Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

Income Taxes

12. 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, US, 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:

	Year Ended December 31,
(In thousands)	2019		2018		2017
Income (loss) before provision for income taxes:
Cayman Islands	$	11,779	$	14,838	$	(163,770)
United States		(99,225)		(69,695)		(33,374)
Ireland		(154,217)		(171,134)		(74,472)
United Kingdom		(14)		(94)		(95)
Total	$	(241,677)	$	(226,085)	$	(271,711)

The components of provision for income tax benefit (expense) were as follows:

	Year Ended December 31,
(In thousands)	2019			2018			2017
Provision for income tax benefit (expense):
Current:
Cayman Islands	$	—		$	—		$	—
United States		5,210			10,563			(13,091)
Ireland		—			—			(566)
United Kingdom		12			(2)			(37)
Subtotal		5,222			10,561			(13,694)
Deferred		—			—			—
Total	$	5,222		$	10,561		$	(13,694)
Effective tax rate		2.16	%		4.67	%		(5.04)	%

The provision for income tax benefit (expense) was $5.2 million, $10.6 million and ($13.7) million for the years ended December 31, 2019, 2018 and 2017 respectively.

The 2019 net income tax benefit was primarily attributed to a reversal of previously accrued contingent tax liabilities for uncertain tax positions due to a lapse of the statute of limitations and current year US research and development credits. The 2018 net income tax benefit was primarily due to additional tax loss generated in 2017 by the US entity as a result of the finalization of transfer pricing policy, current year US research and development credit, and the release of previously recorded contingent tax liabilities due to the lapse of the statute of limitations. The provision for income tax recorded in 2017 primarily resulted from contingent tax liabilities related 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 the Company’s foreign subsidiaries because it considers such earnings to be indefinitely reinvested. In the event of a distribution of these earnings in the form of dividends or otherwise, the Company 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, 2019, there were no undistributed earnings.

As a result of the Company becoming an Irish tax resident effective July 1, 2015, the tax rates reflect the Irish statutory rate of 25%. The differences between the Irish statutory income tax rate and the Company’s effective tax rates were as follows:

	Year Ended December 31,
	2019		2018		2017
Provision at statutory income tax rate	25.00	%	25.00	%	25.00	%
Foreign rate differential	(6.96)		(7.51)		(18.17)
Share-based compensation	(1.17)		0.28		1.52
Non-deductible executive compensation	(0.51)		(0.72)		(1.03)
Uncertain tax positions	(0.63)		(4.00)		(6.55)
Research and development tax credit carryforwards	2.50		1.79		1.21
Federal tax reform - Tax rate change	—		—		(4.66)
Foreign exchange loss	—		8.52		—
Change in valuation allowance	(14.90)		(18.82)		(5.15)
Other	(1.17)		0.13		2.79
Effective tax rate	2.16	%	4.67	%	(5.04)	%

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 the Company’s deferred tax assets and liabilities were as follows:

	December 31,
(In thousands)	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	58,161	$	33,396
Capital loss carryforwards		19,409		19,409
Research and development tax credit carryforwards		15,723		8,508
Fixed assets and intangibles		285,341		285,821
Share-based compensation		15,480		12,479
Accruals		8,245		8,343
Operating lease liabilities		11,358		—
Other		7		—
Subtotal		413,724		367,956
Valuation allowance		(403,836)		(367,748)
Total deferred tax assets		9,888		208
Deferred tax liabilities:
Operating lease assets		(9,429)		—
Prepaid assets		(459)		(208)
Total deferred tax liabilities		(9,888)		(208)
Net deferred tax assets/liabilities	$	—	$	—

The Company follows the accounting guidance related to accounting for income taxes which requires that a company reduce its deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. As of December 31, 2019, the Company’s deferred tax assets were offset in full by a valuation allowance.

