INCOME TAXES

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 21. INCOME TAXES

Loss from Continuing Operations before Income Tax

Our operations are conducted through our various subsidiaries in numerous jurisdictions throughout the world. We have provided for income taxes based upon the tax laws and rates in the jurisdictions in which our operations are conducted.

The components of our Loss from continuing operations before income tax by geography for the years ended December 31, 2023, 2022 and 2021 are as follows (in thousands):

	2023		2022		2021
U.S.	$	(1,609,064)	$	(2,429,315)	$	4,792,852
International	(782,860)		(458,787)		(5,339,455)
Total loss from continuing operations before income tax	$	(2,391,924)	$	(2,888,102)	$	(546,603)

Income tax from continuing operations consists of the following for the years ended December 31, 2023, 2022 and 2021 (in thousands):

	2023		2022		2021
Current:
U.S. Federal	$	44,304	$	21,057	$	13,649
U.S. State	2,900		1,731		1,491
International	3,956		6,031		10,495
Total current income tax	$	51,160	$	28,819	$	25,635
Deferred:
U.S. Federal	$	5,126	$	(622)	$	118
U.S. State	451		1,065		(564)
International	(875)		(7,746)		(2,711)
Total deferred income tax	$	4,702	$	(7,303)	$	(3,157)
Total income tax	$	55,862	$	21,516	$	22,478

Tax Rate

A reconciliation of income tax from continuing operations at the U.S. federal statutory income tax rate to the total income tax provision from continuing operations for the years ended December 31, 2023, 2022 and 2021 is as follows (in thousands):

	2023		2022		2021
Notional U.S. federal income tax provision at the statutory rate	$	(502,304)	$	(606,502)	$	(114,787)
State income tax, net of federal benefit	3,283		(9,517)		6,750
Uncertain tax positions	32,191		21,930		42,415
Residual tax on non-U.S. net earnings	(610,200)		(32,257)		(181,739)
Non-deductible goodwill impairment	—		385,459		76,230
Change in valuation allowance	6,449,891		306,497		495,565
Non-deductible expenses	109,629		47,221		25,679
Executive compensation limitation	7,254		5,580		6,215
Equity based compensation	4,522		3,247		2,695
Financing activities (1)	(3,035,598)		73,629		(287,012)
Investment activities (2)	(2,681,806)		(178,018)		(68,943)
Non-deductible legal settlement	279,216		—		14,112
Other	(216)		4,247		5,298
Income tax	$	55,862	$	21,516	$	22,478

__________

(1)The amount in 2023 primarily relates to tax deductible losses associated with receivables in consolidated subsidiaries. The tax benefit is fully offset by an increase to the valuation allowance. The 2022 amount primarily relates to nondeductible foreign currency gains and losses on intercompany debt.

(2)The amounts in 2023 and 2022 primarily relate to tax deductible losses associated with the investment in consolidated subsidiaries. The tax benefit is fully offset by an increase to the valuation allowance.

The change in income tax expense in 2023 compared to 2022, and the change in 2022 income tax expense compared to 2021, primarily relates to an increase in accrued interest on uncertain tax positions and changes in the geographic mix of pre-tax earnings.

Deferred Tax Assets and Liabilities

Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The significant components of the net deferred income tax liability shown on the balance sheets as of December 31, 2023 and 2022 are as follows (in thousands):

	December 31, 2023		December 31, 2022
Deferred tax assets:
Accrued expenses and reserves	$	274,424	$	220,415
Deferred interest deduction	492,394		421,552
Fixed assets, intangible assets and deferred amortization	549,715		560,257
Loss on capital assets	4,755		23,511
Net operating loss carryforward	15,478,840		9,214,688
Other	59,145		49,943
Research and development and other tax credit carryforwards	7,402		7,777
Total gross deferred income tax assets	$	16,866,675	$	10,498,143
Deferred tax liabilities:
Other	$	(9,148)	$	(3,156)
Investments	(136)		(107)
Intercompany notes	—		(72,286)
Total gross deferred income tax liabilities	$	(9,284)	$	(75,549)
Valuation allowance	(16,873,639)		(10,436,419)
Net deferred income tax liability	$	(16,248)	$	(13,825)

As of December 31, 2023, the Company had significant deferred tax assets for tax credits, net operating and capital loss carryforwards, net of unrecognized tax positions, as presented below (in thousands):

Jurisdiction	Amount		Begin to Expire
Ireland	$	85,816	Indefinite
Luxembourg	$	15,201,302	2034
U.S.:
Federal-ordinary losses	$	21,132	2037
Federal-capital losses	$	4,010	2024
Federal-tax credits	$	9,768	2024
State-ordinary losses	$	210,249	2024
State-capital losses	$	392	2024
State-tax credits	$	3,256	2037

A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company assesses the available positive and negative evidence to estimate whether the existing deferred tax assets will be realized.

