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Income Taxes

12 Months Ended

Dec. 27, 2019



8.	Income Taxes

The U.K. and non-U.K. components of (loss) income from continuing operations before income taxes were as follows:



	Fiscal Year
	2019			2018			2017
U.K.	$	(75.3	)	$	(233.7	)	$	(165.9	)
Non-U.K.	(1,516.2		)	(3,818.3		)	227.5
Total	$	(1,591.5	)	$	(4,052.0	)	$	61.6

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



	Fiscal Year
	2019			2018			2017
Current:
U.K.	$	0.1		$	(0.2	)	$	0.4
Non-U.K.	21.7			113.0			37.7
Current income tax provision	21.8			112.8			38.1
Deferred:
U.K.	(1.1		)	1.4			0.6
Non-U.K.	(605.0		)	(544.3		)	(1,748.3		)
Deferred income tax benefit	(606.1		)	(542.9		)	(1,747.7		)
Total	$	(584.3	)	$	(430.1	)	$	(1,709.6	)

The fiscal 2019 U.K. current income tax provision reflects a tax benefit of $1.2 million from utilization of net operating loss carryforwards. The fiscal 2019 non-U.K. current income tax provision reflects a tax benefit of $0.9 million from utilization of net operating loss carryforwards.

The fiscal 2018 U.K. current income tax provision reflects a tax benefit of $8.5 million from utilization of net operating loss carryforwards. The fiscal 2018 non-U.K. current income tax provision reflects a tax benefit of $13.7 million from utilization of net operating loss carryforwards.

The fiscal 2017 U.K. current income tax provision reflects a tax benefit of $14.3 million from utilization of net operating loss carryforwards. The fiscal 2017 non-U.K. current income tax provision reflects a tax benefit of $57.2 million from utilization of net operating loss carryforwards and $5.6 million of U.S. credits. In addition, the non-U.K. current income tax provision includes a tax benefit of $27.2 million related to carryback claims filed in fiscal 2017. The U.S. credit utilization is comprised of credit carryforwards and credits generated during fiscal 2017.

During fiscal years 2019, 2018, and 2017, net cash payments for income taxes was $30.7 million, $12.4 million, and $73.4 million.

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



	Fiscal Year
	2019			2018			2017
Provision (benefit) for income taxes at U.K. statutory income tax rate ⁽¹⁾	$	(302.4	)	$	(770.1	)	$	11.7
Adjustments to reconcile to income tax provision:
Rate difference between U.K. and non-U.K. jurisdictions ⁽²⁾	(206.3		)	(235.7		)	(219.9		)
Valuation allowances, nonrecurring ⁽³⁾	61.7			—			(3.7		)
Adjustments to accrued income tax liabilities and uncertain tax positions	(12.4		)	60.1			5.1
Interest and penalties on accrued income tax liabilities and uncertain tax positions	(6.3		)	13.1			0.2
Credits, principally research and orphan drug ⁽⁴⁾	(13.5		)	(25.9		)	(13.8		)
Impairments non deductible	—			788.7			—
Permanently nondeductible and nontaxable items ⁽³⁾	98.1			7.2			6.4
Pension plan settlement, release of tax effects lodged in other comprehensive income	—			—			(2.4		)
Divestitures ⁽⁵⁾	9.6			(2.7		)	18.2
U.S. Tax Reform ⁽⁶⁾	—			(8.5		)	(456.9		)
Legal Entity Reorganization ⁽⁷⁾	(212.8		)	(256.0		)	(1,054.8		)
Other	—			(0.3		)	0.3
Benefit for income taxes	$	(584.3	)	$	(430.1	)	$	(1,709.6	)


(1)	The statutory tax rate reflects the U.K. statutory tax rate of 19.0% for all periods presented.


(2)	Includes the impact of certain recurring valuation allowances for U.K. and non-U.K. jurisdictions.


(3)	For fiscal 2019, the nonrecurring valuation allowances and permanently nondeductible and nontaxable item were primarily driven by the impact from the opioid-related litigation settlement charge. Refer to Note 24 for further discussion.


(4)	During fiscal 2019 and 2018, the research and orphan drug credits decreased primarily as a result of the impact of the Tax Cut and Jobs Act of 2017 ("TCJA") and increased in conjunction with the Company's increased investment in qualified research, respectively.


(5)	The Company completed the sale of its wholly owned subsidiary BioVectra in November 2019, a portion of its Hemostasis business during fiscal 2018 and the Intrathecal Therapy Business during fiscal 2017.

(6)

For fiscal 2018, the Company completed its analysis of the TCJA and recognized an additional tax benefit. Other line items, to the extent U.S. related, are reflected at the current U.S. statutory income tax rate of 21.0%. For fiscal 2017, the benefit reflects the redetermination of the Company's end of year net deferred tax liabilities as a result of the new U.S. statutory income tax rate of 21.0%. Other line items, to the extent U.S. related, are reflected at the former U.S. statutory income tax rate of 35.0%.


