Income Taxes

The components of income (loss) before provision for (benefit from) income taxes during the three years ended December 31, 2013 consisted of the following:



	2013			2012			2011
	(in thousands)
United States	$	(390,009	)	$	256,816		$	343,515
Foreign	(586,108		)	(269,197		)	(283,070		)
Income (loss) before provision for (benefit from) income taxes	$	(976,117	)	$	(12,381	)	$	60,445

The components of the provision for (benefit from) income taxes during the three years ended December 31, 2013 consisted of the following:



	2013			2012			2011
	(in thousands)
Current taxes:
United States	$	(11,420	)	$	2,057		$	22,275
Foreign	1,084			(1,865		)	(561		)
State	2,136			1,902			8,655
Total current taxes	$	(8,200	)	$	2,094		$	30,369
Deferred taxes:
United States	$	(131,281	)	$	31,308		$	19,629
Foreign	(127,587		)	—			(32,692		)
State	(21,499		)	5,352			1,960
Total deferred taxes	$	(280,367	)	$	36,660		$	(11,103	)
Provision for (benefit from) income taxes	$	(288,567	)	$	38,754		$	19,266

The difference between the Company’s “expected” tax provision (benefit), as computed by applying the U.S. federal corporate tax rate of 35% to income (loss) before provision for (benefit from) income taxes, and actual tax is reconciled as follows:



	2013			2012			2011
	(in thousands)
Income (loss) before provision for (benefit from) income taxes	$	(976,117	)	$	(12,381	)	$	60,445
Expected tax provision (benefit)	(341,641		)	(4,333		)	21,156
State taxes, net of federal benefit	(19,268		)	7,075			10,624
Foreign rate differential	72,961			62,425			43,629
Tax credits	(16,775		)	(1,980		)	(51,086		)
Unbenefited operating losses	(43,570		)	(30,364		)	(6,286		)
Non-deductible expenses	9,614			3,198			1,953
Rate change	50,076			3,275			—
Other	36			(542		)	(724		)
Provision for (benefit from) income taxes	$	(288,567	)	$	38,754		$	19,266

Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred taxes were as follows:



	As of December 31,
	2013			2012
	(in thousands)
Deferred tax assets:
Net operating loss	$	850,946		$	777,687
Tax credit carryforwards	180,380			147,074
Property and equipment	—			10,701
Intangible assets	26,105			63,353
Deferred revenues	25,158			44,867
Stock-based compensation	63,521			83,979
Inventories	26,278			56,564
Accrued expenses	52,470			27,945
Currency translation adjustment	217			—
Construction financing lease obligation	152,688			—
Gross deferred tax assets	1,377,763			1,212,170
Valuation allowance	(1,243,664		)	(1,211,561		)
Total deferred tax assets	134,099			609
Deferred tax liabilities:
Property and equipment	(134,099		)	—
Unrealized gain	—			(376		)
Contingent milestone and royalty payment obligation	—			(50,904		)
Acquired intangibles	—			(229,696		)
Net deferred tax liabilities	$	—		$	(280,367	)

For federal income tax purposes, as of December 31, 2013, the Company has net operating loss carryforwards of approximately $2.7 billion and tax credits of $120.1 million, which may be used to offset future federal income and tax liability, respectively. Approximately $694.8 million of the federal net operating loss carryforward will result in an increase to additional paid-in capital if and when these carryforwards are used to reduce income taxes payable.

For state income tax purposes, the Company has net operating loss carryforwards of approximately $966.8 million and tax credits of $66.9 million, which may be used to offset future state income and tax liability, respectively. Approximately $204.5 million of the state net operating loss carryforward will result in an increase to additional paid-in capital if and when these carryforwards are used to reduce state income taxes payable.

These federal and state operating loss carryforwards and tax credits expire at various dates through 2033. After consideration of all the evidence, both positive and negative, the Company continues to maintain a valuation allowance for the full amount of the 2013 deferred tax asset because it is more likely than not that the deferred tax asset will not be realized. In future periods, if management determines that it is more likely than not that the deferred tax asset will be realized, (i) the valuation allowance would be decreased, (ii) a portion or all of the deferred tax asset would be reflected on the Company’s consolidated balance sheet and (iii) the Company would record non-cash benefits in its consolidated statements of operations related to the reflection of the deferred tax asset on its consolidated balance sheets.

The valuation allowance increased by $32.1 million from December 31, 2012 to December 31, 2013 primarily due to an increase in net operating losses and credits.

Unrecognized tax benefits during the two years ended December 31, 2013 consisted of the following:



	2013			2012
	(in thousands)
Unrecognized tax benefits beginning of year	$	4,106		$	4,360
Gross change for current year positions	1,325			598
Increase for prior period positions	—			—
Decrease for prior period positions	(290		)	—
Decrease due to settlements and payments	—			—
Decrease due to statute limitations	(185		)	(852		)
Deconsolidation of Alios	(2,932		)	—
Unrecognized tax benefits end of year	$	2,024		$	4,106

The Company had gross unrecognized tax benefits of $2.0 million and $4.1 million, respectively, as of December 31, 2013 and 2012. At December 31, 2013, $2.0 million represented the amount of unrecognized tax benefits that, if recognized, would result in a reduction of the Company’s effective tax rate. The Company recognizes interest and penalties related to income taxes as a component of income tax expense. As of December 31, 2013, no interest and penalties have been accrued. In 2014, it is reasonably possible that the Company will reduce the balance of its unrecognized tax benefits by approximately $0.5 million due to the application of statute of limitations and settlements with taxing authorities, all of which would reduce the Company’s effective tax rate.

The Company files United States federal income tax returns and income tax returns in various state, local and foreign jurisdictions. The Company is no longer subject to any tax assessment from an income tax examination in the United States before 2008 or any other major taxing jurisdiction for years before 2006, except where the Company has net operating losses or tax credit carryforwards that originate before 2006. The Company is currently under examination by Revenue Quebec and the Canada Revenue Agency for the year ended December 31, 2011. No adjustments have been reported. The Company is not under examination by any other jurisdictions for any tax year.

At December 31, 2013, foreign earnings, which were not significant, have been retained indefinitely by foreign subsidiary companies for reinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such earnings, and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to U.S. federal income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.