Taxation

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure

27.       Taxation

The components of pre-tax income from continuing operations are as follows:

	2014	2013	2012
Year to December 31,	$’M	$’M	$’M
	___________	___________	___________
Republic of Ireland	1,472.0	(47.8)	(74.7)
UK	63.1	10.9	30.7
US	1,025.9	1,153.3	683.8
Other jurisdictions	775.2	577.2	368.0
	___________	___________	___________
	3,336.2	1,693.6	1,007.8
	___________	___________	___________

The provision for income taxes by location of the taxing jurisdiction for the years to December 31,2014, 2013 and 2012consisted of the following:

Year to December 31,
	2014	2013	2012
	$’M	$’M	$’M
	__________	__________	__________
Current income taxes:
US federal tax	291.8	274.3	230.0
US state and local taxes	25.3	17.9	11.3
Other	(290.9)	63.4	29.0
	__________	__________	__________
Total current taxes	26.2	355.6	270.3
	__________	__________	__________
Deferred taxes:
US federal tax	39.7	23.8	(63.8)
US state and local taxes	(2.9)	(8.3)	(6.5)
UK corporation tax	(3.0)	11.5	13.1
Other	(3.9)	(104.7)	(10.0)
	__________	__________	__________
Total deferred taxes	29.9	(77.7)	(67.2)
	__________	__________	__________
Total income taxes	56.1	277.9	203.1
	__________	__________	__________

The operating results associated with the DERMAGRAFT business have been classified as discontinued operations for all periods presented.

The Group has determined the amount of income tax expense or benefit allocable to continuing operations using the incremental approach in accordance with ASC 740-20-45-8. The amount of income tax attributed to discontinued operations is disclosed in Note 9.

The reconciliation of income from continuing operations before income taxes and equity in earnings/(losses) of equity method investees at the statutory tax rate to the provision for income taxes is shown in the table below:

Year to December 31,
		2014	2013	2012
		$’M	$’M	$’M
		___________	___________	___________
Income from continuing operations before income taxes and equity in earnings of equity method investees		3,336.2	1,693.6	1,007.8
		___________	___________	___________
Statutory tax rate(1)		25.0%	25.0%	25.0%
Non-deductible items:
	US R&D credit	(2.5%)	(4.5%)	(2.6%)
	Effect of the convertible bond	-	0.5%	0.8%
	Intra-group items(2)	(6.3%)	(9.2%)	(16.0%)
	Recognition of foreign tax credits	-	-	(6.6%)
	Other permanent items	0.7%	(0.7%)	0.8%
Other items:
Change in valuation allowance		0.8%	0.9%	3.4%
Impact of RESOLOR impairment		-	-	4.9%
Difference in taxation rates		3.4%	7.8%	7.6%
Change in provisions for uncertain tax positions		0.2%	3.8%	1.1%
Prior year adjustment		0.1%	(3.4%)	0.8%
Change in fair value of contingent consideration		0.3%	(3.6%)	-
Change in tax rates		0.5%	(0.2%)	0.8%
Receipt of break fee		(12.3%)	-	-
Settlement with Canadian revenue authorities		(7.0%)	-	-
Other		(1.2%)	-	0.1%
		___________	___________	___________
Provision for income taxes on continuing operations		1.7%	16.4%	20.1%
		___________	___________	___________

(1)In addition to being subject to the Irish corporation tax rate of 25%, in 2014 the Company is also subject to income tax in other territories in which the Company operates, including: Canada (15%); France (33.3%); Germany (15%); Italy (27.5%); Luxembourg (21.0%); the Netherlands (25%); Belgium (33.99%); Spain (30%); Sweden (22%); Switzerland (8.5%); United Kingdom (21.5%) and the US (35%). The rates quoted represent the statutory federal income tax rates in each territory, and do not include any state taxes or equivalents or surtaxes or other taxes charged in individual territories, and do not purport to represent the effective tax rate for the Company in each territory.

(2)Intra-group items principally relate to the effect of inter-company dividends, capital receipts (either taxable or non-taxable) and other intra-territory eliminations, the pre-tax effect of which has been eliminated in arriving at the Company's consolidated income from continuing operations before income taxes, noncontrolling interests and equity in earnings/(losses) of equity method investees.

Provisions for uncertain tax positions

The Company files income tax returns in the Republic of Ireland, the US (both federal and state) and various other jurisdictions (see footnote (1) to the table above for major jurisdictions). With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before 2008. Tax authorities in various jurisdictions are in the process of auditing the Company's tax returns for fiscal periods from 2008; these tax audits cover a range of issues, including transfer pricing and potential restrictions on the utilization of net operating losses.

While tax audits remain open, the Company also considers it reasonably possible that issues may be raised by tax authorities resulting in increases to the balance of unrecognized tax benefits, however, an estimate of such an increase cannot be made.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2014	2013	2012
	$’M	$’M	$’M
	___________	___________	___________
Balance at January 1	355.2	278.7	265.5
Increases based on tax positions related to the current year	20.3	56.8	20.5
Decreases based on tax positions taken in the current year	-	(0.5)	-
Increases for tax positions taken in prior years	64.2	34.5	0.4
Decreases for tax positions taken in prior years	(211.0)	(0.8)	(3.3)
Decreases resulting from settlements with the taxing authorities	(9.4)	-	(10.6)
Decreases as a result of expiration of the statute of limitations	(0.6)	(0.6)	(0.3)
Foreign currency translation adjustments(1)	(10.9)	(12.9)	6.5
	___________	___________	___________
Balance at December 31(2)	207.8	355.2	278.7
	___________	___________	___________

(1)Recognized within Other Comprehensive Income

(2)Approximately $181 million (2013: $355 million, 2012: $278 million) of which would affect the effective tax rate if recognized

Decreases for tax positions taken in prior years are primarily driven by the settlement with the Canadian revenue authorities. During the year, the Company received assessments from the Canadian revenue authorities which agreed with original positions adopted by the Company in its Canadian tax returns for the period 1999-2004.The Company received repayments from the Canadian revenue authorities totaling $417million. Following receipt of the assessments the Company recorded a net credit to income taxes of $235 million which includes the release of provisions for uncertain tax positions including interest and penalties of $289.4 million partially offset by associated foreign tax credits.

