Income Taxes

6 Months Ended

Jun. 30, 2020

NOTE 16. INCOME TAXES

The following table displays our Income (loss) from continuing operations before income tax, Income tax expense (benefit) and Effective tax rate for the three and six months ended June 30, 2020 and 2019 (dollars in thousands):


	Three Months Ended June 30,									Six Months Ended June 30,
	2020			2019			2020			2019
Income (loss) from continuing operations before income tax	$	25,252		$	(94,584)		$	46,501		$	(96,293)
Income tax expense (benefit)	$	7,642		$	3,468		$	(128,690)		$	14,371
Effective tax rate	30.3		%	(3.7)		%	(276.7)		%	(14.9)		%

The income tax expense for the three months ended June 30, 2020 primarily relates to the discrete tax adjustment related to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The income tax expense for the comparable 2019 period primarily relates to accrued interest on uncertain tax positions.

The income tax benefit for the six months ended June 30, 2020 primarily relates to the discrete tax benefit arising from the CARES Act, as discussed below. The income tax expense for the comparable 2019 period primarily relates to a taxable gain arising from the extinguishment of debt in the March 2019 Refinancing Transactions and accrued interest on uncertain tax positions.

We have valuation allowances established against our deferred tax assets in most jurisdictions in which we operate, with the exception of Canada and India.

On March 27, 2020, the CARES Act was enacted by the U.S. government in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (NOL) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. During the six months ended June 30, 2020, the Company recorded a discrete tax benefit in continuing operations of $127.9 million as a result of the change in the NOL carryback period.

On June 3, 2020, in connection with the Internal Revenue Service's (IRS) examination of our U.S. income tax return for the fiscal year ended December 31, 2015 (2015 Return), we received an acknowledgement of facts (AoF) from the IRS related to transfer pricing positions taken by Endo U.S., Inc. and its subsidiaries (Endo U.S.). The AoF asserts that Endo U.S. overpaid for certain pharmaceutical products that it purchased from certain non-U.S. related parties and proposes a specific adjustment to our 2015 U.S. income tax return position. We believe that the terms of the subject transactions are consistent with comparable transactions for similarly situated unrelated parties, and we intend to contest the proposed adjustment. While we believe the proposed adjustment is not material to our business, financial condition, results of operations or cash flows, the IRS could seek to apply its position to subsequent tax periods and propose similar adjustments. The aggregate impact of these adjustments, if sustained, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Although the timing of the outcome of this matter is uncertain, it is possible any final resolution of the matter could take a number of years.

In connection with the IRS’s examination of the 2015 Return, we understand that the IRS intends to issue a Technical Advice Memorandum (TAM) regarding the portion of our 2015 NOL relating to our worthless stock deduction that we believe qualifies as a specified product liability loss. Based on our discussions with the IRS, we expect the views expressed in the TAM to be contrary to the positions taken on our 2015 Return. If the IRS’s position is in whole or in part sustained, we could be required to repay a portion of the $760 million tax refund we disclosed in our 2016 Annual Report on Form 10-K, exclusive of interest. This result could have a material adverse effect on our business, financial condition, results of operations and cash flows. We disagree with the IRS’s expected position in the TAM and, if necessary, intend to contest any proposed adjustment. Although the timing of the outcome of this matter is uncertain, it is possible any final resolution of the matter could take a number of years.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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