Income Taxes

12 Months Ended

Dec. 31, 2023

Income Taxes

Income Taxes

14. 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, were included in Ireland in the tables below.

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

	Year Ended December 31,
(In thousands)	2023		2022
Income (loss) before provision for income taxes:
United States	$	1,151	$	(40,556)
Ireland		(50,420)		(52,168)
United Kingdom		—		(91)
Total	$	(49,269)	$	(92,815)

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

	Year Ended December 31,
(In thousands)	2023			2022
Provision for income tax (expense) benefit:
Current:
United States	$	(2,881)		$	—
Ireland		—			(8)
United Kingdom		164			(1)
Subtotal		(2,717)			(9)
Deferred:
United States		(3,207)			—
Subtotal		(3,207)			—
Total	$	(5,924)		$	(9)
Effective tax rate		12.02	%		(0.01)	%

The provision for income tax expense was $5.9 million and $9,000 for the year ended December 31, 2023 and 2022, respectively. The income tax expense for the year ended December 31, 2023 was primarily attributed to the Company’s profitability in the US jurisdiction which no longer had a valuation allowance offset for federal tax purposes due to the valuation allowance’s release in 2022. We expect to have an immaterial federal cash tax expense for the year ended December 31, 2023 which will be offset with a prior year overpayment.

Income tax expense related to discontinued operations 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.

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, 2023, 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,
	2023		2022
Provision at statutory income tax rate	25.00	%	25.00	%
Foreign rate differential	(8.28)		(6.80)
Share-based compensation	(3.00)		(3.28)
Non-deductible executive compensation	(4.45)		(2.79)
Uncertain tax positions	(7.31)		(7.10)
Research and development tax credit carryforwards	3.34		2.65
Change in valuation allowance	(16.00)		(1.01)
Other	(1.32)		(6.68)
Effective tax rate	(12.02)	%	(0.01)	%

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)	2023			2022
Deferred tax assets:
Net operating loss carryforwards	$	153,225	$	141,674
Capital loss carryforwards		21,482		19,409
Research and development tax credit carryforwards		16,910		16,176
Fixed assets and intangibles		235,381		245,822
Share-based compensation		3,431		4,298
Accruals		1,186		1,795
Operating lease liabilities		10,946		11,239
Prepaid assets		(248)		304
Other		4,982		30
Subtotal		447,295		440,747
Valuation allowance		(429,850)		(422,325)
Total deferred tax assets		17,445		18,422
Deferred tax liabilities:
Operating lease assets		(8,076)		(8,634)
Future contingent milestone and royalty assets		(14,512)		(11,725)
Total deferred tax liabilities		(22,588)		(20,359)
Net deferred tax liabilities	$	(5,143)	$	(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 gain and forecasted future taxable income from the TRC Transaction, and as a result, the Company released its valuation allowance against deferred tax assets for US federal tax purposes in 2022 as it was more like than not able to fully utilize such attributes. As of December 31, 2023, the Company continues to maintain its position that a valuation allowance against deferred tax assets for US federal tax purposes is not needed, as it is more like than not able to fully utilize such attributes. As of December 31, 2023, the Company continues to maintain a full valuation allowance in other jurisdictions.

The valuation allowance increased from $422.3 million, as of December 31, 2022, to $429.9 million as December 31, 2023, primarily as a result of activity in the foreign deferred tax assets, as well as the state deferred tax assets during 2023. 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, 2023, the Company has utilized all available US federal net operating loss carryforwards and federal research and development tax credit carryforwards. As of December 31, 2023, the Company had state net operating loss carryforwards of $103.8 million which generally begin to expire in 2034 and state research and development credit carryforwards of $25.9 million to be carried forward indefinitely.

As of December 31, 2023, the Company had Irish net operating loss carryforwards of $1.16 billion with no expiration date and capital loss carryforwards of $65.1 million to be carried forward indefinitely. The Company has additional Irish tax attributes of $1.04 billion which primarily consist of unused capital allowances. Net operating losses and capital allowances can be used to offset future income from Irish entities and income related to intellectual property.

Utilization of federal and state 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, 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
Gross decrease in tax positions for prior years		(632)
Gross increase in tax positions for current year		4,103
Unrecognized tax benefits as of December 31, 2023	$	79,470

The total unrecognized tax benefits of $79.5 million and $76.0 million, as of December 31, 2023 and December 31, 2022, respectively, would reduce the effective tax rate in the period of recognition. As of December 31, 2023, the Company does not believe that it is reasonably possible that its unrecognized tax benefit will significantly increase or decrease in the next twelve months. The Company is not currently under Internal Revenue Service (“IRS”) examination.

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/or penalties related to income tax matters in income tax expense. The amount of tax expense related to interest or penalties was $0.6 million for the year ended December 31, 2023 and was not material for the year ended December 31, 2022. The Company will continue to accrue interest on the respective uncertain tax positions in accordance with applicable rules.

The Company’s $65.3 million net liability for unrecognized tax benefits relating to uncertain tax positions, as of December 31, 2023, 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.

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’s future income tax expense may be affected by such factors as changes in tax laws, regulations, its business, 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.