Income Taxes

12 Months Ended

Dec. 31, 2020

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)	2020		2019		2018
Income (loss) before provision for income taxes:
Cayman Islands	$	37,567	$	11,779	$	14,838
United States		(46,500)		(99,225)		(69,695)
Ireland		(277,105)		(154,217)		(171,134)
United Kingdom		(499)		(14)		(94)
Total	$	(286,537)	$	(241,677)	$	(226,085)

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

	Year Ended December 31,
(In thousands)	2020			2019			2018
Provision for income tax benefit (expense):
Current:
Cayman Islands	$	—		$	—		$	—
United States		8,545			5,210			10,563
Ireland		(13)			—			—
United Kingdom		(12)			12			(2)
Subtotal		8,520			5,222			10,561
Deferred		—			—			—
Total	$	8,520		$	5,222		$	10,561
Effective tax rate		2.97	%		2.16	%		4.67	%

The provision for income tax benefit (expense) was $8.5 million, $5.2 million and $10.6 million for the year ended December 31, 2020, 2019 and 2018 respectively.

The 2020 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 their related interest accruals. The 2019 net income tax benefit was primarily due to the 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.

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, 2020, 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,
	2020		2019		2018
Provision at statutory income tax rate	25.00	%	25.00	%	25.00	%
Foreign rate differential	(11.49)		(6.96)		(7.51)
Share-based compensation	0.75		(1.17)		0.28
Non-deductible executive compensation	(0.63)		(0.51)		(0.72)
Uncertain tax positions	(1.26)		(0.63)		(4.00)
Research and development tax credit carryforwards	1.83		2.50		1.79
Foreign exchange loss	—		—		8.52
Intangible asset	10.01		—		—
Change in valuation allowance	(20.56)		(14.90)		(18.82)
Other	(0.68)		(1.17)		0.13
Effective tax rate	2.97	%	2.16	%	4.67	%

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)	2020			2019
Deferred tax assets:
Net operating loss carryforwards	$	82,821	$	58,161
Capital loss carryforwards		19,409		19,409
Research and development tax credit carryforwards		24,075		15,723
Fixed assets and intangibles		310,187		285,341
Share-based compensation		15,087		15,480
Accruals		8,145		8,245
Operating lease liabilities		11,662		11,358
Other		346		7
Subtotal		471,732		413,724
Valuation allowance		(462,711)		(403,836)
Total deferred tax assets		9,021		9,888
Deferred tax liabilities:
Operating lease assets		(8,680)		(9,429)
Prepaid assets		(341)		(459)
Total deferred tax liabilities		(9,021)		(9,888)
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, 2020, the Company’s deferred tax assets were offset in full by a valuation allowance.

The valuation allowance as of December 31, 2020 increased from $403.8 million (the valuation allowance as of December 31, 2019) to $462.7 million, primarily as a result of additional tax loss generated in various jurisdictions during the current year and the intercompany transfer of intangible assets eligible for tax amortization. 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, 2020, the Company had $209.8 million of US federal net operating loss carryforwards and $21.1 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, 2020, this amount was $164.9 million. The Company had state net operating loss carryforwards of $70.9 million which generally begin to expire in 2034 and state research and development credit carryforwards of $21.2 million to be carried forward indefinitely.

The Company also had Irish net operating loss carryforwards of $565.8 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 year ended December 31, 2020 and 2019.

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, 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
Gross decrease in tax positions for prior years		(8,059)
Gross increase in tax positions for current year		12,743
Unrecognized tax benefits as of December 31, 2020	$	63,447

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 $63.4 million and $58.8 million, as of December 31, 2020 and December 31, 2019, respectively, may reduce the effective tax rate in the period of recognition. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2018 may still be adjusted upon examination by tax authorities since the attributes are not yet utilized. 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 2017 and forward remain open to examination in Ireland, tax years 2018 and forward remain open to examination in the US, and the tax years 2015 and forward remain open to examination in other jurisdictions.

The Company is currently under Internal Revenue Service (“IRS”) examination for the tax year ended December 31, 2018. The Company believes that an adequate provision has been made for any material adjustments that may result from the tax examination. The Company concluded its IRS examination for the tax year ended December 31, 2017 in December 2020 with no adjustments required.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), that features significant tax provision and other measures to assist individuals and businesses impacted by the economic effects of the COVID-19 pandemic, was signed into law. Tax relief measures for businesses include a five-year net operating loss carryback (including a related technical correction to the 2017 Tax Reform Act), a change in Section 163(j) interest deduction limitations, accelerated alternative minimum tax refunds, payroll tax relief, a temporary suspension of certain aviation excise taxes, a tax credit for employers who retain employees, and a ‘qualified improvement property’ technical correction to the 2017 Tax Reform Act. The Company has considered the corporate income tax provisions of the CARES Act and related initial guidance as part of its income tax expense and concluded that these provisions did not have a material impact on the Company’s 2020 income tax expense.

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.