INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES

INCOME TAXES

21.   INCOME TAXES

• The components of (loss) income before recovery of income taxes were as follows:

	2011			2010			2009
Domestic	$	(41,374	)	$	(127,269	)	$	(81,978	)
Foreign		23,374			(108,994	)		256,933
	$	(18,000	)	$	(236,263	)	$	174,955

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

		2011			2010			2009
Current:
	Domestic	$	3,554		$	5,860		$	—
	Foreign		36,337			21,473			14,500
			39,891			27,333			14,500
Deferred:
	Domestic		(21,763	)		(49,820	)		—
	Foreign		(195,687	)		(5,583	)		(16,000	)
			(217,450	)		(55,403	)		(16,000	)
		$	(177,559	)	$	(28,070	)	$	(1,500	)

• The reported recovery of income taxes differs from the expected amount calculated by applying the Company's Canadian statutory rate to income before recovery of income taxes. The reasons for this difference and the related tax effects are as follows:

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

		2011			2010			2009
(Loss) income before recovery of income taxes		$	(18,000	)	$	(236,263	)	$	174,955
Expected Canadian statutory rate			28.3%			30.6%			32.4%
Expected provision for (recovery of) income taxes			(5,085	)		(72,296	)		56,685
Non-deductible amounts:
	Amortization		22,251			18,304			11,962
	Share-based compensation		14,045			8,024			—
	Merger costs		—			7,124			—
	Acquired IPR&D		—			5,661			21,063
	Non-taxable gain on disposal of investments		(15,384	)		(1,679	)		(3,838	)
	Legal settlement costs		—			—			2,944
	Write-down of investments		—			—			1,690
Changes in enacted income tax rates			(18,313	)		880			9,800
Canadian dollar foreign exchange (loss) gain for Canadian tax purposes			40,667			3,358			2,500
Change in valuation allowance related to U.S. operating losses			—			45,483			(26,000	)
Change in valuation allowance on Canadian deferred tax assets and
	tax rate changes		(57,249	)		(46,898	)		(11,000	)
Change in uncertain tax positions			(8,568	)		—			—
Foreign tax rate differences			(180,301	)		(36,649	)		(99,045	)
Loss of U.S. state net operating losses			—			9,783			—
Unrecognized income tax benefit of losses			22,187			22,768			25,496
Withholding taxes on foreign income			5,473			3,177			3,450
Alternative minimum and other taxes			2,513			—			1,877
Other			205			4,890			916
		$	(177,559	)	$	(28,070	)	$	(1,500	)

		2011			2010
Deferred tax assets:
	Tax loss carryforwards	$	285,003		$	272,172
	Tax credit carryforwards		37,141			36,160
	Scientific Research and Experimental Development pool		63,893			66,577
	Research and development tax credits		62,766			66,201
	Provisions		121,288			100,320
	Plant, equipment and technology		11,440			33,736
	Deferred revenue		22,414			27,888
	Deferred financing and share issue costs		50,097			65,620
	Share-based compensation		17,808			9,783
	Other		15,599			15,694
	Total deferred tax assets		687,449			694,151
	Less valuation allowance		(128,742	)		(186,399	)
	Net deferred tax assets		558,707			507,752
Deferred tax liabilities:
	Intangible assets		1,502,215			1,779,460
	5.375% Convertible Notes(1)		2,268			8,171
	Prepaid expenses		441			510
	Other		—			—
	Total deferred tax liabilities		1,504,924			1,788,141
Net deferred income taxes		$	(946,217	)	$	(1,280,389	)

• (1)

  In connection with the issuance of the 5.375% Convertible Notes in June 2009 (as described in note 14), the Company recognized a deferred tax liability of $14.6 million for the original basis difference between the principal amount of the 5.375% Convertible Notes and the value allocated to the liability component, which resulted in a corresponding reduction to the valuation allowance recorded against deferred tax assets. The recognition of the deferred tax liability and the corresponding reduction in the valuation allowance were recorded as offsetting adjustments to additional paid-in capital. In the years ended December 31, 2011 and 2010, the deferred tax benefit recognized in earnings as the debt discount was amortized or extinguished was offset by the deferred tax expense related to the corresponding realization of the deferred tax assets.

• • In 2011 and 2010, the repurchase of $205.0 million and $126.3 million principal amount of the U.S. dollar-denominated 5.375% Convertible Notes, respectively, resulted in a foreign exchange gain for Canadian income tax purposes of approximately $24.0 million and $10.0 million, respectively. The payment of the remaining balance of the 5.375% Convertible Notes will likely result in a foreign exchange gain or loss for Canadian income tax purposes. The amount of this gain or loss will depend on the exchange rate between the U.S. and Canadian dollar at the time the 5.375% Convertible Notes are paid. As of December 31, 2011, the unrealized foreign exchange gain on the translation of the remaining principal amount of the 5.375% Convertible Notes to Canadian dollars for Canadian income tax purposes was approximately $1.6 million.

