INCOME TAXES

The components of (Loss) income before (recovery of) provision for income taxes for the years ended December 31, 2016, 2015 and 2014 were as follows:



(in millions)	2016			2015			2014
Domestic	$	(1,804	)	$	(1,516	)	$	(851	)
Foreign	(631		)	1,361			1,905
	$	(2,435	)	$	(155	)	$	1,054

The components of (Recovery of) provision for income taxes for the years ended December 31, 2016, 2015 and 2014 were as follows:



(in millions)	2016			2015			2014
Current:
Domestic	$	—		$	—		$	1
Foreign	241			77			150
	241			77			151
Deferred:
Domestic	—			(3		)	—
Foreign	(268		)	59			23
	(268		)	56			23
	$	(27	)	$	133		$	174

The (Recovery of) provision for income taxes differs from the expected amount calculated by applying the Company’s Canadian statutory rate to (Loss) income before (recovery of) provision for income taxes. The reasons for this difference and the related tax effects for the years ended December 31, 2016, 2015 and 2014 were as follows:



(in millions)	2016			2015			2014⁽¹⁾
(Loss) income before (recovery of) provision for income taxes	$	(2,435	)	$	(155	)	$	1,054
Expected Canadian statutory rate	26.9		%	26.9		%	26.9		%
Expected (recovery) provision for of income taxes	(655		)	(42		)	284
Non-deductible amounts:
Share-based compensation	30			4			20
Merger and acquisition costs	—			3			—
Adjustments to tax attributes	(147		)	(87		)	(33		)
Non-taxable gain on disposal of investments	—			—			(50		)
Changes in enacted income tax rates	—			—			30
Canadian tax impact of foreign exchange gain or loss on U.S. dollar denominated debt held by VPII and its Canadian Affiliates	11			174			23
Change in valuation allowance related to foreign tax credits and net operating losses	155			114			17
Change in valuation allowance on Canadian deferred tax assets and tax rate changes	472			230			255
Pharma fee	15			16			3
Change in uncertain tax positions	10			—			(2		)
Foreign tax rate differences	(290		)	(350		)	(230		)
Withholding taxes on foreign income	7			7			4
Goodwill impairment	377			—			—
Taxable foreign income	391			441			269
Tax benefit on intra-entity transfers	(399		)	(375		)	(420		)
Other	(4		)	(2		)	4
	$	(27	)	$	133		$	174

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(1)	In 2014, $273 million of tax benefit on intra-entity transfers was included within the foreign tax rate differences and has been revised using the current presentation.

The tax effect of major items recorded as deferred tax assets and liabilities as of December 31, 2016 and 2015 is as follows:



(in millions)	2016			2015
Deferred tax assets:
Tax loss carryforwards	$	1,328		$	1,440
Tax credit carryforwards	422			295
Scientific Research and Experimental Development pool	53			51
Research and development tax credits	129			134
Provisions	563			594
Deferred revenue	15			13
Deferred financing and share issue costs	391			525
Share-based compensation	37			68
Total deferred tax assets	2,938			3,120
Less valuation allowance	(1,857		)	(1,366		)
Net deferred tax assets	1,081			1,754
Deferred tax liabilities:
Intangible assets	4,044			4,711
Outside basis differences	2,165			2,607
Plant, equipment and technology	24			16
Prepaid expenses	80			96
Other	56			71
Total deferred tax liabilities	6,369			7,501
Net deferred income taxes	$	(5,288	)	$	(5,747	)

To facilitate divestitures, streamline operations and simplify the Company's legal structure, in 2016, the Company began a series of internal actions which are expected to be completed during 2017. Due to aspects of the internal restructuring completed in the fourth quarter of 2016, the Company recognized a U.S. taxable gain on the transfer of a foreign subsidiary and expects to utilize approximately $2,000 million of its U.S. net operating losses to offset such gain, resulting in a reduction of the related deferred tax asset. The recognition of the tax gain also resulted in the reversal of an existing deferred tax liability on a related outside basis difference.

In connection with the Company’s internal restructurings, due to a decrease in the Company market value, the Company’s top U.S. subsidiary (Biovail Americas Corporation) ("BAC”) is expecting to recognize a loss on its investment in Valeant Pharmaceuticals International ("VPI") upon the Company's liquidation of BAC in 2017. BAC’s anticipated loss in the stock of VPI is expected to be of a character that, under U.S. tax law, may be carried back to offset the 2016 gain described above. The carryback of this loss will allow for the net operating losses ("NOLs") used to offset the 2016 gain to be available for use against future U.S. taxable income. The Company expects to record the deferred tax asset associated with these NOLs at such time this transaction is completed in 2017.