On January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”) using the modified retrospective approach. ASU 2016-16 requires immediate recognition of income tax consequences of intra-company asset transfers, other than inventory transfers. Legacy GAAP prohibited recognition of income tax consequences of intra-company asset transfers whereby the seller defers any net tax effect and the buyer is prohibited from recognizing a deferred tax asset on the difference between the newly created tax basis of the asset in its tax jurisdiction and its financial statement carrying amount as reported in the consolidated financial statements. An example of an inter-company asset transfers included in ASU 2016-16’s scope is intellectual property. On October 2, 2017, Theravance Biopharma R&D, Inc. (Cayman Islands) transferred its economic interests in certain intellectual property to Theravance Biopharma Ireland Limited. The transfer was classified as an intra-company sale of assets for both financial reporting and income tax purposes. The Company recorded a deferred tax asset of $282.7 million fully offset by a valuation allowance as a result of the sale of intellectual property. The adoption of this pronouncement did not have a material impact on the Company’s consolidated balance sheet or statement of operations.

The valuation allowance as of December 31, 2019 increased from $367.7 million (the valuation allowance as of December 31, 2018) to $403.8 million, primarily as a result of additional tax loss generated in various jurisdictions during the current year and the additional research tax credit generated in the US. Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that the deferred tax assets are recoverable. As required, the Company prepares its assessment of the realizability of deferred tax assets on a jurisdiction-by-jurisdiction basis.

As of December 31, 2019, the Company had $163.6 million of US federal net operating loss carryforwards and $17.9 million of federal research and development tax credit carryforwards which expire beginning in 2035. After the

enactment of the Tax Cut and Jobs Act (the “Tax Act”) in December 2017, the operating losses generated had an indefinite carryforward life, but was limited to 80% of taxable income when utilized. As of December 31, 2019, this amount was $118.7 million. The Company had state net operating loss carryforwards of $71.9 million which generally begin to expire in 2034 and state research and development credit carryforwards of $18.9 million to be carried forward indefinitely.

The Company also had Irish net operating loss carryforwards of $352.9 million with no expiration date and capital loss carryforwards of $58.8 million to be carried forward indefinitely.

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.

The Company’s 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, 2019 and 2018.

Uncertain Tax Positions

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

(In thousands)
Unrecognized tax benefits as of December 31, 2017	$	41,794
Gross decrease in tax positions for prior years		(685)
Gross increase in tax positions for current year		11,295
Unrecognized tax benefits as of December 31, 2018		52,404
Gross decrease in tax positions for prior years		(2,010)
Gross increase in tax positions for current year		8,369
Unrecognized tax benefits as of December 31, 2019	$	58,763

The Company records liabilities related to uncertain tax positions in accordance with the income tax guidance which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Resolution of one or more of these uncertain tax positions in any period may have a material impact on the results of operations for that period. The Company includes any applicable interest and penalties within the provision for income taxes in the consolidated statements of operations.

The total unrecognized tax benefits of $58.8 million and $52.4 million, as of December 31, 2019 and December 31, 2018, respectively, may reduce the effective tax rate in the period of recognition. Within the next twelve months, the Company is no longer subject to IRS tax audit examinations for the years ended on or before December 31, 2016. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2017 may still be adjusted upon examination by tax authorities since the attributes are not yet utilized. As of December 31, 2019, the Company believes it is reasonably possible that its unrecognized tax benefits and related interest recorded for various US matters could decrease by approximately $8.0 million in the next twelve months. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months. The Company currently has a full valuation allowance against its 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.

The Company is subject to taxation in Ireland, the US, and various other jurisdictions. The tax years 2016 and forward remain open to examination in Ireland, tax years 2016 and forward remain open to examination in the US, and the tax years 2013 and forward remain open to examination in other jurisdictions.

The Company’s future income tax expense may be affected by such factors as changes in tax laws, its 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, its international organization, shifts in the amount of income before tax earned in the US as compared with other regions in the world, and changes in overall levels of income before tax.

US Tax Reform

In December 2017, the US government enacted the Tax Act. The Tax Act significantly revises the US corporate income tax laws by, amongst other things, reducing the corporate income tax rate from 35% to 21% and implementing a modified territorial tax system that includes a one-time repatriation tax on accumulated undistributed foreign earnings.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allowed the Company to record provisional amounts for the Tax Act during a measurement period not to extend beyond one year of the enactment date, with further clarifications made recently with the issuance of amendments to SAB 118. The Company has completed its assessment of the Tax Act and did not have any significant adjustments to its provisional amount of $12.4 million related to the reduction in the corporate income tax rate from 35% to 21%.