

7.	Income Taxes

In May 2015, the activities of the Company's principal executive offices were relocated from Ireland to the U.K. which resulted in a change in the Company's tax residence to the U.K. Mallinckrodt plc remains incorporated in Ireland. The tax regime applicable to holding companies resident in the U.K. allows Mallinckrodt plc to continue to have flexibility in structuring its subsidiary operations and enhanced global cash management. The Company continues to be subject to taxation in various tax jurisdictions worldwide. As a result of the integration of acquired intellectual property, the Company's income and assets are no longer concentrated in a single tax jurisdiction. Accordingly, in 2015 the Company reports the U.K. tax jurisdiction as its Domestic jurisdiction and the International jurisdiction represents areas outside the U.K. tax jurisdiction.

The Domestic and International components of income from continuing operations before income taxes were as follows⁽¹⁾:



	2015			2014			2013
Domestic	$	(107.0	)	$	(159.9	)	$	34.7
International	322.3			6.0			21.0
Total	$	215.3		$	(153.9	)	$	55.7

(1) Domestic reflects U.K. in fiscal 2015, and U.S. federal and state in fiscal 2014 and fiscal 2013.

Significant components of income taxes related to continuing operations are as follows⁽¹⁾:



	2015			2014			2013
Current:
Domestic	$	0.3		$	40.9		$	49.3
International	95.1			17.9			12.1
Current income tax provision	95.4			58.8			61.4
Deferred:
Domestic	$	(0.8	)	$	(49.7	)	$	(18.3	)
International	(187.5		)	(19.2		)	4.4
Deferred income tax (benefit) provision	(188.3		)	(68.9		)	(13.9		)
	$	(92.9	)	$	(10.1	)	$	47.5

(1) Domestic reflects U.K. in fiscal 2015, and U.S. federal and state in fiscal 2014 and fiscal 2013.

The fiscal 2015 International current income tax provision reflects a utilization of $7.0 million of net operating losses (primarily in the U.S.) and $14.3 million of U.S. credits. The net operating loss utilization is comprised of $4.8 million of net operating losses acquired in conjunction with the Ikaria Acquisition and the remainder utilization relating to net operating losses carried forward from fiscal 2014. The U.S. credit utilization is comprised of $7.2 million of credits acquired in conjunction with the Ikaria Acquisition and the remainder utilization relating to credits carried forward or generated during fiscal 2015.

The fiscal 2014 Domestic current income tax provision reflects a utilization of $221.3 million of net operating losses (primarily in the U.S.) and $8.6 million of U.S. credits. The net operating loss utilization is comprised of $187.8 million of net operating losses acquired in conjunction with the Cadence Acquisition and the remainder utilization relating to net operating losses carried forward.

The Company has a provincial tax holiday in Canada that expires on April 1, 2017. The tax holiday reduced International tax expense by $5.1 million and $0.3 million for the fiscal years 2015 and 2014, respectively.

The reconciliation between Domestic income taxes at the statutory rate and the Company's provision for income taxes on continuing operations is as follows:



	2015			2014			2013
Provision for income taxes at Domestic statutory income tax rate ⁽¹⁾	$	43.1		$	(53.8	)	$	19.5
Adjustments to reconcile to income tax provision:
U.S. state income tax provision, net ⁽⁶⁾	—			(6.1		)	3.7
Rate difference between Domestic and International jurisdictions ^{(2) (3)}	(138.6		)	(10.6		)	3.3
U.S. manufacturing deduction ⁽⁶⁾	—			(4.1		)	(2.5		)
Valuation allowances, nonrecurring	(2.1		)	0.1			3.4
Adjustments to accrued income tax liabilities and uncertain tax positions ⁽³⁾	(6.8		)	(1.5		)	5.0
Interest and penalties on accrued income tax liabilities and uncertain tax positions ⁽³⁾	0.2			(7.9		)	4.7
Investment in partnership	—			20.0			—
Credits, principally research and orphan drug ⁽⁴⁾	(8.1		)	(0.8		)	(6.3		)
Impairments, nondeductible	—			41.8			—
Permanently nondeductible and nontaxable items ⁽⁵⁾	16.4			13.8			15.3
Other	3.0			(1.0		)	1.4
Provision for income taxes	$	(92.9	)	$	(10.1	)	$	47.5


(1)	The statutory tax rate reflects the U.K. statutory tax rate of 20% for fiscal 2015, and the U.S. federal statutory tax rate of 35% for fiscal 2014 and 2013.


(2)	Includes the impact of certain recurring valuation allowances for Domestic and International jurisdictions.


(3)	Fiscal year 2013 includes impact of items relating to entities retained by Covidien in connection with the Separation.

