Income Taxes

The components of loss before provision for (benefit from) income taxes during the three years ended December 31, 2017 consisted of the following:



	2017			2016			2015
	(in thousands)
United States	$	330,340		$	(147,860	)	$	(272,326	)
Foreign	(346,029		)	80,494			(285,474		)
Loss before (benefit from) provision for income taxes	$	(15,689	)	$	(67,366	)	$	(557,800	)

The components of the provision for (benefit from) income taxes during the three years ended December 31, 2017 consisted of the following:



	2017			2016			2015
	(in thousands)
Current taxes:
United States	$	11,559		$	(3,821	)	$	25,623
Foreign	3,576			1,794			831
State	5,025			1,836			3,629
Total current taxes	$	20,160		$	(191	)	$	30,083
Deferred taxes:
United States	$	(113,805	)	$	18,659		$	497
Foreign	(3,222		)	(3,359		)	(355		)
State	(10,457		)	1,556			156
Total deferred taxes	$	(127,484	)	$	16,856		$	298
(Benefit from) provision for income taxes	$	(107,324	)	$	16,665		$	30,381

A reconciliation of the provision for (benefit from) income taxes as computed by applying the U.S. federal statutory rate of 35% to the provision for (benefit from) income taxes during the three years ended December 31, 2017 is as follows:



	2017			2016			2015
	(in thousands)
Loss before (benefit from) provision for income taxes	$	(15,689	)	$	(67,366	)	$	(557,800	)

Expected benefit from income taxes	(5,491		)	(23,578		)	(195,230		)
State taxes, net of federal benefit	4,742			3,621			3,800
Foreign income tax rate differential	77,801			21,346			47,402
Tax credits	(49,088		)	(47,773		)	(55,696		)
Provision for (benefit from) income taxes attributable to valuation allowances	(584,917		)	14,837			226,169
Permanent items	21,825			24,749			5,817
Rate change	575,192			12,836			(1,224		)
Stock compensation (benefit) shortfalls and cancellations	(21,453		)	4,162			951
Tax attribute expiration	—			9,947			—
Deconsolidation of VIE	(126,183		)	—			—
Other	248			(3,482		)	(1,608		)
(Benefit from) provision for income taxes	$	(107,324	)	$	16,665		$	30,381

The Company operates in many foreign tax jurisdictions, which impose income taxes at different rates than the U.S. The impact of these rate differences, which is primarily related to the Company’s operations in the U.K., is included in the “Foreign income tax rate differential” in the Company’s tax rate reconciliation above, which reconciles the U.S. federal statutory tax rate to the Company’s effective tax rate. In 2017, the effect of “Permanent items” was related to equity compensation, Research and Development Credits, Orphan Drug Credits, and foreign amortization.

The change in the “Provision for (benefit from) income taxes attributable to valuation allowances” on deferred tax assets in the tax rate reconciliation table above is primarily related to the U.S., U.K. and Canada. In 2017, the valuation allowance decreased by $178.2 million primarily due to the utilization of net operating losses (“NOLs”) in the U.S. and a decrease in the U.S. corporate tax rate from 35% to 21% partially offset by the adoption of ASU 2016-09. In 2016, the valuation allowance increased by $14.8 million primarily due to an increase in tax credits in the U.S. and an increase in the net operating loss in the U.K., both due to the uncertainty in the Company’s ability to use them in future periods. In 2015, the valuation allowance increased by $306.4 million primarily related to an increase in net operating losses that were incurred with no corresponding benefit due to the uncertainty in the Company’s ability to use them in future periods.

On December 22, 2017, H.R.1., known as the Tax Cuts and Jobs Act, was signed into law. The new law did not have a significant impact on the Company’s consolidated financial statements for the year ended December 31, 2017 because it maintains a valuation allowance on the majority of its net operating losses and other deferred tax assets. However, the reduction of the U.S. federal corporate tax rate from 35% to 21% resulted in increases to the amounts reflected in “Provision for (benefit from) income taxes attributable to valuation allowances” and “Rate change” in the Company’s tax reconciliation table above for the year ended December 31, 2017 compared to the years ended December 31, 2016 and 2015. The change in the U.S. federal corporate tax rate, which is effective January 1, 2018, is also reflected in the Company’s deferred tax table below. Lastly, the Company has discussed Staff Accounting Bulletin No. 118’s (“SAB 118”) possible impact on the Company’s consolidated financial statements below.

