INCOME TAXES

9 Months Ended

Sep. 30, 2011

INCOME TAXES

INCOME TAXES

16.   INCOME TAXES

• In the three-month period ended September 30, 2011, the Company recognized a recovery of income taxes of $29.0 million, which comprised $28.5 million related to the expected tax benefit in tax jurisdictions outside of Canada combined with a tax benefit of $0.5 million related to Canadian income taxes and, in the nine-month period ended September 30, 2011, the Company recognized a recovery of income taxes of $45.0 million, which comprised $48.3 million related to the expected tax benefit in tax jurisdictions outside of Canada offset with tax expense of $3.3 million related to Canadian income taxes. In the nine months ended September 30, 2011, the Company's effective tax rate was primarily impacted by (i) tax benefit of current U.S. losses, (ii) the release of liabilities for uncertain tax positions due to the settlement of various tax examinations in the U.S., (iii) a partial increase of the valuation allowance specific to the Canadian net deferred tax assets, (iv) changes in U.S. Federal and State tax law, and (v) additional tax benefit recognized on the U.S. Federal tax return as compared to the December 31, 2010 income tax provision.

  The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. The valuation allowance against deferred tax assets was $186.9 million as of September 30, 2011 and $186.4 million as of December 31, 2010. The Company does not record a valuation allowance against its U.S. foreign tax credits as it has determined it is more likely than not the Company will realize these deferred tax assets in the future. However, the Company continues to monitor its U.S. foreign source income and losses in the future and assess the need for a valuation allowance.

  The Company has assessed the impact of changes in tax law for various U.S. state jurisdictions. As of September 30, 2011, the Company has recognized a decrease to the net deferred tax liability balance of $2.8 million. The Company will continue to monitor the impact of these tax law changes in future periods.

  As of September 30, 2011, the Company had $113.6 million of unrecognized tax benefits, which included $23.1 million relating to interest and penalties. Of the total unrecognized tax benefits, $74.7 million would reduce the Company's effective tax rate, if recognized. It is anticipated that up to $1.5 million of the unrecognized tax benefits may be resolved within the next 12 months.

  The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of September 30, 2011, the Company had accrued $21.6 million for interest and $1.5 million for penalties. The Company accrued additional interest and penalties of $0.9 million during the three months ended September 30, 2011.

  Valeant is currently under examination by the Internal Revenue Service for the 2009 tax year, as well as various state tax audits for years 2002 to 2009. The Company is currently under examination by the Canada Revenue Agency for years 2003 to 2006 and remains open to examination for years 2007 and later.