(4)

During fiscal 2013, the U.S. Research Credit legislation was extended, with a retroactive effective date of January 1, 2012. As such, fiscal 2013 includes approximately $2.3 million of credit related to the period January 1, 2012 through September 28, 2012. Due to the December 31, 2013 tax law expiration, fiscal 2014 includes $0.7 million for the period September 28, 2013 through December 31, 2013. During fiscal 2015, the legislation was extended, with a retroactive effective date of January 1, 2014. As such, fiscal 2015 includes approximately $3.6 million of credit related to the period January 1, 2014 through September 26, 2014.


(5)	Includes the impact of nondeductible transaction and separation costs.


(6)	For fiscal 2015, U.S. state income tax benefit of $36.4 million, and U.S. manufacturing deduction tax benefit of $5.6 million were combined with the rate differences between Domestic and International jurisdictions. Fiscal 2014 includes U.S. state income tax benefit of $4.4 million associated with fiscal 2014 acquisitions and integration thereof.

The rate difference between Domestic and International jurisdictions changed from $10.6 million of tax benefit to $138.6 million of tax benefit for fiscal 2014 to fiscal 2015, respectively. The rate difference between Domestic and International jurisdictions would have been $32.1 million of tax benefit in fiscal 2014 if the referenced rate would have been the U.K. statutory rate of 21%. This change was predominately related to recent acquisitions, which resulted in more income in lower tax rate jurisdictions and less income in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions. The change in the lower tax rate jurisdictions was predominately due to recent acquisitions, both of which resulted in more income in lower tax rate jurisdictions and less income in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions. The change in the lower tax rate jurisdictions was primarily attributable to increased operating income partially offset by amortization. The change in the U.S. jurisdiction was primarily attributable to increased amortization and the cost of financing recent acquisitions. Of the $128.0 million increase to tax benefit, $21.5 million of tax benefit can be attributed to the change in the referenced rate from U.S. to U.K, $35.0 million of tax benefit to the change in operating income, $22.5 million of tax expense to the change in amortization, $31.8 million of tax benefit to the U.S. state tax benefit associated with the impact of recent acquisitions, integration thereof, and legislative changes, and $62.2 million of tax benefit related to acquisition and other non-acquisition related items.

The rate difference between Domestic and International jurisdictions changed from $3.3 million of tax expense to $10.6 million of tax benefit for fiscal 2013 to fiscal 2014, respectively. The rate difference between Domestic and International jurisdictions would have been $10.0 million of tax expense and $32.1 million of tax benefit if the referenced rate would have been the U.K. statutory rate of 23% and 21% for fiscal 2013 and 2014 respectively. This change was predominately related to recent acquisitions, which resulted in more income in lower tax rate jurisdictions and less income in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions. The change in the lower tax rate jurisdictions was predominately due to recent acquisitions and the benefit of intercompany debt transferred to the Company at Separation, both of which resulted in more income in lower tax rate jurisdictions and less income in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions. The change in the lower tax rate jurisdictions was primarily attributable to increased operating income partially offset by amortization. The change in the U.S. jurisdiction was primarily attributable to increased amortization and the cost of financing recent acquisitions. Of the $13.9 million decrease in tax expense, $10.8 million of tax expense can be attributed to the change in operating income, $14.0 million of tax expense to the change in amortization, and $38.7 million of tax benefit related to acquisition and other non-acquisition related items.

As of September 25, 2015, September 26, 2014 and September 27, 2013, the amounts of unrecognized tax benefits for which the Company is legally and directly liable and would be required to remit cash if not sustained were $89.2 million, $82.0 million and $100.1 million, respectively. For periods prior to the Separation, the Company's operations had been included in tax returns filed by Covidien or certain of its subsidiaries not included in the Company's historical combined financial statements. As a result, some U.S. uncertain tax positions related to the Company's operations resulted in unrecognized tax benefits that are obligations of entities not included in the combined financial statements for periods prior to June 28, 2013. Because the activities that gave rise to these unrecognized tax benefits relate to the Company's operations, the impact of these items (presented in the table below) were charged to the income tax provision through parent company investment, which was a component of parent company equity in the combined balance sheets.