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,
	2017			2016
	(in thousands)
Deferred tax assets:
Net operating loss	$	1,004,404		$	1,232,399
Tax credit carryforwards	440,429			367,402
Intangible assets	54,091			34,938
Deferred revenues	19,593			31,205
Stock-based compensation	83,196			110,446
Inventories	4,250			4,705
Accrued expenses	17,808			23,078
Construction financing lease obligation	109,354			177,735
Other	1,417			27
Gross deferred tax assets	1,734,542			1,981,935
Valuation allowance	(1,552,942		)	(1,731,186		)
Total deferred tax assets	181,600			250,749
Deferred tax liabilities:
Property and equipment	(101,019		)	(169,089		)
Acquired intangibles	(6,341		)	(134,063		)
Deferred revenue	(73,357		)	(73,357		)
Unrealized gain	(6,401		)	(7,967		)
Net deferred tax liabilities	$	(5,518	)	$	(133,727	)

The Company presents its deferred tax assets and deferred tax liabilities gross on its consolidated balance sheets. As of December 31, 2017, $4.8 million of the deferred tax liabilities were attributable to the Company’s collaboration with BioAxone. As of December 31, 2016, $131.4 million of the deferred tax liabilities were attributable to the Company’s collaborations with BioAxone and Parion. Please refer to Note B, “Collaborative Arrangements and Acquisitions,” and Note J, “Intangible Assets and Goodwill,” for further information regarding the decrease in the deferred tax liability in 2017, which was primarily related to the Company’s collaboration with Parion.

For U.S. federal income tax purposes, as of December 31, 2017, the Company had net operating loss carryforwards of approximately $3.6 billion and tax credits of $312.5 million, which may be used to offset future federal income and tax liability, respectively. For U.S. state income tax purposes, as of December 31, 2017, the Company had net operating loss carryforwards of approximately $880.7 million and tax credits of $115.7 million, which may be used to offset future state income and tax liability, respectively. These U.S. federal and state net operating loss carryforwards and tax credits expire at various dates through 2037.

The Company maintains a valuation allowance on the majority of its net operating losses and other deferred tax assets. Accordingly, the Company has not reported any benefits from income taxes relating to the remaining NOLs and income tax credit carryforwards that will be utilized in future periods in these jurisdictions. On a periodic basis, the Company reassesses the valuation allowance on its deferred income tax assets weighing positive and negative evidence to assess the recoverability of the deferred tax assets. In 2017, the Company reassessed the valuation allowance and considered negative evidence, including its cumulative losses over the three years ended December 31, 2017, and positive evidence, including its income during the year ended December 31, 2017. After assessing both the negative evidence and the positive evidence, the Company concluded that it should continue to maintain the valuation allowance on its net operating losses and the majority of its other deferred tax assets as of December 31, 2017. Based on the Company’s recent financial performance and its future projections, it could record a reversal of all, or a portion of the valuation allowance associated with U.S. deferred tax assets in future periods. However, any such change is subject to actual performance and other considerations that may present positive or negative evidence at the time of the assessment. The Company’s total deferred tax asset balance subject to the valuation allowance was approximately $1.6 billion at December 31, 2017.

Unrecognized tax benefits during the three years ended December 31, 2017 were not material to the Company’s consolidated financial statements. The Company has reviewed the tax positions taken, or to be taken, in its tax returns for all tax years currently open to examination by a taxing authority. The total amount of unrecognized tax benefits, that is the aggregate tax effect of differences between tax return positions and the benefits recognized in the financial statements, as of December 31, 2017, 2016 and 2015 were $3.8 million, zero and $0.4 million, respectively. The Company recognizes interest and penalties related to income taxes as a component of provision for (benefit from) income taxes. As of December 31, 2017, no interest and penalties have been accrued.

The Company files U.S. 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 U.S. or any other major taxing jurisdiction for years before 2011, except where the Company has net operating losses or tax credit carryforwards that originate before 2011. The Company currently is under examination in Canada for 2011 through 2013, Germany for 2012 through 2015 and Italy for 2015 and 2016. No adjustments have been reported. The Company is not under examination by any other jurisdictions for any tax year. The Company concluded audits with Internal Revenue Service, Delaware, Pennsylvania, Texas and Revenue Quebec during 2016, and Massachusetts and New York during 2015, with no material adjustments.

On December 22, 2017, the SEC staff issued SAB 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of H.R.1. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The Company has an accumulated deficit from its foreign operations and does not have an associated liability from the repatriation tax on accumulated earnings in H.R.1. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of H.R.1. The Company’s accounting treatment is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018. As of December 31, 2017, foreign earnings, which were not significant, have been retained indefinitely by the Company’s foreign subsidiaries for reinvestment. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company could be subject to withholding taxes payable to the various foreign countries.