(7)	Associated unrecognized tax benefit netted within this line.

The rate difference between U.K. and non-U.K. jurisdictions changed from $235.7 million of tax benefit to $206.3 million of tax benefit for fiscal 2018 to fiscal 2019, respectively. The $29.4 million decrease in the tax benefit included a $101.0 million decrease attributable to the non-restructuring impairment charges, a $45.8 million decrease attributable to changes in operating income, a $20.2 million decrease attributable to divestitures; partially offset by an increase of $76.7 million attributable to the gain on debt extinguishment and $60.9 million attributable to the opioid-related settlement charge.

The rate difference between U.K. and non-U.K. jurisdictions changed from $219.9 million of tax benefit to $235.7 million of tax benefit for fiscal 2017 to fiscal 2018, respectively. The $15.8 million increase in the tax benefit included a $90.3 million increase attributable to the non-restructuring impairment charges in fiscal 2018, a $22.2 million increase attributable to divestitures; partially offset by decreases of $80.2 million to the tax benefit attributable to the impact of U.S. Tax Reform, an $11.8 million decrease related to recent acquisitions, and a $4.7 million decrease attributable to changes in operating income and fiscal 2017 one-time items that did not recur in fiscal 2018.

During fiscal 2019, the Company completed a reorganization of its intercompany financing and associated legal entity ownership in response to the changing global tax environment. As a result, the Company recognized current income tax expense of $26.2 million and a deferred income tax benefit of $239.0 million with a corresponding reduction to net deferred tax liabilities. The reduction in net deferred tax liabilities was comprised of a decrease in interest-bearing deferred tax obligations which resulted in the elimination of the December 28, 2018 balance of $227.5 million, a $29.7 million increase in various other net deferred tax liabilities, a $28.7 million increase to a deferred tax asset related to excess interest carryforwards and a $12.5 million increase to a deferred tax asset related to tax loss and credit carryforwards net of valuation allowances. The elimination of the interest-bearing deferred tax obligation also eliminated the annual Internal Revenue Code section 453A interest expense. The reorganization involved the interpretation of multi-jurisdictional tax laws and regulations, supported by third party opinions. Interpretation of tax laws can be inherently uncertain and can be subject to potential challenges by the relevant tax authorities, both of which were considered in assessing its reserves for uncertain tax positions.

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



	Fiscal Year
	2019			2018			2017
Balance at beginning of period	$	287.7		$	182.5		$	118.7
Additions related to current year tax positions	123.5			19.6			79.9
Additions related to prior period tax positions	19.2			125.1			0.3
Reductions related to prior period tax positions	(5.7		)	(32.7		)	(13.6		)
Settlements	(1.0		)	(2.0		)	—
Lapse of statute of limitations	(25.1		)	(4.8		)	(2.8		)
Balance at end of period	$	398.6		$	287.7		$	182.5

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



	December 27, 2019		December 28, 2018
Other assets	$	204.7	$	—
Accrued and other current liabilities	—		1.0
Other income tax liabilities	193.9		189.9
Deferred income taxes (non-current liability)	—		96.8
	$	398.6	$	287.7

Included within total unrecognized tax benefits as of December 27, 2019, December 28, 2018, and December 29, 2017, were $395.9 million, $275.8 million, and $180.8 million, respectively, of unrecognized tax benefits, which if favorably settled would benefit the effective tax rate, of which up to $20.0 million in each year may be reported in discontinued operations. The remaining unrecognized tax benefits for each period would be offset by the write-off of related other tax assets, if recognized. During fiscal

2019, the Company recorded $14.4 million of additional interest through tax provision and decreased accrued interest and penalties by $18.6 million related to prior period reductions, settlements and lapse of statute of limitations. During fiscal 2018 and 2017, the Company had a net increase of interest and penalties activity of $30.0 million and a net interest and penalties activity of zero, respectively. The total amount of accrued interest and penalties related to uncertain tax positions was $32.9 million, $37.1 million, and $7.1 million, respectively.

It is reasonably possible that within the next twelve months, as a result of the resolution of various U.K. and non-U.K. examinations and appeals and the expiration of various statutes of limitation, that the unrecognized tax benefits could decrease by up to $99.5 million. Interest and penalties could decrease by up to $21.7 million.

