INCOME TAXES

3 Months Ended

Mar. 31, 2012

INCOME TAXES

INCOME TAXES

15.   INCOME TAXES

• In the three-month period ended March 31, 2012, the Company recognized a recovery of income taxes of $0.3 million, which comprised $2.0 million related to the expected tax benefit in tax jurisdictions outside of Canada offset with a tax expense of $1.7 million related to Canadian income taxes. In the three months ended March 31, 2012, the Company's effective tax rate was primarily impacted by (i) the tax benefit of current U.S. losses, (ii) the increase in liabilities for uncertain tax positions, (iii) an adjustment of the valuation allowance specific to acquired Canadian net deferred tax liabilities, and (iv) withholding tax outside of Canada.

  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 $130.2 million as of March 31, 2012 and $128.7 million as of December 31, 2011. 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.

  As of March 31, 2012, the Company had $117.6 million of unrecognized tax benefits, which included $21.8 million relating to interest and penalties. Of the total unrecognized tax benefits, $68.3 million would reduce the Company's effective tax rate, if recognized. The Company does not expect any significant change to the above unrecognized tax benefits during the next twelve months.

  The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2012, the Company had accrued $0.4 million for interest and $0.1 million for penalties.

  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 2010. The Company is currently under examination by the Canada Revenue Agency for years 2003 to 2006 and remains open to examination for years 2004 and later. Valeant is currently under examination by the Australian Tax Office for the 2010 tax year.