INCOME TAXES

The components of (Loss) Income before provision for (recovery of) income taxes were as follows:



	2015			2014 (Restated)			2013
Domestic	$	(1,516.0	)	$	(851.1	)	$	(574.5	)
Foreign	1,360.7			1,904.7			(739.9		)
	$	(155.3	)	$	1,053.6		$	(1,314.4	)

The components of Provision for (recovery of) income taxes were as follows:



	2015			2014 (Restated)		2013
Current:
Domestic	$	—		$	0.6	$	3.4
Foreign	76.9			150.1		80.0
	76.9			150.7		83.4
Deferred:
Domestic	(3.6		)	—		—
Foreign	59.2			23.5		(534.2		)
	55.6			23.5		(534.2		)
	$	132.5		$	174.2	$	(450.8	)

The Provision for (recovery of) income taxes differs from the expected amount calculated by applying the Company’s Canadian statutory rate to (Loss) Income before provision for (recovery of) income taxes. The reasons for this difference and the related tax effects are as follows:



	2015			2014 (Restated)			2013
(Loss) Income before provision for (recovery of) income taxes	$	(155.3	)	$	1,053.6		$	(1,314.4	)
Expected Canadian statutory rate	26.9		%	26.9		%	26.9		%
Expected (recovery) provision for of income taxes	(41.8		)	283.4			(353.6		)
Non-deductible amounts:
Share-based compensation	4.4			19.8			13.1
Merger and acquisition costs	3.1			—			1.1
Adjustments to tax attributes	(87.1		)	(32.3		)	(3.0		)
Non-taxable gain on disposal of investments	—			(50.1		)	—
Changes in enacted income tax rates	—			29.6			6.6
Canadian dollar foreign exchange gain for Canadian tax purposes	173.6			22.8			0.6
Change in valuation allowance related to foreign tax credits and net operating losses	114.0			17.4			70.2
Change in valuation allowance on Canadian deferred tax assets and tax rate changes	229.4			255.2			143.9
Pharma fee	15.9			3.5			—
Change in uncertain tax positions	(0.1		)	(1.8		)	—
Foreign tax rate differences	(350.0		)	(502.8		)	(407.6		)
Withholding taxes on foreign income	6.7			3.7			3.4
Taxable foreign income	441.4			269.0			55.4
Tax benefit on intra-entity transfers	(374.9		)	(147.3		)	(5.7		)
Other	(2.1		)	4.1			24.8
	$	132.5		$	174.2		$	(450.8	)

The tax effect of major items recorded as deferred tax assets and liabilities is as follows:



	2015			2014 (Restated)
Deferred tax assets:
Tax loss carryforwards	$	1,439.7		$	964.5
Tax credit carryforwards	294.8			234.9
Scientific Research and Experimental Development pool	50.7			58.2
Research and development tax credits	134.4			90.5
Provisions	594.2			369.9
Plant, equipment and technology	—			2.8
Deferred revenue	13.1			13.5
Deferred financing and share issue costs	525.3			209.4
Share-based compensation	67.9			49.8
Other	—			38.2
Total deferred tax assets	3,120.1			2,031.7
Less valuation allowance	(1,366.6		)	(859.2		)
Net deferred tax assets	1,753.5			1,172.5
Deferred tax liabilities:
Intangible assets	4,711.4			520.0
Outside basis differences	2,607.0			2,636.6
Plant, equipment and technology	16.2			—
Prepaid expenses	95.7			0.6
Other	69.6			—
Total deferred tax liabilities	7,499.9			3,157.2
Net deferred income taxes	$	(5,746.4	)	$	(1,984.7	)

The Company effected an internal reorganization in December 2013 to streamline and integrate certain aspects of its operations. As part of this internal reorganization, the Company migrated certain of its intellectual property to a foreign holding company operating in Ireland and Luxembourg. During 2014, the Company concluded certain additional steps relating to this internal reorganization. The 2014 steps required the Company to convert its existing basis differences in the contributed intellectual property to an outside basis difference.

The realization of deferred tax assets is dependent on the Company generating sufficient domestic and foreign taxable income in the years that the temporary differences become deductible. A valuation allowance has been provided for the portion of the deferred tax assets that the Company determined is more likely than not to remain unrealized based on estimated future taxable income and tax planning strategies. In 2015 and 2014, the valuation allowance increased by $507 million and $382 million, respectively. For both periods, the net increase in valuation allowance resulted from an increase in losses in Canada, and additional foreign tax credits generated by the Company’s U.S. subsidiaries. Given the Company’s history of pre-tax losses and expected future losses in Canada, the Company determined there was insufficient objective evidence to release the remaining valuation allowance against Canadian tax loss carryforwards, International Tax Credits (“ITC”) and pooled Scientific Research and Experimental Development Tax Incentive (“SR&ED”) expenditures. The Company determined that it will not earn sufficient foreign source taxable income to utilize the Company’s U.S. foreign tax credits.

