

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, beginning 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⁾:



	2016			2015			2014
Domestic	$	(275.3	)	$	(107.5	)	$	(76.0	)
International	508.7			214.8			41.4
Total	$	233.4		$	107.3		$	(34.6	)

(1) Domestic reflects U.K. in fiscal 2016 and 2015, and U.S. federal and state in fiscal 2014.

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



	2016			2015			2014
Current:
Domestic	$	0.3		$	0.2		$	22.3
International	120.5			67.3			18.9
Current income tax provision	120.8			67.5			41.2
Deferred:
Domestic	$	0.7		$	(0.8	)	$	(41.9	)
International	(377.1		)	(196.0		)	(11.9		)
Deferred income tax (benefit)	(376.4		)	(196.8		)	(53.8		)
	$	(255.6	)	$	(129.3	)	$	(12.6	)

(1) Domestic reflects U.K. in fiscal 2016 and 2015, and U.S. federal and state in fiscal 2014.

The fiscal 2016 Domestic current income tax provision reflects a utilization of $1.0 million of net operating losses. The Domestic net operating loss utilization is comprised of net operating losses carried forward from fiscal 2015. The fiscal 2016 International current income tax provision reflects a utilization of $29.2 million of net operating losses and $9.5 million of U.S. credits. The International net operating loss utilization is comprised of $17.9 million of net operating losses acquired in conjunction with the Hemostasis Acquisition and the remainder of the utilization relates to net operating losses carried forward from fiscal 2015. The U.S. credit utilization is comprised of credits carried forward from fiscal 2015 and generated during fiscal 2016.

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 of the utilization relates 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 $1.0 million, $5.1 million and $0.3 million for the fiscal years 2016, 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:



	2016			2015			2014
Provision for income taxes at Domestic statutory income tax rate ⁽¹⁾	$	46.6		$	21.4		$	(12.1	)
Adjustments to reconcile to income tax provision:
U.S. state income tax provision, net ⁽⁵⁾	—			—			(7.0		)
Rate difference between Domestic and International jurisdictions ⁽²⁾	(249.3		)	(152.9		)	(14.2		)
U.S. manufacturing deduction ⁽⁵⁾	—			—			(2.7		)
Valuation allowances, nonrecurring	2.1			(2.1		)	0.1
Adjustments to accrued income tax liabilities and uncertain tax positions	(14.9		)	(7.0		)	(0.4		)
Interest and penalties on accrued income tax liabilities and uncertain tax positions	(16.4		)	0.3			(7.7		)
Investment in partnership	—			—			20.0
Credits, principally research and orphan drug ⁽³⁾ ⁽⁴⁾	(33.7		)	(8.1		)	(0.7		)
Permanently nondeductible and nontaxable items	7.9			14.7			13.4
Other	2.1			4.4			(1.3		)
Provision for income taxes	$	(255.6	)	$	(129.3	)	$	(12.6	)


(1)	The statutory tax rate reflects the U.K. statutory tax rate of 20% for fiscal 2016 and 2015, and the U.S. federal statutory tax rate of 35% for fiscal 2014.


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


(3)	Due to the December 31, 2013 Research Credit 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.


(4)	The Company realized a tax benefit of $27.4 million resulting from a U.K. tax credit on a dividend between affiliates.

(5)

For fiscal 2016, U.S. state income tax benefit of $15.1 million was combined with the rate differences between Domestic and International jurisdictions. For fiscal 2015, U.S. state income tax benefit of $34.9 million, and U.S. manufacturing deduction tax benefit of $4.3 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 $152.9 million of tax benefit to $249.3 million of tax benefit for fiscal 2015 to fiscal 2016, 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, 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. The $96.4 million increase in the tax benefit included increases of $146.3 million of tax benefit attributed to changes in operating income and $32.0 million of tax benefit related to acquisition and other non-acquisition related items; partially offset by $56.8 million of increased tax expense to the change in amortization and a $25.1 million decrease to the U.S. state tax benefit associated with the impact of recent acquisitions, integration thereof, and legislative changes.

The rate difference between Domestic and International jurisdictions changed from $14.2 million of tax benefit to $152.9 million of tax benefit for fiscal 2014 to fiscal 2015, respectively. The rate difference between Domestic and International jurisdictions would have been $19.0 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. The $138.7 million increase in the tax benefit included increases of $62.4 million of tax benefit attributed to changes in operating income, $62.2 million of tax benefit related to acquisition and other non-acquisition related items and $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 $4.8 million of tax benefit can be attributed to the change in the referenced rate from U.S. to U.K.; partially offset by $22.5 million of increased tax expense to the change in amortization.

