(15) INCOME TAXES

The provision for (benefit from) income taxes is based on loss before income taxes as follows:

	Years Ended December 31,
	2016			2015			2014
U.S. Source	$	10,696		$	182,215		$	49,411
Non-U.S. Source		(841,746	)		(336,939	)		(174,279	)
Loss before income taxes	$	(831,050	)	$	(154,724	)	$	(124,868	)

The U.S. and foreign components of the provision for (benefit from) income taxes are as follows:

	Years Ended December 31,
	2016			2015			2014
Provision for current income tax expense:
Federal	$	22,239		$	84,743		$	28,093
State and local		1,418			5,323			3,011
Foreign		3,557			3,836			3,614
		27,214			93,902			34,718
Provision for (benefit from) deferred income tax expense:
Federal		(78,428	)		(17,741	)		(20,367	)
State and local		(6,012	)		(8,770	)		(4,982	)
Foreign		(143,614	)		(50,316	)		(268	)
		(228,054	)		(76,827	)		(25,617	)
Provision for (benefit from) income taxes	$	(200,840	)	$	17,075		$	9,101

For the year ended December 31, 2016, the Company’s Dutch operations had a GAAP loss of $539.2 million, which included the impairment of the Kyndrisa IPR&D assets and a resulting deferred tax benefit of $143.5 million associated with the reversal of the deferred tax liability of such IPR&D assets.

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate expressed as a percentage of loss before income taxes:

	Years Ended December 31,
	2016			2015			2014
Federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State and local taxes		0.4	%		(2.2	)%		(1.6	)%
Orphan Drug & General Business Credit		7.5	%		34.8	%		29.3	%
Stock compensation expense		4.6	%		(2.8	)%		(2.4	)%
Changes in the fair value of contingent acquisition consideration payable		0.9	%		0.2	%		(3.6	)%
Subpart F income		—	%		(8.4	)%		(9.2	)%
Foreign tax rate differential		(18.6	)%		(46.2	)%		(51.5	)%
Section 162(m) limitation		(5.4	)%		(1.3	)%		(1.7	)%
Other		0.3	%		(1.6	)%		(1.9	)%
Valuation allowance/deferred benefit		(0.5	)%		(18.5	)%		0.3	%
Effective income tax rate		24.2	%		(11.0	)%		(7.3	)%

The significant components of the Company’s net deferred tax assets are as follows:

	December 31,
	2016			2015
Net deferred tax assets:
Net operating loss carryforwards	$	49,787		$	44,942
Tax credit carryforwards		352,535			143,987
Accrued expenses, reserves, and prepaids		77,904			79,029
Intangible assets		26,751			16,177
Stock-based compensation		47,713			49,322
Inventory		15,581			18,942
Impairment		5,017			5,005
Other		1,415			1,155
Valuation allowance		(73,037	)		(67,708	)
Total deferred tax assets		503,666			290,851

Joint venture basis difference		(1,714	)		(1,888	)
Acquired intangibles		(8,773	)		(162,689	)
Convertible notes discount		(24,394	)		(32,162	)
Property, plant and equipment		(22,103	)		(13,192	)
Unrealized (gains) losses		104			(4,256	)
Total deferred tax liabilities		(56,880	)		(214,187	)
Net deferred tax assets	$	446,786		$	76,664

The increase to the tax credit carryforwards was primarily attributed to the adoption of ASU 2016-09 in 2016. See Note 4 to these Consolidated Financial Statements for additional discussion related to the adoption of ASU 2016-09. The decrease in the acquired intangibles was primarily attributed to the reversal of the deferred tax liability for impairment of the Kyndrisa IPR&D. See Note 7 to these Consolidated Financial Statements for additional discussion related to the impairment of the Kyndrisa IPR&D assets.

As of December 31, 2016, the Company had federal net operating loss carryforwards of $18.9 million, state net operating loss carryforwards of $174.7 million and Dutch net operating loss carryforwards of $125.1 million. The Company also had federal R&D and orphan drug credit carryforwards of $377.4 million and state research credit carryovers of $71.7 million.

The federal net operating loss carryforwards will expire at various dates beginning in 2028 through 2033 if not utilized. The federal credit carryforward will expire at various dates beginning in 2024 through 2036 if not utilized. The state net operating loss carryforwards will expire at various dates beginning in 2017 through 2036 if not utilized. The Dutch net operating loss carryforwards will expire at various dates beginning in 2017 through 2025 if not utilized. Certain state research credit carryovers will begin to expire in 2019 if not utilized, with others carrying forward indefinitely.

The Company’s net operating losses and credits could be subject to annual limitations due to ownership change limitations provided by Internal Revenue Code Section 382 and similar state provisions. An annual limitation could result in the expiration of net operating losses and tax credit carryforward before utilization. There are limitations on the tax attributes of acquired entities however, the Company does not believe the limitations will have a material impact on the utilization of the net operating losses or tax credits.

In 2016, the valuation allowance increased by $5.3 million primarily due to California net operating losses that may not be realized. In 2015, the Company established deferred tax assets related to the future contingent consideration on the sale of talazoparib and the net operating loss carryforwards acquired with Prosensa. Due to the uncertainty of the Company’s ability to realize the benefits from these deferred tax assets, the Company has recorded a full valuation allowance on these assets resulting in a $59.9 million increase in the valuation allowance.

The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2016 is as follows:

	December 31,
	2016		2015
Balance at beginning of period	$	86,731	$	71,663
Additions based on tax positions related to the current year		15,982		13,614
Additions for tax positions of prior years	497			1,454
Balance at end of period	$	103,210	$	86,731

Included in the balance of unrecognized tax benefits at December 31, 2016 are potential benefits of $103.2 million that, if recognized, would affect the effective tax rate. The Company’s policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items in the income tax expense. The total amount of accrued interest and penalties was not significant as of December 31, 2016.

The Company files income tax returns in the U.S. and various foreign jurisdictions. The U.S. and foreign jurisdictions have statute of limitations ranging from three to five years. However, carryforward tax attributes that were generated in 2013 and earlier may still be adjusted upon examination by tax authorities. Currently, the Company is under audit by the Internal Revenue Service for the years 2012 through 2014 and various states for similar periods.

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This excess totaled approximately $3.9 million as of December 31, 2016, which will be indefinitely reinvested; deferred income taxes have not been provided on such foreign earnings.