The Company has recorded a valuation allowance against certain jurisdictional NOL carryforwards and other tax attributes. As of December 31, 2023 and 2022, the total valuation allowance was $16,873.6 million and $10,436.4 million, respectively. During the years ended December 31, 2023 and 2022, the Company increased its valuation allowance by $6.4 billion and $267.1 million, respectively, which was primarily driven by taxable losses in Luxembourg related to investments and financing activities in consolidated subsidiaries. As previously disclosed, the Company concluded that there was substantial doubt about its ability to continue as a going concern within one year after the date of issuance of the Condensed Consolidated Financial Statements included in the Second-Quarter 2022 Form 10-Q. The Company considered this in determining that certain net deferred tax assets were no longer more likely than not realizable. As a result, an immaterial increase in valuation allowance on the Company’s net deferred tax assets was recorded in various jurisdictions during the second quarter of 2022.

As of December 31, 2023, the Company had the following significant valuation allowances (in thousands):

Jurisdiction	December 31, 2023
Ireland	$	330,465
Luxembourg	$	15,201,530
U.S.	$	1,328,840

The Company maintains a full valuation allowance against the net deferred tax assets in the U.S., Luxembourg, Ireland and certain other foreign tax jurisdictions as of December 31, 2023. It is possible that in the future there may be sufficient positive evidence to release a portion or all of the valuation allowance. Release of these valuation allowances would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment and prospective earnings.

We have provided for any applicable income taxes associated with current year distributions, as well as any earnings that are expected to be distributed in the future, in the calculation of the income tax provision. As a result of the bankruptcy filing, we have reassessed our historical indefinite reinvestment assertion with respect to undistributed earnings. Based on that reassessment, we have determined that the undistributed earnings of certain subsidiaries will continue to be indefinitely reinvested. Those entities for which we will continue to assert indefinite reinvestment have an accumulated earnings deficit as of December 31, 2023. No additional provision has been made for Irish and non-Irish income taxes on those undistributed earnings that we are not asserting indefinite reinvestment as no tax is expected to be incurred with respect to those earnings. A liability could arise if our intention to indefinitely reinvest such earnings were to change and amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. The potential tax implications of unremitted earnings are driven by the facts at the time of the distribution. It is not practicable to estimate the additional income taxes related to indefinitely reinvested earnings or the basis differences related to investments in subsidiaries.

Uncertain Tax Positions

The Company and its subsidiaries are subject to income taxes in the U.S., various states and numerous foreign jurisdictions with varying statutes as to which tax years are subject to examination by the tax authorities. The Company has taken positions on its tax returns that may be challenged by various tax authorities. The Company believes it has appropriately established reserves for tax-related uncertainties. The Company endeavors to resolve matters with a tax authority at the examination level and could reach agreement with a tax authority at any time. The accruals for tax-related uncertainties are based on the Company’s best estimate of the potential tax exposures. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. The final outcome with a tax authority may result in a tax liability that is more or less than that reflected in our financial statements. Favorable resolution of such matters could be recognized as a reduction of the Company’s effective tax rate in the year of resolution, while a resolution that is not favorable could increase the effective tax rate and may require the use of cash. Uncertain tax positions are reviewed quarterly and adjusted as necessary when events occur that affect potential tax liabilities, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, identification of new issues and issuance of new legislation, regulations or case law.

As of December 31, 2023, the Company had total UTPs, including accrued interest and penalties, of $680.2 million. If recognized in future years, $295.9 million of such amounts would impact the income tax provision and effective tax rate. As of December 31, 2022, the Company had total UTPs, including accrued interest and penalties, of $646.4 million. If recognized in future years, $251.4 million of such amounts would have impacted the income tax provision and effective tax rate. The following table summarizes the activity related to UTPs during the years ended December 31, 2023, 2022 and 2021 (in thousands):

	Unrecognized Tax Positions Federal, State and Foreign Tax
UTP Balance at December 31, 2020	$	529,775
Gross additions for current year positions	36,662
Gross reductions for prior period positions	(702)
Gross additions for prior period positions	1,203
Decrease due to lapse of statute of limitations	(475)
Currency translation adjustment	(24)
UTP Balance at December 31, 2021	$	566,439
Gross additions for current year positions	20,061
Decrease due to lapse of statute of limitations	(4,451)
Currency translation adjustment	(2,419)
UTP Balance at December 31, 2022	$	579,630
Gross additions for current year positions	12,457
Decrease due to lapse of statute of limitations	(186)
Currency translation adjustment	(199)
UTP Balance at December 31, 2023	$	591,702
Accrued interest and penalties	88,463
Total UTP balance including accrued interest and penalties	$	680,165

The Company records accrued interest and penalties, where applicable, related to uncertain tax positions as part of the provision for income taxes. The cumulative accrued interest and penalties related to uncertain tax positions were $88.5 million and $66.7 million as of December 31, 2023 and 2022, respectively.

