Income Taxes

The components of income (loss) before (benefit from) provision for income taxes during the three years ended December 31, 2018 consisted of the following:



	2018			2017			2016
	(in thousands)
United States	$	812,086		$	330,340		$	(147,860	)
Foreign	(211,845		)	(346,029		)	80,494
Income (loss) before (benefit from) provision for income taxes	$	600,241		$	(15,689	)	$	(67,366	)

On a periodic basis, the Company reassesses the valuation allowance on its deferred income tax assets weighing positive and negative evidence to assess the recoverability of the deferred tax assets. In the fourth quarter of 2018, the Company assessed the valuation allowance and considered positive evidence, including significant cumulative consolidated and U.S. income over the three years ended December 31, 2018, revenue growth, clinical trial data from the Company’s triple combination regimens, competitor clinical progress and expectations regarding future profitability, and negative evidence, including the potential impact of competition on the Company’s projections and cumulative losses in one of the jurisdictions. After assessing both the positive evidence and the negative evidence, the Company determined it was more likely than not that its deferred tax assets would be realized in the future and released the valuation allowance on the majority of its NOLs and other deferred tax assets as of December 31, 2018, resulting in a benefit from income taxes of $1.56 billion. As of December 31, 2018, the Company maintained a valuation allowance of $168.5 million related primarily to U.S. state and foreign tax attributes.

The components of the (benefit from) provision for income taxes during the three years ended December 31, 2018 consisted of the following:



	2018			2017			2016
	(in thousands)
Current taxes:
United States	$	772		$	11,559		$	(3,821	)
Foreign	15,600			3,576			1,794
State	9,018			5,025			1,836
Total current taxes	25,390			20,160			(191		)
Deferred taxes:
United States	(1,105,053		)	(113,805		)	18,659
Foreign	(364,919		)	(3,222		)	(3,359		)
State	(42,280		)	(10,457		)	1,556
Total deferred taxes	(1,512,252		)	(127,484		)	16,856
(Benefit from) provision for income taxes	$	(1,486,862	)	$	(107,324	)	$	16,665

A reconciliation of the (benefit from) provision for income taxes as computed by applying the U.S. federal statutory rate of 21% for the year ended December 31, 2018 and 35% for the years ended December 31, 2017 and 2016 to the (benefit from) provision for income taxes is as follows:



	2018			2017			2016
	(in thousands)
Income (loss) before (benefit from) provision for income taxes	$	600,241		$	(15,689	)	$	(67,366	)

Expected provision for (benefit from) income taxes	126,051			(5,491		)	(23,578		)
State taxes, net of federal benefit	8,680			4,742			3,621
Foreign income tax rate differential	23,427			77,801			21,346
Tax credits	(52,629		)	(58,204		)	(47,773		)
(Benefit from) provision for income taxes attributable to valuation allowances	(1,563,169		)	(575,801		)	14,837
Permanent items	1,421			15,324			24,663
Rate change	—			575,192			12,836
Stock compensation (benefit) shortfalls and cancellations	(49,044		)	(21,453		)	4,162
Officer’s compensation	8,310			6,501			86
Tax attribute expiration	—			—			9,947
Deconsolidation of VIE	(9,390		)	(126,183		)	—
Uncertain tax positions	15,431			—			—
Other	4,050			248			(3,482		)
(Benefit from) provision for income taxes	$	(1,486,862	)	$	(107,324	)	$	16,665

In 2018, the change in the “(Benefit from) provision for income taxes attributable to valuation allowances” on deferred tax assets in the tax rate reconciliation table above was primarily related to the release of the Company’s valuation allowances on the majority of its NOLs and other deferred tax assets related to the United States and the United Kingdom. In 2017, the valuation allowance decreased by $178.2 million primarily due to the utilization of NOLs in the United States and a decrease in the U.S. federal corporate tax rate from 35% to 21% partially offset by the adoption of ASU 2016-09. In 2016, the valuation allowance increased by $14.8 million primarily due to an increase in tax credits in the U.S. and an increase in the NOL in the United Kingdom.

On December 22, 2017, H.R.1., known as the Tax Cuts and Jobs Act, was signed into law. The new law did not have a significant impact on the Company’s consolidated financial statements for the year ended December 31, 2017. However, the reduction of the U.S. federal corporate tax rate from 35% to 21% resulted in increases to the amounts reflected in “(Benefit from) provision for income taxes attributable to valuation allowances” and “Rate change” in the Company’s tax reconciliation table above for the year ended December 31, 2017 compared to the year ended December 31, 2016. The change in the U.S. federal corporate tax rate, which was effective January 1, 2018, is also reflected in the Company’s deferred tax table below. Staff Accounting Bulletin No. 118’s (“SAB 118”) impact on the Company’s consolidated financial statements is discussed below.