The Company considers it reasonably possible that certain audits currently being conducted will be concluded in the next 12 months, and as a result the total amount of unrecognized tax benefits recorded at December 31, 2014 could decrease by up to approximately $25 million. As at the balance sheet date, the Company believes that its reserves for uncertain tax positions are adequate to cover the resolution of these audits. However, the resolution of these audits could have a significant impact on the financial statements if the settlement differs from the amount reserved.

The Company recognizes interest and penalties accrued related to unrecognized tax positions within income taxes. During the year ended December 31, 2014the Company recognized a net creditto income taxes of $103.1 million and in the years ended December 31, 2013 and 2012 a charge of $0.4 million and $5.1 million, respectivelywith respect to interest and penalties and the Company had a liability of $25.8million, $112.2 million and $119.6 million for the payment of interest and penalties accrued at December 31, 2014, 2013 and 2012, respectively.

Deferred taxes

The significant components of deferred tax assets and liabilities and their balance sheet classifications, as at December 31, are as follows:

	December 31,	December 31,
	2014	2013
	$’M	$’M
	____________	____________
Deferred tax assets:
Deferred revenue	3.2	5.2
Inventory & warranty provisions	28.8	48.6
Losses carried forward (including tax credits)1	686.3	500.6
Provisions for sales deductions and doubtful accounts	166.7	151.8
Intangible assets	5.8	10.7
Share-based compensation	29.5	25.5
Excess of tax value over book value of assets	13.4	22.1
Accruals and provisions	51.5	55.1
Other	14.0	2.6
	____________	____________
Gross deferred tax assets	999.2	822.2
Less: valuation allowance	(324.7)	(282.4)
	____________	____________
	674.5	539.8
Deferred tax liabilities:
Intangible assets	(1,196.5)	(586.8)
Excess of book value over tax value of assets and investments	(231.8)	(56.9)
	____________	____________
Net deferred tax liabilities	(753.8)	(103.9)
	____________	____________
Balance sheet classifications:
Deferred tax assets - current	344.7	315.6
Deferred tax assets - non-current	112.1	141.1
Deferred tax liabilities - non-current	(1,210.6)	(560.6)
	____________	____________
	(753.8)	(103.9)
	____________	____________

• Excluding $24.6million of deferred tax assets at December 31, 2014 (2013: $15.0million), related to net operating losses that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders' equity.

At December 31, 2014, the Company had a valuation allowance of $324.7million (2013: $282.4million) to reduce its deferred tax assets to estimated realizable value. These valuation allowances related primarily to operating loss, capital loss and tax-credit carry-forwards in Ireland (2014: $75.2million; 2013: $78.8million); the US (2014: $77.5million; 2013: $60.9million); Germany (2014: $27.5million; 2013: $30.8million); and other foreign tax jurisdictions (2014: $144.5million; 2013: $111.9 million).

Management is required to exercise judgement in determining whether deferred tax assets will more likely than not be realized. A valuation allowance is established where there is an expectation that on the balance of probabilities management considers it is more likely than not that the relevant deferred tax assets will not be realized. In assessing the need for a valuation allowance, management weighs all available positive and negative evidence including cumulative losses in recent years, projection of future taxable income, carry-forward and carry-back potential under relevant tax law, expiration period of tax attributes, taxable temporary differences, and prudent and feasible tax planning strategies.

The net increase in valuation allowances of $42.3million is principally due to increases of losses and other temporary differences in European jurisdictions where management consider that there is insufficient positive evidence in respect of the factors described above to overcome cumulative losses and therefore it is more likely than not that the relevant deferred tax assets will not be realized in full.

At December 31, 2014, based upon a consideration of the factors described above, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowances. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if these factors are revised in the future periods.

The approximate tax effect of NOLs, capital losses and tax credit carry-forwards as at December 31, are as follows:

	2014	2013
	$’M	$’M
	____________	____________
US federal tax	38.7	32.2
US state tax	82.8	61.5
UK	4.0	6.7
Republic of Ireland	75.2	78.8
Foreign tax jurisdictions	347.8	273.1
R&D and other tax credits	137.8	48.3
	____________	____________

The approximate gross value of NOLs and capital losses at December 31, 2014 is $3,313.0million (2013: $2,583.7million). The tax-effected NOLs, capital losses and tax credit carry-forwards shown above have the following expiration dates:

	December 31,
	2014
	$’M
	___________
Within 1 year	1.0
Within 1 to 2 years	0.8
Within 2 to 3 years	3.4
Within 3 to 4 years	10.3
Within 4 to 5 years	42.1
Within 5 to 6 years	20.1
After 6 years	244.0
Indefinitely	364.6

The Company does not provide for deferred taxes on the excess of the financial reporting over the tax basis in investments in foreign subsidiaries that are essentially permanent in duration. At December 31, 2014, that excess totalled approximately $8.1 billion.The determination of additional deferred taxes is not practicable and is not provided.