In January 2017, also in connection with the planned restructuring efforts, the Company expects to recognize additional U.S. taxable gain. This taxable gain is expected to be offset by the anticipated 2017 tax loss expected to be realized on BAC’s investment in VPI.

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. As a result of losses in Canada, and additional foreign tax credits generated by the Company’s U.S. subsidiaries in 2016 and 2015, the valuation allowance increased by $491 million and $507 million, respectively. 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 also 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, 2016 and 2015, the Company had accumulated tax losses available to offset future years’ federal and provincial taxable income in Canada of approximately $3,456 million and $1,800 million, respectively. As of December 31, 2016 and 2015, unclaimed ITCs available to offset future years’ federal taxes in Canada were approximately $34 million and $33 million, respectively, which expire from 2017 to 2035. In addition, as of December 31, 2016 and 2015, pooled SR&ED expenditures available to offset against future years’ taxable income in Canada were approximately $195 million and $188 million, respectively, which may be carried forward indefinitely. As of December 31, 2016 and 2015, a full valuation allowance against the net Canadian deferred tax assets has been provided of $1,328 million and $973 million, respectively.

As of December 31, 2016 and 2015, the Company had accumulated tax losses available to offset future years' federal taxable income in the U.S. of approximately $651 million and $2,750 million, respectively, including acquired losses and which expire between 2021 and 2036. While the losses are subject to multiple annual loss limitations as a result of previous ownership changes, the Company believes that the recoverability of the deferred tax assets associated with these tax losses are more likely than not to be realized. As of December 31, 2016 and 2015, U.S. research and development credits available to offset future years' federal taxes in the U.S. were approximately $91 million and $85 million, respectively, which includes acquired research and development credits and which expire between 2021 and 2036. As of December 31, 2016, the Company had approximately $342 million in foreign tax credits, including acquired foreign tax credits, recognized for tax return purposes for which a full valuation allowance has been established as they are not expected to be utilized before their expiration.

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 Canadian 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, 2016 the Company estimates there will be no Canadian tax liability attributable to the permanently reinvested U.S. earnings.

As of December 31, 2016 and 2015, unrecognized tax benefits (including interest and penalties) were $423 million and $344 million, of which $185 million and $127 million would affect the effective income tax rate, respectively. The remaining unrecognized tax benefits of approximately $238 million would not impact the effective tax rate as the tax positions are offset against existing tax attributes or are timing in nature. In 2016 and 2015, the Company recognized net increases to unrecognized tax benefits for current year tax positions of $16 million and $5 million, respectively. In 2016, the Company recognized a net increase of $63 million and in 2015 recognized a net decrease of $21 million to unrecognized tax benefits related to tax positions taken in the prior years.

The Company provides for interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2016 and 2015, accrued interest and penalties related to unrecognized tax benefits were approximately $39 million and $46 million. In 2016, the Company recognized a decrease of approximately $7 million and in 2015 recognized an increase of $7 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 2015 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 - 2015
Canada		2005 - 2015
Brazil		2011 - 2015
Germany		2007 - 2015
France		2013 - 2015
China		2011 - 2015
Ireland		2012 - 2015
Netherlands		2015 - 2015

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 through 2013. The Company is currently under examination by the Canada Revenue Agency for three separate cycles: (a) years 2005 through 2006, (b) years 2007 through 2009 and (c) years 2012 through 2013. In February 2013, the Company received from the Canada Revenue Agency 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. The Canada Revenue Agency audits of the 2010 and 2011 tax years were closed in 2016, and resulted in no material adjustments.

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

The following table presents a reconciliation of the unrecognized tax benefits for 2016, 2015 and 2014:



(in millions)	2016			2015			2014
Balance, beginning of year	$	344		$	345		$	248
Acquisition of Salix	—			15			—
Additions based on tax positions related to the current year	16			5			143
Additions for tax positions of prior years	96			23			13
Reductions for tax positions of prior years	(20		)	(39		)	(51		)
Lapse of statute of limitations	(13		)	(5		)	(8		)
Balance, end of year	$	423		$	344		$	345

The Company estimates that unrecognized tax benefits realized during the next 12 months will not be material.