  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 2011, the valuation allowance decreased by $57.7 million. The net decrease in valuation allowance resulted from the Company's decision to write off U.S. federal and state net operating losses which were limited as a result of the Merger ($64.1 million decrease in the valuation allowance), offset by an increase in the valuation allowance for Canadian tax loss carryforwards of $6.4 million for the year ended December 31, 2011. The net increase of $32.4 million in valuation allowance for 2010 resulted from the limitation on the Company's use of U.S. federal and state net operating losses resulting from the Merger ($45.5 million increase in the valuation allowance), and the impact of foreign exchange rates on the reported value in U.S. dollars of Canadian tax loss carryforwards, Investment Tax Credits ("ITCs"), and pooled Scientific Research and Experimental Development ("SR&ED") expenditures ($33.8 million increase in the valuation allowance) offset by the partial recognition of future benefits of Canadian tax loss carryforwards, ITCs, and pooled SR&ED expenditures of $46.9 million recognized to the extent of deferred tax liabilities arising from the Merger. 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, ITCs and pooled SR&ED expenditures.

  As of December 31, 2011, the Company had accumulated losses of approximately $318.1 million (2010 — $154.8 million) available for federal and provincial tax purposes in Canada. As of December 31, 2011, the Company had approximately $62.8 million (2010 — $66.2 million) of unclaimed Canadian ITCs and U.S. research and development credits, which expire from 2020 to 2030. These losses and ITCs can be used to offset future years' taxable income and federal tax, respectively. In addition, as of December 31, 2011, the Company had pooled SR&ED expenditures amounting to approximately $248.3 million (2010 — $282.9 million) available to offset against future years' taxable income from its Canadian operations, which may be carried forward indefinitely. The valuation allowance against the Canadian deferred tax assets is $124.6 million (2010 — $118.2 million).

  As of December 31, 2011, the Company has accumulated tax losses of approximately $512.1 million (2010 — $672.6 million) for federal purposes in the U.S., including pre-acquisition losses arising from the Merger of $332.2 million, which expire from 2021 to 2028 of which $185.9 million of the NOLs are subject to annual loss limitation restrictions. In 2010 a valuation allowance of $68.2 million had been provided on U.S. federal and state losses. However, management has determined the losses subject to limitation restrictions should be written off and the corresponding valuation allowance reversed as of December 31, 2011. The Company's accumulated losses are subject to annual limitations as a result of previous ownership changes that have occurred. Included in the $512.1 million of tax losses is approximately $13.5 million of losses related to the exercise of non-qualified stock options and restricted stock awards.

  The Company accrues for U.S. tax on the unremitted earnings of its foreign subsidiaries that are owned by the Company's U.S. subsidiaries. Prior to the Merger, the Company asserted that the unremitted earnings of its Barbados subsidiaries would be permanently reinvested. The Company discontinued making this assertion as of December 31, 2010, but such change did not affect the Company's deferred tax liabilities since the Barbados earnings can be repatriated to Canada without incurring additional tax. 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, 2011 the Company estimates there would be no Canadian tax liability attributable to the permanently reinvested U.S. earnings.

  As of December 31, 2011, the total amount of unrecognized tax benefits (including interest and penalties) was $102.3 million (2010 — $110.9 million), of which $67.3 million (2010 — $75.9 million) would affect the effective tax rate. In the year ended December 31, 2011, the Company recognized a $2.7 million (2010 — $10.1 million) increase and a $11.3 million (2010 — $15.6 million) net decrease in the amount of unrecognized tax benefits related to tax positions taken in the current and prior years, respectively, which have resulted in a corresponding decrease to current tax expense.

  The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes. As of December 31, 2011, approximately $23.0 million (2010 — $20.5 million) was accrued for the payment of interest and penalties. In the year ended December 31, 2011, the Company recognized approximately $2.5 million (2010 — $3.4 million) in interest and penalties.

  The Company and one or more of its subsidiaries file federal income tax returns in Canada, the U.S., Barbados, 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 1996 to 2010 with significant taxing jurisdictions including Barbados, 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.

  In 2011, the Internal Revenue Service ("IRS") closed their examination of Valeant Pharmaceuticals International's consolidated tax returns for the 2007 and 2008 tax years as well as Biovail Americas Corporation consolidated federal income tax return for the 2009 tax year. The Valeant Pharmaceuticals International consolidated federal income tax return is currently under examination by the IRS for the 2009 tax year. Additionally, the Company has been informed that the Valeant Pharmaceuticals International consolidated return for the 2010 short tax year and the Biovail Americas Corporation consolidated federal return for the 2010 tax year will be under examination. In 2011, the Canadian Revenue Agency ("CRA") continued its audit of the Company's Canadian income tax returns for tax years 2005 to 2008, and claims for SR&ED expenditures and related ITCs for the 2006 and 2007 taxation years. The CRA has made proposals for audit adjustments to the Company for its examinations of tax years 2003 to 2004 and 2005 to 2006. The Company has reviewed the proposed adjustments and is assessing our response. While the matters have not been settled, the Company continues to maintain a liability for uncertain tax positions on these proposed adjustments. As a result of audits and statutes of limitation the Company estimates that up to $10.0 million of its uncertain tax positions may be realized.

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

	2011			2010		2009
Balance, beginning of year	$	110,857		$	66,200	$	63,700
Acquisition of Valeant		—			18,916		—
Additions based on tax positions related to the current year		2,701			10,133		1,000
Additions for tax positions of prior years		—			15,608		3,400
Reductions for tax positions of prior years		(11,268	)		—		(1,900	)
Balance, end of year	$	102,290		$	110,857	$	66,200

• The Company does not expect any significant change to the above unrecognized tax benefits during the next 12 months.

  Certain unrecognized tax benefits have been recorded as a reduction of deferred tax assets.