The following table summarizes the activity related to the Company's unrecognized tax benefits, excluding interest:



	2015			2014			2013
Balance at beginning of fiscal year	$	82.0		$	100.1		$	165.5
Unrecognized tax benefits retained by Covidien	—			—			(153.7		)
Unrecognized tax benefits transferred from Covidien	—			—			84.2
Additions related to current year tax positions	4.5			3.2			3.5
Additions related to prior period tax positions	19.9			30.6			6.6
Reductions related to prior period tax positions	(7.7		)	(33.0		)	(4.3		)
Settlements	(7.8		)	(6.9		)	(1.6		)
Lapse of statute of limitations	(1.7		)	(12.0		)	(0.1		)
Balance at end of fiscal year	89.2			82.0			100.1

During fiscal 2015, the Company made a payment of $8.9 million ($7.4 million of tax and $1.5 million of interest) to the U.S. Internal Revenue Service ("IRS") in connection with the settlement of certain tax matters for 2008 and 2009. During fiscal 2014, the Company made a payment of $35.9 million ($27.3 million of tax and $8.6 million of interest) to the IRS in connection with the settlement of certain tax matters for 2005 through 2007.

Unrecognized tax benefits, excluding interest, are reported in the following consolidated balance sheet captions in the amount shown:



	September 25, 2015		September 26, 2014
Accrued and other current liabilities	$	1.3	$	6.5
Other income tax liabilities	80.0		70.7
Deferred income taxes (non-current liability)	7.9		4.8
	$	89.2	$	82.0

Included within total unrecognized tax benefits at September 25, 2015, September 26, 2014 and September 27, 2013, were $87.4 million, $82.0 million and $96.3 million, respectively, of unrecognized tax benefits, which if favorably settled would benefit the effective tax rate. The remaining unrecognized tax benefits for each period would be offset by the write-off of related deferred and other tax assets, if recognized. During fiscal 2015, the Company recorded $5.7 million of additional interest through tax provision and acquisition accounting and decreased interest $9.3 million related to cash payments related to settlements as well as reductions related to prior periods. During fiscal 2014 and 2013, the Company accrued additional interest of $7.0 million and $2.4 million, respectively. The total amount of accrued interest related to uncertain tax positions was $41.7 million, $45.1 million and $62.1 million, respectively.

It is reasonably possible that within the next twelve months, as a result of the resolution of various Domestic and International examinations and appeals and the expiration of various statutes of limitation, that the unrecognized tax benefits could decrease by up to $17.5 million. Interest and penalties could decrease by up to $8.8 million.

Income taxes payable, including uncertain tax positions and related interest accruals, is reported in the following consolidated balance sheet captions in the amounts shown.



	September 25, 2015		September 26, 2014
Accrued and other current liabilities	$	19.8	$	13.1
Other income tax liabilities	121.3		122.6
	$	141.1	$	135.7

At September 25, 2015, other assets includes $52.2 million of tax payments associated with non-current deferred intercompany transactions. Prepaid expenses and other current assets includes $8.7 million of tax payments associated with current deferred intercompany transactions, and $81.3 million of receivables associated with tax payments on account with the taxing authorities. At September 26, 2014, other assets includes $14.8 million of tax payments associated with non-current deferred intercompany transactions. Prepaid expenses and other current assets includes a receivable of $60.0 million associated with the Questcor acquisition and tax payments of $0.6 million associated with current deferred intercompany transactions. All of the above items exclude amounts related to assets which are held for sale.



	September 25, 2015		September 26, 2014
Other assets	$	52.2	$	14.8
Prepaid expenses and other current assets	90.0		63.4
	$	142.2	$	78.2

Covidien continues to be examined by various taxing authorities for periods the Company was included within the consolidated results of Covidien. In connection with the Separation, the Company entered into a tax matters agreement ("the Tax Matters Agreement") with Covidien that generally governs Covidien's and Mallinckrodt's respective rights, responsibilities and obligations after the Separation with respect to certain taxes, including, but not limited to, ordinary course of business taxes. For further information on the Tax Matters Agreement, refer to Note 17.

As of September 25, 2015, the earliest open year for U.S. federal and state tax jurisdictions is 1996. Additionally, a number of tax periods from 2009 to present are subject to examination by tax authorities in various jurisdictions, including Ireland, Luxembourg, Switzerland, and the U.K.

Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred tax (liability) asset at the end of each fiscal year were as follows:



	September 25, 2015			September 26, 2014
Deferred tax assets:
Accrued liabilities and reserves	$	92.5		$	68.9
Inventories	23.2			21.4
Tax loss and credit carryforwards	163.3			93.8
Environmental liabilities	23.6			29.5
Rebate reserves	48.5			41.1
Expired product	26.3			39.0
Postretirement benefits	33.8			34.5
Federal and state benefit of uncertain tax positions and interest	33.6			29.5
Share-based compensation	18.9			28.1
Intangible assets	105.7			9.6
Other	20.2			32.0
	589.6			427.4
Deferred tax liabilities:
Property, plant and equipment	(140.1		)	(121.6		)
Intangible assets	(1,550.7		)	(2,177.9		)
Installment sale	(1,465.3		)	(93.6		)
Investment in partnership	(187.9		)	(191.3		)
	(3,344.0		)	(2,584.4		)
Net deferred tax (liability) before valuation allowances	(2,754.4		)	(2,157.0		)
Valuation allowances	(233.0		)	(76.9		)
Net deferred tax (liability)	$	(2,987.4	)	$	(2,233.9	)

