Income Taxes

9 Months Ended

Sep. 28, 2019

INCOME TAXES

The effective tax rates were as follows:



Three Months Ended				Nine Months Ended
September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
5.2	%	14.5	%	19.6	%	42.9	%

The effective tax rates for the three and nine months ended September 28, 2019 decreased primarily due to changes in jurisdictional mix of pre-tax book income, non-deductible intangible and goodwill impairments in the prior periods, and the sale of the animal health business in the current year period.

As previously disclosed, the Internal Revenue Service (“IRS”) is currently auditing Perrigo’s fiscal years ended June 29, 2013, June 28, 2014, and June 27, 2015. On August 22, 2019, we received a draft Notice of Proposed Adjustment (“NOPA”) from the IRS relative to fiscal tax years ended June 28, 2014 and June 27, 2015 and relating to the deductibility of interest on $7.5 billion in debts owed to Perrigo Company plc by Perrigo Company, a Michigan corporation and wholly-owned indirect subsidiary of Perrigo Company, plc. The debts were incurred in connection with the Elan merger transaction in 2013. The draft NOPA would cap the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of 4.0% per annum), on the stated ground that the loans were not negotiated on an arms’-length basis. The draft NOPA proposes a reduction in gross interest expense of approximately $480.0 million for fiscal years 2014 and 2015. If the IRS were to prevail in its proposed adjustment, we estimate an increase in tax expense of approximately $170.0 million, excluding interest and penalties, for fiscal years ended June 28, 2014 through June 27, 2015. In addition, we expect the IRS to seek similar adjustments for the period from June 28, 2015 through December 31, 2019. If those further adjustments were sustained, based on our preliminary calculations and subject to further analysis, our current best estimate is that the additional tax expense will not exceed $200.0 million, excluding interest and penalties, for the period June 28, 2015 through December 31, 2019. We do not expect any similar adjustments beyond this period given that proposed regulations, issued under section 267A of the Internal Revenue Code, will eliminate the deductibility of interest on this debt. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies. No payment of any amount related to the proposed adjustments is required to be made, if at all, until all applicable proceedings have been completed.

Following receipt of the draft NOPA, Perrigo provided the IRS with a detailed written response on September 20, 2019. That submission included an analysis by external advisors that supported the original interest rates as being consistent with arms’-length rates for comparable debt and explained why the exam team’s analyses and conclusions were both factually and legally misguided. Based on discussions with the IRS, we believed that IRS staff would take our submission into account and meet with us to discuss whether this issue could be resolved at the examination level. However, in the weeks following such discussions, IRS staff advised that they would not respond in detail to our September submission or negotiate the interest rate issue prior to issuing a final NOPA consistent with the draft NOPA. Accordingly, we expect to receive a final NOPA regarding this matter in or around mid-November 2019 that proposes substantially the same adjustments described in the draft NOPA.

On October 31, 2018, we received an audit finding letter from the Irish Office of the Revenue Commissioners (“Irish Revenue”) for the years ended December 31, 2012 and December 31, 2013. The audit finding letter relates to the tax treatment of the 2013 sale of the Tysabri^® intellectual property and other assets related to Tysabri^® to Biogen Idec from Elan Pharma. The consideration paid by Biogen to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Irish Revenue issued a Notice of Amended Assessment (“NoA”) on November 29, 2018 which assesses an Irish corporation tax liability against Elan Pharma in the amount of €1,636 million, not including interest or any applicable penalties. We disagree with this assessment and believe that the NoA is without merit and incorrect as a matter of law. We filed an appeal of the NoA on December 27, 2018 and will pursue all available administrative and judicial avenues as may be necessary or appropriate. As part of this strategy to pursue all available administrative and judicial avenues, Elan Pharma was, on February 25, 2019, granted leave by the Irish High Court to seek judicial review of the issuance of the NoA by Irish Revenue. The judicial review filing is based on our belief that Elan Pharma's legitimate expectations as a taxpayer have been breached, not on the merits of the NoA itself. The High Court has scheduled a hearing in this judicial review proceeding in April 2020, and we would expect a decision in this matter in the second half of 2020. If we are ultimately successful in the judicial review proceedings the NoA will be invalidated and Irish Revenue will not be able to re-issue the NoA. The proceedings before the Tax Appeals Commission have been stayed until a decision on the judicial review application has been made. If for any reason the judicial review proceedings are ultimately unsuccessful in establishing that Irish Revenue's issuance of the NoA breaches our legitimate expectations, Elan Pharma will reactivate its appeal to challenge the merits of the NoA before the Tax Appeals Commission.

On August 15, 2017, we filed a complaint in the United States 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 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 in Other non-current assets 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 in Other non-current assets on our balance sheet during the three months ended July 1, 2017. The cumulative deferred charge as recorded on the balance sheet is $29.7 million lower than the amounts reflected above due to overpayments credited to succeeding years, such that the actual refund the company is seeking to receive will be reduced by that amount. In addition, we recently conceded a royalty due to Perrigo U.S. on all omeprazole sales that equates to a 24% of our refund claims and any omeprazole adjustments that may be asserted by the IRS for future years.

On July 11, 2017, we received a draft NOPA associated with transfer pricing positions 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. Athena was the originator of the patents associated with Tysabri^® prior to the acquisition of Athena by Elan in 1996. The draft NOPA asserted that when Elan took over the future funding of Athena’s in-process R&D in 1996, after it acquired Athena in 1996, it should have paid a substantially higher royalty rate for the right to exploit Athena’s intellectual property, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. In response to the draft NOPA, we provided the IRS with substantial additional documentation supporting our position. On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena for the years ended December 31, 2011, 2012 and 2013. The NOPA carries forward the theory from the 2017 draft NOPA. The

revised NOPA proposes a payment of $843.0 million, which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and potentially material interest. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including potentially those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation.

On December 22, 2016, we received a notice of proposed adjustment for the IRS audit of Athena 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.

We have ongoing audits in multiple other jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the United States, Ireland and other jurisdictions in Europe. The Israel Tax Authority's audit of our fiscal years ended June 29, 2013 and June 28, 2014 concluded with no material impact to the financial statements and the Israel Tax Authority is now auditing our fiscal years ended December 31, 2015, December 31, 2016 and December 31, 2017.