During the year ended December 31, 2023, the Company recognized net expense of $43.8 million associated with UTPs, primarily related to interest. During the year ended December 31, 2022, the Company recognized net expense of $16.2 million associated with UTPs, primarily related to interest and penalties. During the year ended December 31, 2021, the Company recognized net expense of $10.6 million associated with UTPs, primarily related to interest and penalties. At December 31, 2023 and 2022, the Company’s UTP liability is included in the Consolidated Balance Sheets within Liabilities subject to compromise, Other liabilities and, where appropriate, as a reduction to Deferred tax assets.

Our subsidiaries file income tax returns in the countries in which they have operations. Generally, these countries have statutes of limitations ranging from 3 to 5 years. Certain subsidiary tax returns are currently under examination by taxing authorities, including U.S. tax returns for the 2006 through 2018 tax years by the IRS.

As a result of the U.S. Government Economic Settlement, it is expected that the amount of UTPs will change during the next 12 months, which is expected to have a material impact on our results of operations and financial position.

On June 3, 2020, in connection with the IRS’s examination of our U.S. income tax return for the fiscal year ended December 31, 2015 (2015 Return), we received an acknowledgement of facts (AoF) from the IRS related to transfer pricing positions taken by Endo U.S., Inc. and its subsidiaries (Endo U.S.). The AoF asserted that Endo U.S. overpaid for certain pharmaceutical products that it purchased from certain non-U.S. related parties and proposed a specific adjustment to our 2015 U.S. income tax return position. On September 4, 2020, we received a Form 5701 Notice of Proposed Adjustment (NOPA) that is consistent with the previously disclosed AoF. We believe that the terms of the subject transactions are consistent with comparable transactions for similarly situated unrelated parties, and we intend to contest the proposed adjustment. While the NOPA is not material to our business, financial condition, results of operations or cash flows, the IRS could seek to apply its position to subsequent tax periods and propose similar adjustments. The aggregate impact of these adjustments, if sustained, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Although the timing of the outcome of this matter is uncertain, it is possible any final resolution of the matter could take a number of years.

In connection with the IRS’s examination of our 2015 Return, on December 31, 2020, the IRS issued a Technical Advice Memorandum (TAM) regarding the portion of our 2015 NOL that we believe qualifies as a specified product liability loss (SLL). The TAM concurred in part with our positions on the 2015 Return but disagreed with our position that the AMS worthless stock loss qualifies as an SLL. In April 2021, we received draft NOPAs from the IRS consistent with the TAM. We continue to disagree with the IRS’s position and the draft NOPAs received and, if necessary, intend to contest any additional tax determined to be owed with respect to the NOPAs. However, if we were unsuccessful in contesting the IRS’s position, we have preliminarily estimated that we would have additional cash taxes payable to the IRS of between $70 million and $250 million excluding interest. We continue to discuss this position with the IRS and the actual amount that may be owed to the IRS if we are unsuccessful may be different than our preliminary estimate. Although the timing of the outcome of this matter is uncertain, it is possible any final resolution of the matter could take a number of years.

As of December 31, 2023, we may be subject to examination in the following major tax jurisdictions:

Jurisdiction	Open Years
Canada	2016 through 2023
India	2012 through 2023
Ireland	2016 through 2023
Luxembourg	2015 through 2023
U.S. - federal, state and local	2006 through 2023

Bankruptcy-Related Developments

In connection with our ongoing bankruptcy proceedings, the IRS has filed multiple proofs of claim against several of the Debtors. The total amount of the asserted claims filed by the IRS, which relate to tax years ended 2006 through 2014, 2016 through 2018 and 2020 through 2021, is approximately $18.7 billion. The IRS amended its proof of claims on May 30, 2023 and increased the total amount of approximately $20 billion. A number of the amended claims are in respect of the same proposed tax liability but are filed against multiple subsidiary members of our U.S. consolidated tax groups. After excluding the repetitive claims filed to different members of our U.S. consolidated tax groups, the net claims are approximately $4 billion (the IRS’s initial net claim amount was approximately $2.6 billion). In general, the claims primarily relate to the IRS’s challenges of our historic tax positions discussed above for certain intercompany arrangements, including the level of profit earned by our U.S. subsidiaries pursuant to such arrangements, and a product liability loss carryback claim. We disagree with the IRS’s amended claims and, if necessary, intend to contest any additional tax determined to be owed with respect to the claims.

The IRS’s claims and uncertain tax positions related to historical federal income tax positions not specifically challenged by the IRS, as well as certain federal income tax-related claims anticipated to arise during the Chapter 11 Cases and as a result of the consummation of the Plan which is subject to Bankruptcy Court approval, will be resolved in accordance with the U.S. Government Economic Settlement. The claims brought against the Debtors by the IRS will be deemed to be, in part, an allowed, unsubordinated priority claim and, in part, an allowed, unsubordinated general unsecured claim, each in such amount equal to the settlement amounts to be received by the IRS as allocated by the U.S. Government.