Income Taxes

The components of loss from continuing operations before provision for income taxes during the three years ended December 31, 2016 consisted of the following:



	2016			2015			2014
	(in thousands)
United States	$	(147,860	)	$	(272,326	)	$	(645,465	)
Foreign	80,494			(285,474		)	(89,410		)
Loss from continuing operations before provision for income taxes	$	(67,366	)	$	(557,800	)	$	(734,875	)

The components of the provision for income taxes from continuing operations during the three years ended December 31, 2016 consisted of the following:



	2016			2015			2014
	(in thousands)
Current taxes:
United States	$	(3,821	)	$	25,623		$	2,853
Foreign	1,794			831			2,457
State	1,836			3,629			1,366
Total current taxes	$	(191	)	$	30,083		$	6,676
Deferred taxes:
United States	$	18,659		$	497		$	244
Foreign	(3,359		)	(355		)	—
State	1,556			156			38
Total deferred taxes	$	16,856		$	298		$	282
Provision for income taxes	$	16,665		$	30,381		$	6,958

The difference between the Company’s “expected” tax provision (benefit), as computed by applying the U.S. federal corporate tax rate of 35% to loss from continuing operations before provision for income taxes, and actual tax is reconciled as follows:



	2016			2015			2014
	(in thousands)
Loss from continuing operations before provision for income taxes	$	(67,366	)	$	(557,800	)	$	(734,875	)
Expected tax provision (benefit)	(23,578		)	(195,230		)	(257,206		)
State taxes, net of federal benefit	3,621			3,800			1,124
Foreign rate differential	21,346			47,402			39,335
Tax credits	(47,773		)	(55,696		)	(33,788		)
Unbenefitted operating losses (gains)	14,837			226,169			241,037
Non-deductible expenses	24,749			5,817			18,756
Rate change	12,836			(1,224		)	(1,826		)
Tax attribute expiration	9,947			—			—
Other	680			(657		)	(474		)
Provision for income taxes	$	16,665		$	30,381		$	6,958

The foreign rate differential in the tax rate reconciliation table reflects the effect of operations in jurisdictions with tax rates that are different from the United States. As set forth in the components of loss before provision for income taxes, the Company had income in 2016 and losses in 2015 and 2014 in foreign jurisdictions in each year presented. Due to lower foreign tax rates, particularly in the United Kingdom, the Company’s tax expense (benefit) in foreign jurisdictions is less than the “expected” tax expense (benefit) that would have resulted from income (losses) in these jurisdictions at corporate tax rates in the United States. The difference between the tax expense (benefit) at foreign corporate tax rates and the “expected” expense (benefit) based on corporate tax rates in the United States is reflected in the tax reconciliation table under the caption “foreign rate differential.”

The unbenefitted operating losses in the tax rate reconciliation table primarily reflect a change in the valuation allowance on deferred tax assets related to the United States, United Kingdom and Switzerland. In 2016, the valuation allowance increased primarily due to an increase in tax credits in the United States and an increase in the net operating loss in the United Kingdom, both due to the uncertainty in the Company’s ability to use them in future periods. In 2015 and 2014, the valuation allowance increased primarily related to an increase in net operating losses that have been incurred with no corresponding benefit due to the uncertainty in the Company’s ability to use them in future periods.

In 2016, the effect of non-deductible expenses is related to equity compensation, Orphan Drug Credits, foreign amortization and partial disallowance of expenses related to dissolution of a foreign subsidiary.

Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred taxes were as follows:



	As of December 31,
	2016			2015
	(in thousands)
Deferred tax assets:
Net operating loss	$	1,232,399		$	1,250,642
Tax credit carryforwards	367,402			315,535
Property and equipment	22			—
Intangible assets	34,938			14,673
Deferred revenues	31,205			9,341
Stock-based compensation	110,446			93,404
Inventories	4,705			5,913
Accrued expenses	23,078			27,236
Currency translation adjustment	—			222
Unrealized loss	5			—
Construction financing lease obligation	177,735			176,250
Gross deferred tax assets	1,981,935			1,893,216
Valuation allowance	(1,731,186		)	(1,716,349		)
Total deferred tax assets	250,749			176,867
Deferred tax liabilities:
Property and equipment	(169,089		)	(175,424		)
Acquired intangibles	(134,063		)	(110,439		)
Deferred revenue	$	(73,357	)	$	—
Unrealized gain	$	(7,967	)	$	(1,088	)
Net deferred tax liabilities	$	(133,727	)	$	(110,084	)

The Company presents its deferred tax assets and deferred tax liabilities gross on its consolidated balance sheets. As of December 31, 2016, $134.0 million of the deferred tax liabilities are attributable to the Company’s collaborations with BioAxone and Parion. As of December 31, 2015, $110.4 million of the deferred tax liabilities are attributable to the Company’s collaborations with BioAxone and Parion.

For federal income tax purposes, as of December 31, 2016, the Company has net operating loss carryforwards of approximately $4.1 billion and tax credits of $262.9 million, which may be used to offset future federal income and tax liability, respectively. In addition, the Company will record an increase of approximately $1.2 billion of the federal net operating loss carryforward with a corresponding valuation allowance upon adoption of the new stock compensation guidance in the first quarter 2017.

For state income tax purposes, the Company has net operating loss carryforwards of approximately $975.8 million and tax credits of $103.8 million, which may be used to offset future state income and tax liability, respectively. In addition, the Company will record an increase of approximately $190.0 million of the state net operating loss carryforward with a corresponding valuation allowance upon adoption of the new stock compensation guidance in the first quarter 2017.

These federal and state operating loss carryforwards and tax credits expire at various dates through 2036. After consideration of all the evidence, both positive and negative, the Company continues to maintain a valuation allowance for the majority of the 2016 deferred tax asset because it is more likely than not that the deferred tax asset will not be realized. In future periods, if management determines that it is more likely than not that the deferred tax asset will be realized, (i) the valuation allowance would be decreased, (ii) the deferred tax asset would be reflected on the Company’s consolidated balance sheet and (iii) the Company would record non-cash benefits in its consolidated statements of operations related to the reflection of the deferred tax asset on its consolidated balance sheets.

The valuation allowance increased by $14.8 million from December 31, 2015 to December 31, 2016 primarily due to an increase in research tax credit carry forwards in the United States and other timing items.

Unrecognized tax benefits during the two years ended December 31, 2016 consisted of the following:



	2016			2015
	(in thousands)
Unrecognized tax benefits beginning of year	$	425		$	880
Decrease due to statute of limitations expiring	(425		)	—
Decrease due to settlements and payments	—			(455		)
Unrecognized tax benefits end of year	$	—		$	425

The Company had gross unrecognized tax benefits of zero and $0.4 million, respectively, as of December 31, 2016 and 2015. The Company recognizes interest and penalties related to income taxes as a component of income tax expense. As of December 31, 2016, no interest and penalties have been accrued.

The Company files United States federal income tax returns and income tax returns in various state, local and foreign jurisdictions. The Company is no longer subject to any tax assessment from an income tax examination in the United States or any other major taxing jurisdiction for years before 2011, except where the Company has net operating losses or tax credit carryforwards that originate before 2011. The Company currently is under examination by Canada Revenue Agency for the years ending December 31, 2011 through December 31, 2013. No adjustments have been reported. The Company is not under examination by any other jurisdictions for any tax year. The Company concluded audits with Internal Revenue Service, Delaware, Pennsylvania, Texas and Revenue Quebec during 2016, and Massachusetts and New York during 2015, with no material adjustments.

At December 31, 2016, foreign earnings, which were not significant, have been retained indefinitely by foreign subsidiary companies for reinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such earnings and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to U.S. federal income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.