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



	2016			2015			2014
Balance at beginning of fiscal year	$	89.2		$	82.0		$	100.1
Additions related to current year tax positions	63.8			4.5			3.2
Additions related to prior period tax positions	10.8			19.9			30.6
Reductions related to prior period tax positions	(37.8		)	(7.7		)	(33.0		)
Reductions related to disposition transactions	(6.6		)	—			—
Settlements	(2.6		)	(7.8		)	(6.9		)
Lapse of statute of limitations	(2.0		)	(1.7		)	(12.0		)
Balance at end of fiscal year	$	114.8		$	89.2		$	82.0

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.

On January 19, 2016, Tyco International plc (“Tyco International”) announced it had entered into Stipulations of Settled Issues with the IRS to resolve certain disputes before the U.S. Tax Court. The disputes involved IRS audits of Tyco International for years in which companies that are now subsidiaries of Mallinckrodt were subsidiaries of Tyco International. On May 31, 2016, the U.S. Tax Court entered decisions consistent with the Stipulations of Settled Issues. As a result, all aspects of the disputes that were before the U.S. Tax court and Appeals Division of the IRS have been resolved for audit cycles from 1997-2007. Mallinckrodt is not a participant in the tax sharing agreement between Medtronic plc (as successor to Covidien plc), Tyco International and TE Connectivity and will not share in or be responsible for any payments to be made under the terms of the settlement.

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



	September 30, 2016		September 25, 2015
Accrued and other current liabilities	$	—	$	1.3
Other income tax liabilities	55.4		80.0
Deferred income taxes (non-current liability)	59.4		7.9
	$	114.8	$	89.2

Included within total unrecognized tax benefits at September 30, 2016, September 25, 2015 and September 26, 2014, were $113.1 million, $87.4 million and $82.0 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 2016, the Company recorded $4.1 million of additional interest through tax provision and acquisition accounting and decreased accrued interest by $32.1 million related to cash payments related to settlements as well as reductions related to prior periods and $6.5 million related to disposition transactions. During fiscal 2015 and 2014, the Company accrued additional interest of $5.7 million and $7.0 million, respectively. The total amount of accrued interest related to uncertain tax positions was $7.2 million, $41.7 million and $45.1 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 $14.6 million. Interest and penalties could decrease by up to $6.1 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 30, 2016		September 25, 2015
Accrued and other current liabilities	$	111.8	$	15.6
Other income tax liabilities	67.7		121.3
	$	179.5	$	136.9

At September 30, 2016, other assets included $69.1 million of tax payments associated with non-current deferred intercompany transactions. Prepaid expenses and other current assets includes $10.0 million of tax payments associated with current deferred intercompany transactions, and $43.5 million of receivables associated with tax payments on account with the taxing authorities. At September 25, 2015, other assets includes $51.7 million of tax payments associated with non-current deferred intercompany transactions. Prepaid expenses and other current assets includes a receivable of $81.1 million and tax payments of $8.7 million associated with current deferred intercompany transactions. All of the above items exclude amounts related to assets which are held for sale.



	September 30, 2016		September 25, 2015
Other assets	$	69.1	$	51.7
Prepaid expenses and other current assets	53.5		89.8
	$	122.6	$	141.5

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 18.

As of September 30, 2016, the earliest open years for U.S. federal and state tax jurisdictions is 2010 and 2000, respectively. 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 30, 2016			September 25, 2015
Deferred tax assets:
Accrued liabilities and reserves	$	80.8		$	91.0
Inventories	35.4			21.4
Tax loss and credit carryforwards	332.3			159.5
Environmental liabilities	28.6			23.6
Rebate reserves	48.7			48.1
Expired product	12.2			26.3
Postretirement benefits	48.7			37.3
Federal and state benefit of uncertain tax positions and interest	17.4			33.6
Share-based compensation	22.1			17.6
Intangible assets	341.8			105.7
Other	14.9			8.7
	982.9			572.8
Deferred tax liabilities:
Property, plant and equipment	(111.3		)	(111.8		)
Intangible assets	(775.1		)	(1,550.7		)
Installment sale	(1,902.9		)	(1,465.3		)
Investment in partnership	(186.0		)	(187.9		)
	(2,975.3		)	(3,315.7		)
Net deferred tax (liability) before valuation allowances	(1,992.4		)	(2,742.9		)
Valuation allowances	(564.9		)	(233.0		)
Net deferred tax (liability)	$	(2,557.3	)	$	(2,975.9	)