As of December 31, 2015, the Company had accumulated losses of approximately $1.80 billion (2014 - $1.01 billion) available for federal and provincial tax purposes in Canada. As of December 31, 2015, the Company had approximately $33 million (2014 - $39 million) of unclaimed Canadian ITCs, which expire from 2017 to 2034. These losses and ITCs can be used to offset future years’ taxable income and federal tax, respectively. In addition, as of December 31, 2015, the Company had pooled SR&ED expenditures amounting to approximately $188 million (2014 - $216 million) available to offset against future years’ taxable income from its Canadian operations, which may be carried forward indefinitely. As in past years, a full valuation allowance has been maintained against the net Canadian deferred tax assets of $973 million (2014 - $572 million).

As of December 31, 2015, the Company has accumulated tax losses of approximately $2.75 billion (2014 - $2.38 billion) for U.S. federal income tax purposes which expire between 2021 and 2035, including acquired losses. While the losses are subject to multiple annual loss limitations, the Company believes that the recoverability of the deferred tax assets associated with the losses is more likely than not to be realized. The Company’s accumulated losses are subject to annual limitations as a result of previous ownership changes that have occurred. As of December 31, 2015, the Company had approximately $85 million (2014 - $71 million) of U.S. research and development credits, which expire between 2021 and 2035, which includes acquired research and development credits. As of December 31, 2015, the Company had approximately $259 million in foreign tax credits, including acquired foreign tax credits, recognized on tax returns for which a full valuation allowance has been established as they are not expected to be utilized before their expiration. Approximately $86 million of the $2.75 billion of tax losses relates to the exercise of non-qualified stock options and restricted stock awards.

The Company accrues for U.S. tax on the unremitted earnings of the foreign subsidiaries owned by the Company’s U.S. subsidiaries. In addition, the Company provides for the non-U.S. tax on the unremitted earnings of its direct foreign affiliates except for its direct U.S. subsidiaries. The Company continues to assert that the unremitted earnings of its U.S. subsidiaries will be permanently reinvested and not repatriated to Canada. As of December 31, 2015 the Company estimates there will be no Canadian tax liability attributable to the permanently reinvested U.S. earnings.

As of December 31, 2015, the total amount of unrecognized tax benefits (including interest and penalties) was $344 million (2014 - $345 million), of which $127 million (2014 - $109 million) would affect the effective tax rate. The remaining approximately $217 million of unrecognized tax benefits would not impact the effective tax rate as the tax positions are offset against existing tax attributes with valuation allowances or are timing in nature. In the year ended December 31, 2015, the Company recognized a $5 million (2014 - $143 million) increase and a $21 million (2014 - $46 million) net decrease in the amount of unrecognized tax benefits related to tax positions taken in the current and prior years, respectively.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes. As of December 31, 2015, approximately $46 million (2014 - $39 million) was accrued for the payment of interest and penalties. In the year ended December 31, 2015, the Company recognized an increase of approximately $7 million (2014 - decrease of $8 million) of interest and penalties.

The Company and one or more of its subsidiaries file federal income tax returns in Canada, the U.S., and other foreign jurisdictions, as well as various provinces and states in Canada and the U.S. The Company and its subsidiaries have open tax years primarily from 2005 to 2014 with significant taxing jurisdictions including Canada, and the U.S. These open years contain certain matters that could be subject to differing interpretations of applicable tax laws and regulations, and tax treaties, as they relate to the amount, timing, or inclusion of revenues and expenses, or the sustainability of income tax positions of the Company and its subsidiaries. Certain of these tax years are expected to remain open indefinitely.



Jurisdiction:		Open Years
United States - Federal		2013 - 2014
Canada		2005 - 2014
Brazil		2009 - 2014
Germany		2011 - 2014
France		2011 - 2014
China		2009 - 2014
Ireland		2009 - 2014
Netherlands		2011 - 2014

The audit of Valeant’s U.S. consolidated federal income tax return for the 2011 and 2012 tax years was concluded by the Internal Revenue Service during 2015. Valeant remains under examination for various state tax audits in the U.S. for years 2002 to 2013. The Company is currently under examination by the Canada Revenue Agency for three separate cycles: (a) years 2005 through 2006, (b) 2007 through 2009, and (c) 2010 through 2012. In February 2013 the Company received a proposed audit adjustment for the years 2005 through 2007. The Company disagrees with the adjustments and has filed a Notice of Objection. The total proposed adjustment will result in a loss of tax attributes which are subject to a full valuation allowance and will not result in material change to the provision for income taxes.

In 2014, the Company’s subsidiaries in Australia were notified that the Australian Tax Office would conduct an audit of the 2010 - 2011 tax years. There have been no assessments or proposed adjustments at this time.

The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:



	2015			2014			2013
Balance, beginning of year	$	345.0		$	247.5		$	128.0
Acquisition of B&L	—			—			52.2
Acquisition of Salix	15.4			—			—
Additions based on tax positions related to the current year	4.6			143.0			60.7
Additions for tax positions of prior years	23.3			12.8			19.4
Reductions for tax positions of prior years	(39.3		)	(50.2		)	(10.8		)
Lapse of statute of limitations	(5.0		)	(8.1		)	(2.0		)
Balance, end of year	$	344.0		$	345.0		$	247.5

The Company estimates approximately $7 million of the above unrecognized tax benefits will be realized during the next 12 months.