Certain of the Company's subsidiaries continue to be subject to examination by the IRS for tax years as early as 2014. On August 5, 2019, the IRS proposed an adjustment to the taxable income of Mallinckrodt Hospital Products Inc. (“MHP”) (formerly known as Cadence Pharmaceuticals, Inc.) as a result of its findings in the audit of MHP's tax year ended September 26, 2014. The proposed adjustment to taxable income of $871.0 million, excluding potential associated interest and penalties, is proposed as a multi-year adjustment and may result in a non-cash reduction of the Company's U.S. Federal net operating loss carryforward of $782.0 million. The Company strongly disagrees with the proposed adjustment and intends to contest it through all available administrative and judicial remedies, which may take a number of years to conclude. See Note 19 for further details. In addition, the earliest open years for state tax jurisdictions are 2009 and a number of tax periods from 2013 to present are subject to examination by tax authorities in various jurisdictions, including Ireland, Luxembourg, Switzerland and the U.K.

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



	December 27, 2019		December 28, 2018
Accrued and other current liabilities	$	15.0	$	25.0
Other income tax liabilities	227.1		228.0
	$	242.1	$	253.0

Tax receivables and payments associated with deferred intercompany transactions are included in the following consolidated balance sheet captions in the amounts shown:



	December 27, 2019		December 28, 2018
Other assets	$	3.1	$	3.0
Prepaid expenses and other current assets	8.0		16.2
	$	11.1	$	19.2

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 asset (liability) at the end of each fiscal year were as follows:



	December 27, 2019			December 28, 2018
Deferred tax assets:
Tax loss and credit carryforwards	$	2,263.4		$	1,987.8
Intangible assets	981.2			757.7
Opioid-related litigation settlement liability	273.7			—
Excess interest	81.5			71.4
Other	200.4			189.5
	3,800.2			3,006.4
Deferred tax liabilities:
Intangible assets	(139.4		)	(264.7		)
Interest-bearing deferred tax obligations	—			(227.5		)
Investment in partnership	(178.9		)	(170.2		)
Other	(46.3		)	(42.9		)
	(364.6		)	(705.3		)
Net deferred tax asset before valuation allowances	3,435.6			2,301.1
Valuation allowances	(3,131.5		)	(2,604.9		)
Net deferred tax assets (liability)	$	304.1		$	(303.8	)

The deferred tax asset valuation allowances of $3,131.5 million and $2,604.9 million as of December 27, 2019 and December 28, 2018, respectively, relate primarily to the uncertainty of the utilization of certain deferred tax assets, driven by U.K. and non-U.K. net operating losses, credits, intangible assets and the opioid-related settlement liability. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets.

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



	December 27, 2019			December 28, 2018
Other assets	$	315.1		$	20.5
Deferred income taxes (non-current liability)	(11.0		)	(324.3		)
Net deferred tax asset (liability)	$	304.1		$	(303.8	)

The net deferred tax liability decreased from $303.8 million as of December 28, 2018 to a non-current deferred tax asset of $304.1 million as of December 27, 2019, primarily due to $239.0 million of decreases associated with the deferred tax benefit recognized from a completed reorganization of its intercompany financing and associated legal entity ownership in response to the changing global tax environment, $211.9 million of decreases related to the opioid-related settlement charge, $69.0 million of decreases related to non-restructuring impairment charges, $37.8 million of decreases associated with the amortization of intangibles and $50.2 million of decreases predominately related to the generation of net operating losses and other operational activity.

The sale of BioVectra was completed in November 2019. This divestiture resulted in a net deferred tax liability decrease of $3.1 million. Significant components of this decrease includes a decrease of $2.7 million of deferred tax liability associated with fixed assets and $2.2 million of deferred tax liability associated with intangible assets, partially offset by an increase of $1.3 million associated with other deferred tax assets and $0.5 million of deferred tax assets associated with tax loss and credit carryforwards.

As of December 27, 2019, the Company had approximately $2,084.0 million of net operating loss carryforwards in certain non-U.K. jurisdictions measured at the applicable statutory rates, of which $1,378.2 million have no expiration and the remaining $705.8 million will expire in future years through 2040. The Company had $115.1 million of U.K. net operating loss carryforwards measured at the applicable statutory rates at December 27, 2019, which have no expiration date.

As of December 27, 2019, the Company also had $64.3 million of tax credits available to reduce future income taxes payable, primarily in jurisdictions within the U.S., of which $2.6 million have no expiration and the remainder will expire in future years through 2040.

As of December 27, 2019, the Company's financial reporting basis in international subsidiaries that may be subject to tax was in excess of its corresponding tax basis by $17.0 million. Such excess amount is considered to be indefinitely reinvested and it is not practicable to determine the cumulative amount of tax liability that would arise if this indefinitely reinvested amount were realized due to a variety of factors including the complexity of the Company's legal entity structure as well as the timing, extent, and nature of any hypothetical realization. The net decrease, as compared to fiscal 2018, was attributable to the divestiture of BioVectra as well as income and losses attributed to current year activity. The Company has recorded a deferred tax liability of $7.6 million for amounts not considered to be indefinitely reinvested.