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



	September 30, 2016			September 25, 2015
Deferred income taxes (current asset)	$	—		$	139.2
Other non-current assets	24.1			6.6
Accrued and other current liabilities	—			(4.2		)
Deferred income taxes (non-current liability)	(2,581.4		)	(3,117.5		)
Net deferred tax (liability)	$	(2,557.3	)	$	(2,975.9	)

The above table reflects the reclassification of current deferred taxes to non-current upon the Company's adoption of ASU 2015-17, "Balance Sheet Reclassification of Deferred Taxes."

The Company's current deferred tax asset decreased from $139.2 million at September 25, 2015 to zero at September 30, 2016 due to tax credit utilization of $12.4 million in the current year, and the remainder primarily due to the adoption of ASU 2015-17, "Balance Sheet Reclassification of Deferred Taxes," whereby deferred taxes are reclassified as non-current. Non-current deferred tax liability decreased from $3,117.5 million at September 25, 2015 to $2,581.4 million at September 30, 2016, primarily due to $322.8 million of decreases associated with the payment of internal installment sale obligations, $122.6 million of decreases due to reclassification on the adoption of ASU 2015-17, $66.4 million of decreases associated with the amortization of intangibles, and $50.0 million of decreases related to other impacts of recent acquisitions and integration and normal operating activity. These factors were partially offset by a $25.7 million increase from current year acquisitions.

The Hemostasis Acquisition resulted in a net deferred tax liability increase of $1.4 million. Significant components of this increase include $20.3 million of deferred tax liabilities associated with intangibles and $4.1 million associated with inventory, partially offset by $23.0 million of deferred tax assets associated with non U.K. net operating losses and tax credits.

The Stratatech Acquisition resulted in a net deferred tax liability increase of $24.3 million. Significant components of this include $35.5 million of deferred tax liabilities associated with intangibles partially offset by $11.2 million of deferred tax assets associated with non U.K. net operating losses and tax credits.

As a part of the Ikaria integration, the Company entered into an internal installment sale transaction during fiscal 2016. The Ikaria internal installment sale transaction resulted in a decrease of $535.1 million to the deferred tax liability associated with the completed technology and IPR&D intangible assets, a $519.5 million increase to the deferred tax liability associated with an installment sale note receivable, a $42.8 million increase to the current income tax liability, a $23.8 million increase to deferred tax charges and a $1.0 million increase to prepaid taxes.

As part of the Therakos integration, the Company entered into an internal installment sale transaction during fiscal 2016. The Therakos internal installment sale transaction resulted in a decrease of $267.3 million to the deferred tax liability associated with the completed technology intangible asset, a $250.4 million increase to the deferred tax liability associated with an installment sale note receivable, a $17.3 million increase to the current income tax liability and a $0.3 million increase to prepaid taxes.

At September 30, 2016, the Company had approximately $246.1 million of net operating loss carryforwards in certain International jurisdictions, of which $175.3 million have no expiration and the remaining $70.8 million will expire in future years through 2036. As a result of the Company's disposition of its CMDS business, as discussed in Note 4, the Company's International net operating losses increased by $29.5 million. The Company had $75.0 million of Domestic net operating loss carryforwards at September 30, 2016, which have no expiration date.

At September 30, 2016 the Company also had $11.2 million of tax credits available to reduce future income taxes payable, primarily in jurisdictions within the U.S., of which $4.0 million have no expiration and the remainder expire during fiscal 2017 through 2036.

The deferred tax asset valuation allowances of $564.9 million and $233.0 million at September 30, 2016 and September 25, 2015, 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.

As of September 30, 2016, 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 $354.8 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 25, 2015 was attributable to the removal of the earnings for the entities classified as held for sale, further adjusted by unrepatriated earnings associated with income and losses attributed to the current year activity.

As of September 25, 2015, the Company has also accrued a $6.5 million deferred tax liability associated with approximately $41.3 million of unrepatriated earnings that were not indefinitely reinvested related to assets held for sale, which was adjusted to $3.9 million in 2016. As a result of the disposition of the CMDS business, the Company satisfied this deferred tax liability. As of September 30, 2016, the Company has no deferred tax liabilities associated with unrepatriated earnings that are not indefinitely reinvested on assets from continuing operations or related to assets held for sale.