In 2018 and 2017, “Deconsolidation of VIE” in the Company’s tax rate reconciliation above related to the impairments of VX-210 and Parion’s pulmonary ENaC platform, respectively, and the decreases in the Company’s fair value of the contingent payments to BioAxone and Parion associated with these deconsolidations, respectively. Please refer to Note J, “Intangible Assets and Goodwill,” for further information regarding these impairments.

The Company operates in foreign tax jurisdictions, which impose income taxes at different rates than the United States. The impact of these rate differences, which are primarily related to the Company’s operations in the United Kingdom, is included in the “Foreign income tax rate differential” in the Company’s tax rate reconciliation above. Other items that affected the Company’s tax rate reconciliation table were related to equity and executive compensation, research and development credits, Orphan Drug Credits and foreign amortization during the three years ended December 31, 2018.

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,
	2018			2017
	(in thousands)
Deferred tax assets:
Net operating loss	$	882,014		$	1,004,404
Tax credit carryforwards	487,635			440,429
Intangible assets	241,775			54,091
Deferred revenues	19,311			19,593
Stock-based compensation	93,915			83,196
Accrued expenses	17,795			17,808
Construction financing lease obligation	130,849			109,354
Other	6,831			5,667
Gross deferred tax assets	1,880,125			1,734,542
Valuation allowance	(168,491		)	(1,552,942		)
Total deferred tax assets	1,711,634			181,600
Deferred tax liabilities:
Property and equipment	(128,407		)	(101,019		)
Acquired intangibles	—			(6,341		)
Deferred revenue	(73,357		)	(73,357		)
Unrealized gain	(10,198		)	(6,401		)
Net deferred tax assets (liabilities)	$	1,499,672		$	(5,518	)

The Company presents its deferred tax assets and deferred tax liabilities gross on its consolidated balance sheets. As of December 31, 2018, the majority of the Company’s net deferred tax assets were related to NOLs and tax credit carryforwards. As of December 31, 2017, the Company’s net deferred tax liability, which was primarily attributable to the Company’s collaboration with BioAxone, was not material to the Company’s consolidated financial statements.

As of December 31, 2018, the Company had NOL carryforwards of $2.9 billion and tax credits of $350.7 million for U.S. federal income tax purposes and had NOL carryforwards of $775.5 million and tax credits of $134.9 million for U.S. state income tax purposes. These U.S. federal and state NOL carryforwards and tax credits expire at various dates through 2038 and may be used to offset future federal and state income tax liabilities, respectively. As of December 31, 2018, the Company had foreign net operating loss carryforwards of $942.0 million, including $7.6 million that were subject to expiration and $934.4 million that had an indefinite carryforward period.

Unrecognized tax benefits during the three years ended December 31, 2018 were as follows:



	2018		2017		2016
	(in thousands)
Balance at beginning of the period	$	3,814	$	—	$	425
Increases related to current period tax positions	9,704		3,814		—
Increases related to prior period tax positions	6,031		—		—
Decrease due to statute limitations	—		—		(425		)
Balance at end of period	$	19,549	$	3,814	$	—

As of December 31, 2018, the Company has classified $7.6 million and $11.9 million of its unrecognized tax benefits as credits to “Deferred tax assets” and “Accrued expenses”, respectively on its consolidated balance sheet.

The Company has reviewed the tax positions taken, or to be taken, in its tax returns for all tax years currently open to examination by a taxing authority. Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the benefits recognized in the financial statements. As of December 31, 2018, the Company had $19.5 million of gross unrecognized tax benefits, which would affect the Company's tax rate if recognized. As of December 31, 2017, the Company had $3.8 million of gross unrecognized tax benefits, which would not affect the Company's tax rate if recognized. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company recognizes interest and penalties related to income taxes as a component of its “(Benefit from) provision for income taxes.” As of December 31, 2018, no interest and penalties have been accrued. The Company did not recognize any material interest or penalties related to uncertain tax positions during the three years ended December 31, 2018.

In December 2017, the SEC staff issued SAB 118 to address the application of 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 H.R.1. The Company recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The Company did not record any adjustments in the year ended December 31, 2018 to these provisional amounts that were material to its financial statements. As of December 31, 2018, the Company’s accounting treatment is complete.

As of December 31, 2018, unremitted foreign earnings, which were not significant, have been retained by the Company’s foreign subsidiaries for indefinite reinvestment. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company could be subject to immaterial withholding taxes payable to the various foreign countries.

The Company files U.S. 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 NOLs or tax credit carryforwards that originate before 2011. The Company currently is under examination in Canada for 2011 through 2013, Germany for 2012 through 2015, Italy for 2015 and 2016 and the United Kingdom for 2015 and 2016. No adjustments have been reported. The Company is not under examination by any other jurisdictions for any tax year.