes of limitation	(5.3		)
Balance at December 31, 2016	334.5
Additions:
Positions related to the current year	55.0
Positions related to prior years	76.6
Reductions:
Settlements with taxing authorities	(11.1		)
Lapse of statutes of limitation	(0.1		)
Decrease in prior year positions	(35.2		)
Balance at December 31, 2017	$	419.7

We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The total amount accrued for interest and penalties in the liability for uncertain tax positions was $82.0 million, $63.5 million, and $52.1 million as of December 31, 2017, December 31, 2016, and December 31, 2015, respectively.

The total liability for uncertain tax positions was $501.7 million, $398.0 million, and $340.3 million as of December 31, 2017, December 31, 2016, and December 31, 2015, respectively, before considering the federal tax benefit of certain state and local items, of which $204.0 million, $248.7 million, and $198.5 million, respectively, would impact the effective tax rate in future periods, if recognized.

We file income tax returns in numerous jurisdictions and are therefore subject to audits by tax authorities. Our primary income tax jurisdictions are Ireland, U.S., Israel, Belgium, France, and the United Kingdom.

Although we believe that our tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audit and any related litigation could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.

On August 15, 2017, we filed a complaint in the U.S. District Court for the Western District of Michigan to recover $163.6 million of Federal income tax, penalties, and interest assessed and collected by the Internal Revenue Service (“IRS”), plus statutory interest thereon from the dates of payment, for the fiscal years ended June 27, 2009, June 26, 2010, June 25, 2011, and June 30, 2012 (the “2009 tax year,” “2010 tax year,” “2011 tax year,” and “2012 tax year,” respectively). The IRS audits of those years culminated in the issuances of two statutory notices of deficiency: (1) on August 27, 2014 for the 2009 and 2010 tax years and (2) on April 20, 2017 for the 2011 and 2012 tax years. The statutory notices of deficiency both included un-agreed income adjustments related principally to transfer pricing adjustments regarding the purchase, distribution, and sale of store-brand OTC pharmaceutical products in the United States. In addition, the statutory notice of deficiency for the 2011 and 2012 tax years included the capitalization of certain expenses that were deducted when paid or incurred in defending against certain patent infringement lawsuits. We fully paid the assessed amounts of tax, interest, and penalties set forth in the statutory notices and filed timely claims for refund on June 11, 2015 and June 7, 2017 for the 2009-2010 tax years and 2011-2012 tax years, respectively. Our claims for refund were disallowed by certified letters dated August 18, 2015 and July 11, 2017, for the 2009-2010 tax years and 2011-2012 tax years, respectively. The complaint was timely, based upon the refund claim denials, and seeks refunds of tax, interest, and penalties of $37.2 million for the 2009 tax year, $61.5 million for the 2010 tax year, $40.2 million for the 2011 tax year, and $24.7 million for the 2012 tax year. The amounts sought in the complaint for the 2009 and 2010 tax years were recorded as deferred charges on our balance sheet during the three months ended March 28, 2015, and the amounts sought in the complaint for the 2011 and 2012 tax years were recorded as deferred charges on our balance sheet during the three months ended July 1, 2017.

On December 22, 2016, we received a notice of proposed adjustment for the IRS audit of Athena Neurosciences, Inc. (“Athena”), a subsidiary of Elan acquired in 1996, for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. Perrigo acquired Elan in December 2013. This proposed adjustment relates to the deductibility of litigation costs. We disagree with the IRS’s position asserted in the notice of proposed adjustment and intend to contest it.

On July 11, 2017, we received a draft notice of proposed adjustment associated with transfer pricing positions for the IRS audit of Athena for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. Athena was the originator of the patents associated with Tysabri^® prior to the acquisition of Athena by Elan in 1996. In response to the draft notice of proposed adjustment, we provided the IRS with substantial additional documentation supporting our position. The amount of adjustments that may be asserted by the IRS in the final notice of proposed adjustment cannot be quantified at this time; however, based on the draft notice received, the amount to be assessed may be material. We disagree with the IRS’s position as asserted in the draft notice of proposed adjustment and intend to contest it.

We have ongoing audits in multiple other jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the U.S., Israel, Ireland and other jurisdictions in Europe. In addition to the matters discussed above, the IRS is currently auditing our fiscal years ended June 29, 2013, June 28, 2014, and June 27, 2015. The Israel Tax Authority is currently auditing our fiscal years ended June 29, 2013 and June 28, 2014 (which covers the period of the Elan transaction). The Ireland Tax Authority is currently auditing our years ended December 31, 2012 and December 31, 2013.

Based on the final resolution of tax examinations, judicial or administrative proceedings, changes in facts or law, expirations of statute of limitations in specific jurisdictions or other resolutions of, or changes in, tax positions, it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those represented on the financial statements as of December 31, 2017. During the next 12 months, it is reasonably possible that such circumstances may occur that would have a material effect on previously unrecognized tax benefits. As a result, the total net amount of unrecognized tax benefits may decrease, which would reduce the provision for taxes on earnings by a range estimated at $1.0 million to $17.9 million.

Tax Law Changes

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. Tax Act”). The U.S. Tax Act includes a number of significant changes to existing U.S. tax laws that impact the Company. These changes include a corporate income tax rate reduction from 35% to 21% and the elimination or reduction of certain U.S. deductions and credits including limitations on the U.S. deductibility of interest expense and executive compensation. The U.S. Tax Act also transitions the U.S. taxation of international earnings from a worldwide system to a modified territorial system. These changes are effective beginning in 2018. The U.S. Tax Act also includes a one-time mandatory deemed repatriation tax on accumulated U.S. owned foreign corporations’ previously untaxed foreign earnings (“Transition Toll Tax”). The Transition Toll Tax may be paid over an eight-year period, starting in 2018, and will not accrue interest.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of the U.S. GAAP ASC 740 income tax accounting for tax law changes enacted during 2017, 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. In accordance with SAB 118, we have recorded an income tax benefit of $2.4 million in connection with the remeasurement of certain deferred tax assets and liabilities. We also recorded a $17.5 million increase of current tax expense in connection with the Transition Toll Tax on cumulative U.S. owned foreign earnings of $1.2 billion. The tax impacts represent provisional amounts and are a reasonable estimate at December 31, 2017. Additional work is necessary to perform additional analysis of historical foreign earnings and U.S. cumulative temporary differences, as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in 2018 when the analysis is complete.

The U.S. Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At December 31, 2017, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we are unable to make a reasonable estimate and have not reflected any adjustments related to GILTI in our financial statements.

On December 22, 2017, the Belgian Parliament approved Belgian tax reform legislation (“Belgium Tax Act”), which was signed by the Belgian King and enacted on December 25, 2017. The Belgium Tax Act provides for a reduction to the corporate income tax rate from 34% to 30%, for 2018 and 2019, as well as a reduced corporate income tax rate of 25% for 2020 and beyond. The Belgium Tax Act also increased the participation exemption on dividend distributions to Belgium entities from 95% to 100%. The Belgium Tax Act also introduces Belgium tax consolidation and other anti-tax avoidance directives. We recorded an additional income tax expense of $24.1 million for the remeasurement of certain deferred tax assets and additional income tax benefit of $33.2 million for the remeasurement of certain deferred tax liabilities as a result of the Belgium Tax Act.

For the years ended December 31, 2016 and December 31, 2015, statutory rate changes, primarily in Europe, favorably impacted the effective tax rate in the amount of $4.0 million and $27.9 million, respectively.