Deferred taxes are reported in the following consolidated and combined balance sheet captions in the amounts shown:



	September 25, 2015			September 26, 2014
Deferred income taxes (current asset)	$	142.7		$	152.3
Other non-current assets	7.0			13.4
Accrued and other current liabilities	(4.7		)	—
Deferred income taxes (non-current liability)	(3,132.4		)	(2,399.6		)
Net deferred tax (liability)	$	(2,987.4	)	$	(2,233.9	)

The Company's current deferred tax asset decreased from $152.3 million at September 26, 2014 to $142.7 million at September 25, 2015 primarily due to changes in inventory valuation as a result of profits in intercompany inventory, the increase in deferred tax assets from the Ikaria Acquisition, and decreases to operational deferred tax assets due to normal operating activities. Additionally, the Company's non-current deferred tax liability increased from $2,399.6 million at September 26, 2014 to $3,132.4 million at September 25, 2015, primarily due to $623.6 million related to the Ikaria Acquisition, $324.3 million related to the Therakos Acquisition, offset by $54.3 million of decreases associated with the amortization of intangibles, $105.4 million of decreases associated with the payment of internal installment sale obligations, and approximately $44.0 million of decreases related to other impacts of recent acquisitions and integration.

The Ikaria Acquisition resulted in a net deferred tax liability increase of $596.9 million. Significant components of this increase include $620.2 million of deferred tax liabilities associated with intangibles and $17.5 million of deferred tax liability associated with property, plant and equipment, partially offset by $21.7 million of deferred tax assets associated with U.S. tax credits, $13.1 million of deferred tax assets associated with financing repayments and $4.9 million of deferred tax assets associated with U.S. net operating losses.

The Therakos Acquisition resulted in a net deferred tax liability increase of $324.3 million. Significant components of this increase include $334.1 million of deferred tax liabilities associated with intangibles partially offset by $13.5 million of deferred tax assets predominately associated with U.S. net operating losses.

As a part of the Questcor integration, the Company entered into an internal installment sale transaction during the three months ended December 26, 2014. The Questcor internal installment sale transaction resulted in a decrease of $1,488.7 million to the deferred tax liability associated with the Acthar intangible asset, a $1,515.9 million increase to the deferred tax liability associated with an installment sale note receivable, a $25.3 million increase to deferred tax charge, and a $1.9 million increase to prepaid taxes.

At September 25, 2015, the Company had approximately $126.0 million of net operating loss carryforwards in certain non-U.K. jurisdictions, of which $91.4 million have no expiration and the remaining $34.6 million will expire in future years through 2025. The Company had $19.6 million of U.K. net operating loss carryforwards at September 25, 2015, which have no expiration date.

At September 25, 2015 the Company also had $16.3 million of tax credits available to reduce future income taxes payable, primarily in jurisdictions within the U.S., of which $3.1 million have no expiration and the remainder expire during fiscal 2016 through 2034.

The deferred tax asset valuation allowances of $233.0 million and $76.9 million at September 25, 2015 and September 26, 2014, respectively, relate principally to the uncertainty of the utilization of certain deferred tax assets, primarily International net operating losses and intangible assets. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets.

The tax residency change impacts the Company’s analysis of its cumulative unrepatriated earnings. As of September 25, 2015, the cumulative amount of undistributed earnings of the Company's subsidiaries that may be subject to tax, but are considered to be indefinitely reinvested, was $369.0 million. It is not practicable to determine the cumulative amount of tax liability that would arise if these indefinitely reinvested earnings were remitted due to a variety of factors including the complexity of the Company's global legal entity structure as well as the timing, extent, and nature of any hypothetical repatriation of unremitted earnings. The net decrease in such undistributed earnings as compared to the period ended September 26, 2014 was attributable to the impact of the tax residency change and associated jurisdictions that could be remitted in a tax-free manner as well as the removal of the earnings for the entities classified as held for sale. These decreases were partially offset by an increase in unrepatriated earnings associated with income and losses attributed to the current year activity.

The Company has accrued a $0.7 million deferred tax liability associated with approximately $13.4 million of unrepatriated earnings that are not indefinitely reinvested on assets from continuing operations. The Company has also accrued a $6.5 million deferred tax liability associated with approximately $41.3 million of unrepatriated earnings that are not indefinitely reinvested related to assets held for sale.