9. Income Taxes

Theravance Biopharma was incorporated in the Cayman Islands in July 2013 under the name Theravance Biopharma, Inc. as a wholly-owned subsidiary of Innoviva and began operations subsequent to the Spin-Off with wholly-owned subsidiaries in the Cayman Islands, U.S., United Kingdom, and Ireland. Effective July 1, 2015, Theravance Biopharma became an Irish tax resident, therefore, the loss before income taxes of Theravance Biopharma, the parent company, are included in Ireland in the tables below.

The components of the loss before income taxes were as follows:

	December 31,
(In thousands)	2016			2015			2014
Income (loss) before provision for income taxes:
Cayman Islands	$	(185,099	)	$	(107,074	)	$	(235,306	)
United States		(18,441	)		(45,960	)		5,189
Ireland		23,323			(27,013	)		—
Other		(342	)		(1,221	)		(557	)

Total	$	(180,559	)	$	(181,268	)	$	(230,674	)

The components of provision for income taxes were as follows:

	December 31,
(In thousands)	2016			2015			2014
Provision for income taxes:
Current:
Cayman Islands	$	—		$	—		$	—
United States		9,859			883			6,223
Ireland		219			45			—
Other		32			23			141

Subtotal		10,110			951			6,364

Deferred		—			—			—

Total	$	10,110		$	951		$	6,364

Effective tax rate		(5.60	)%		(0.52	)%		(2.76	)%

The provision for income taxes was $10.1 million, $1.0 million and $6.4 million in 2016, 2015 and 2014, respectively, although we incurred operating losses on a consolidated basis. In general, the provision for 2016 and 2015 resulted from recording contingent tax liabilities pertaining primarily to uncertain tax positions taken with respect to transfer pricing and tax credits.

No provision for income taxes has been recognized on undistributed earnings of our foreign subsidiaries because we consider such earnings to be indefinitely reinvested. In the event of a distribution of these earnings in the form of dividends or otherwise, we may be liable for income taxes, subject to an adjustment, if any, for foreign tax credits and foreign withholdings taxes payable to certain foreign tax authorities. As of December 31, 2016, there were no undistributed earnings.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:

	December 31,
(In thousands)	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	2,239		$	4,541
Research and development tax credit carryforwards		3,955			2,405
Fixed assets and acquired intangibles		6,839			7,275
Share-based compensation		13,208			10,895
Accruals		2,109			2,285
Other		476			21

Subtotal		28,826			27,422
Valuation allowance		(28,465	)		(26,822	)

Total deferred tax assets		361			600

Deferred tax liabilities:
Prepaid assets		(361	)		(600	)

Total deferred tax liabilities		(361	)		(600	)

Net deferred tax assets/liabilities	$	—		$	—

In the table below, the Cayman tax rate of 0% was used in 2014. For 2016 and 2015, as a result of the Company becoming an Irish tax resident effective July 1, 2015, the tax rate reflects the Irish statutory rate of 25%. The differences between the Ireland (2016 and 2015) and Cayman Islands (2014) federal statutory income tax rate and our effective tax rates are as follows:

	Year Ended December 31,
	2016			2015			2014
Provision at statutory income tax rate		25.00	%		25.00	%		0.00	%
Foreign rate differential		(23.11	)		(14.62	)		(0.99	)
Change in valuation allowance		(0.89	)		(4.42	)		(2.42	)
Share-based compensation		(0.27	)		(4.15	)		—
Non-deductible executive compensation		(1.07	)		(1.09	)		—
Uncertain tax positions		(8.55	)		(3.88	)		(0.25	)
Research and development tax credit carryforwards		1.93			2.05			1.00
Other		1.36			0.59			(0.10	)

Effective tax rate		(5.60	)%		(0.52	)%		(2.76	)%

Realization of deferred tax assets is dependent upon future taxable income in the respective jurisdictions, if any, the timing and the amount of which are uncertain. Accordingly, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowance as of December 31, 2016 increased from $26.8 million (the valuation allowance as of December 31, 2015) to $28.5 million, primarily as a result of changes to temporary differences in share-based compensation and tax credit carryforwards. Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis.

As of December 31, 2016, we had $13.9 million of U.S. federal net operating losses and $5.4 million U.S. federal research and development tax credit carryforwards which begin to expire in 2035. We had state net operating losses of $26.4 million which generally begin to expire in 2034, and state research and development credit carryforwards of $7.4 million to be carried forward indefinitely.

The net operating loss deferred tax asset balances as of December 31, 2016 do not include excess tax benefits from option exercises. Shareholders' equity and parent company deficit will be credited if and when such excess tax benefits are ultimately realized.

Utilization of net operating loss and tax credit carryforwards may be subject to an annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.

Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The amount of tax expense related to interest or penalties was immaterial for the years ended December 31, 2016 and 2015.

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits are as follows:

(In thousands)
Unrecognized tax benefits as of December 31, 2013	$	41
Gross increase in tax positions for prior years		—
Gross increase in tax positions for current year		1,018

Unrecognized tax benefits as of December 31, 2014		1,059
Gross increase in tax positions for prior years		108
Gross increase in tax positions for current year		8,031

Unrecognized tax benefits as of December 31, 2015		9,198

Gross increase in tax positions for prior years		157
Gross increase in tax positions for current year		13,899

Unrecognized tax benefits as of December 31, 2016	$	23,254

The total unrecognized tax benefits of $23.3 million and $9.2 million at December 31, 2016 and 2015, respectively, if recognized, would reduce the effective tax rate in the period of recognition. As of December 31, 2016, we do not believe that it is reasonably possible that our unrecognized tax benefit will significantly decrease in the next twelve months. We currently have a full valuation allowance against our deferred tax assets, which would impact the timing of the effective tax rate benefit should any of these uncertain positions be favorably settled in the future.

We are subject to taxation in Ireland, the U.S., and various other jurisdictions. The tax years 2015 and forward remain open to examination in Ireland, tax years 2013 and forward remain open to examination in the U.S., and the tax years 2012 and forward remain open to examination in other jurisdictions.

Our future income tax expense may be affected by such factors as changes in tax laws, our business, regulations, tax rates, interpretation of existing laws or regulations, the impact of accounting for share-based compensation, the impact of accounting for business combinations, our international organization, shifts in the amount of income before tax earned in the U.S. as compared with other regions in the world, and changes in overall levels of income before tax.