Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

13. 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 a 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 income (loss) before income taxes of Theravance Biopharma, the parent company, are included in Ireland in the tables below.

The components of the income (loss) before income taxes from continuing operations were as follows:

	Year Ended December 31,
(In thousands)	2022		2021		2020
Income (loss) before provision for income taxes:
Cayman Islands	$	—	$	—	$	37,567
United States		(40,556)		(82,213)		(63,306)
Ireland		(52,168)		(182,775)		(277,105)
United Kingdom		(91)		(234)		(499)
Total	$	(92,815)	$	(265,222)	$	(303,343)

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

	Year Ended December 31,
(In thousands)	2022			2021			2020
Provision for income tax (expense) benefit:
Current:
Cayman Islands	$	—		$	—		$	—
United States		—			173			8,545
Ireland		(8)			(8)			(13)
United Kingdom		(1)			(14)			(12)
Subtotal		(9)			151			8,520
Deferred:
Cayman Islands		—			—			—
United States		—			—			—
Ireland		—			—			—
United Kingdom		—			—			—
Subtotal		—			—			—
Total	$	(9)		$	151		$	8,520
Effective tax rate		(0.01)	%		0.06	%		2.81	%

The provision for income tax (expense) benefit from continuing operations was nil, $0.2 million, and $8.5 million for the year ended December 31, 2022, 2021, and 2020, respectively.

Income tax expense for the year ended December 31, 2022 of $179.0 million was a result of the Company’s gain from the TRC Transaction, which was recognized as a discontinued operation. The 2021 and 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.

The Company’s $64.0 million liability for unrecognized tax benefits can be relieved only if (i) the contingency becomes legally extinguished through either payment to the taxing authority or expiration of the statute of limitations; (ii) the recognition of the benefits associated with the position meets the more-likely-than-not threshold; or (iii) the liability becomes effectively settled through the examination process. The Company considers matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews. The Company also accrues for potential interest and penalties related to unrecognized tax benefits in its income tax expense (benefit) calculation.

As of December 31, 2022, the amount of uncertain tax benefit, that if realized would affect the effective tax rate, was $76.0 million and is primarily due to transfer pricing adjustments related to share-based compensation.

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, 2022, 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 for non-trading income and the Company’s effective tax rates from continuing operations were as follows:

	Year Ended December 31,
	2022		2021		2020
Provision at statutory income tax rate	25.00	%	25.00	%	25.00	%
Foreign rate differential	(6.80)		(8.50)		(11.02)
Share-based compensation	(3.28)		(3.11)		0.71
Non-deductible executive compensation	(2.79)		(1.22)		(0.60)
Uncertain tax positions	(7.10)		(3.95)		(1.19)
Research and development tax credit carryforwards	2.65		1.79		1.73
Intangible asset	—		1.83		9.45
Change in valuation allowance	(1.01)		(11.34)		(20.62)
Other	(6.68)		(0.44)		(0.65)
Effective tax rate	(0.01)	%	0.06	%	2.81	%

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)	2022			2021
Deferred tax assets:
Net operating loss carryforwards	$	104,236	$	115,606
Capital loss carryforwards		19,409		19,409
Research and development tax credit carryforwards		16,176		28,372
Fixed assets and intangibles		283,260		287,177
Share-based compensation		4,298		10,432
Accruals		1,795		3,590
Operating lease liabilities		11,239		11,607
Prepaid assets		304		—
Other		30		10,505
Subtotal		440,747		486,698
Valuation allowance		(422,325)		(477,868)
Total deferred tax assets		18,422		8,830
Deferred tax liabilities:
Operating lease assets		(8,634)		(8,575)
Future contingent milestone and royalty assets		(11,725)		—
Prepaid assets		—		(255)
Total deferred tax liabilities		(20,359)		(8,830)
Net deferred tax assets (liabilities)	$	(1,937)	$	—

The Company follows the accounting guidance related to accounting for income taxes which requires that a company reduces 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. During the year ended December 31, 2022, the Company concluded that the valuation allowance related to its US federal assets was no longer needed primarily due to the current year gain and forecasted future taxable income from the TRC Transaction. As of December 31, 2022, the Company released its valuation allowance against deferred tax assets for US federal tax purposes as it is more like than not able to fully utilize such attributes. As of December 31, 2022, the Company continues to maintain a full valuation allowance in other jurisdictions.

The valuation allowance as of December 31, 2022 decreased from $477.9 million, as of December 31, 2021, to $422.3 million, primarily as a result of utilization of the Company’s federal net operating losses and research tax credits generated in the US offset by additional tax loss generated in various jurisdictions during the current year.

As of December 31, 2022, the Company has utilized all available US federal net operating loss carryforwards and federal research and development tax credit carryforwards. As of December 31, 2022, the Company had state net operating loss carryforwards of $102.7 million which will begin to expire in 2034 and state research and development credit carryforwards of $25.4 million to be carried forward indefinitely.

The Company also had Irish net operating loss carryforwards of $786.2 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.

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, 2020	$	63,447
Gross decrease in tax positions for prior years		(395)
Gross increase in tax positions for current year		11,971
Unrecognized tax benefits as of December 31, 2021		75,023
Gross decrease in tax positions for prior years		(7,395)
Gross increase in tax positions for current year		8,371
Unrecognized tax benefits as of December 31, 2022	$	75,999

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’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The amount of tax expense related to interest and penalties was not material for the year ended December 31, 2022 and 2021.

The total unrecognized tax benefits of $76.0 million and $75.0 million, as of December 31, 2022 and December 31, 2021, respectively, may reduce the effective tax rate in the period of recognition. 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 is subject to taxation in Ireland, the US, and various other jurisdictions. The tax years 2015 and forward remain open to examination in Ireland, tax years 2015 and forward remain open to examination in the US, and the tax years 2012 and forward remain open to examination in other jurisdictions.

The Company was recently under Internal Revenue Service (“IRS”) examination for the tax year ended December 31, 2018. On July 21, 2022, the IRS informed the Company that the examination was completed and no adjustments to its 2018 tax return were necessary.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (“IRA”). The provisions include the new Corporate Alternative Minimum Tax (“CAMT”), an excise tax on stock buybacks, and significant tax

incentives for energy and climate initiatives, and all of these provisions are effective for tax year 2023. The Company will evaluate the impact of these provisions, but it currently does not expect the enactment of these provisions to have a material impact on the Company.

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 and other transactions, 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.