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INCOME TAXES
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
The benefit from income taxes was based on loss before income taxes as follows:
Years Ended December 31
202120202019
U.S. Source$(259,258)$(162,939)$(182,112)
Non-U.S. Source183,908 120,617 87,301 
Loss before income taxes$(75,350)$(42,322)$(94,811)
The U.S. and foreign components of the benefit from income taxes were as follows:
Years Ended December 31,
202120202019
Provision for (benefit from) current income tax expense:
Federal$(2,038)$(14,758)$5,127 
State and local1,339 1,201 1,331 
Foreign5,037 1,042 5,339 
4,338 (12,515)11,797 
Provision for (benefit from) deferred income taxes:
Federal(29,895)(45,038)(58,311)
State and local(1,230)(5,321)(5,394)
Foreign15,517 (838,548)(19,055)
(15,608)(888,907)(82,760)
Benefit from income taxes$(11,270)$(901,422)$(70,963)
In the third quarter of 2020, the Company completed an intra-entity transfer of certain intellectual property rights from a wholly owned foreign subsidiary (tax resident in the Bahamas) to its wholly owned Irish subsidiary. The rights were sold to the Company’s Irish subsidiary where its ex-U.S. regional headquarters are located and has significant manufacturing and commercial operations, to better align ownership of intellectual property rights with how the business operates. The intra-entity transfer did not result in a taxable gain in 2020 in any jurisdiction including the U.S. as the transaction was disregarded for U.S. tax purposes. The Company filed an election to treat the Irish subsidiary as a disregarded entity for U.S. income tax purposes in 2011. The transaction resulted in a step-up in the tax basis in the transferred intellectual property rights and the Company’s Irish subsidiary recognized a deferred tax asset for the book and tax basis difference of the transferred intellectual property rights. As a result, the Company recognized a deferred tax asset of $835.1 million and related tax benefit on its Consolidated Financial Statements based on the fair value of the transferred intellectual property rights. The fair value of the transferred intellectual property rights was determined utilizing the income approach which relied on projections of product-specific revenues and the inclusion or exclusion of a terminal value for each product.
The tax deductions related to the amortization of these transferred intellectual property rights will be recognized in the future and any amortization not deducted for tax purposes will be carried forward indefinitely under Irish tax laws. The Company expects to be able to realize the deferred tax asset resulting from this transaction and has not recorded a valuation allowance as of December 31, 2021 and 2020.
The following is a reconciliation of the statutory federal income tax benefit to the Company’s effective tax rate:
December 31,
202120202019
Federal statutory income tax benefit$(15,824)$(8,888)$(19,911)
State and local taxes509 (3,264)(2,784)
Orphan Drug & General Business Credit(29,363)(44,114)(43,124)
Stock compensation expense7,859 (1,101)239 
Changes in the fair value of contingent consideration— — (1,804)
Foreign Source Income Subject to U.S. Tax16,878 6,266 (52)
Foreign tax rate differential (1) (2)
(16,971)(16,238)(30,639)
Section 162(m) limitation6,304 9,571 8,294 
Tax Reserves15,530 2,166 12,123 
Intra-entity transfer of assets(3,920)(852,338)— 
CARES Act carryback claim— (2,201)— 
Valuation allowance/deferred benefit6,821 6,876 7,827 
Other907 1,843 (1,132)
Effective income tax benefit$(11,270)$(901,422)$(70,963)
(1)     For the year ended December 31, 2021, the foreign rate differential included foreign local tax expense which was at an effective rate lower than the U.S. statutory rate and includes the recognition of the valuation allowance against a portion of the deferred tax assets of the Company’s Dutch subsidiary of $9.3 million.
(2)    For the year ended December 31, 2019, the foreign rate differential included foreign local tax expense which was at an effective rate lower than the U.S. statutory rate and was offset by the benefit of the valuation allowance release against the deferred tax assets of the Company’s Dutch subsidiary of $29.6 million.
The significant components of the Company’s net deferred tax assets were as follows:
December 31,
20212020
Net deferred tax assets:
Net operating loss carryforwards$25,936 $30,718 
Tax credit carryforwards563,022 532,394 
Accrued expenses, reserves, and prepaids72,759 66,889 
Intangible assets875,311 873,575 
Stock-based compensation50,910 47,011 
Lease liabilities7,422 8,991 
Inventory25,169 32,012 
Other1,943 454 
Valuation allowance(109,176)(93,075)
Total deferred tax assets1,513,296 1,498,969 
Joint venture basis difference(1,665)(1,164)
Acquired intangibles(1,250)(1,364)
Deferred revenue— (1,517)
ROU assets(6,808)(8,280)
Property, plant and equipment(54,498)(54,682)
Total deferred tax liabilities(64,221)(67,007)
Net deferred tax assets$1,449,075 $1,431,962 
Valuation allowances are provided to reduce the amounts of the Company's deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts. At the end of each period, the Company will reassess the ability to realize
its deferred tax benefits. If it is more likely than not that the Company would not realize the deferred tax benefits, a valuation allowance may need to be established against all or a portion of the deferred tax assets, which will result in a charge to tax expense.
In the fourth quarter of 2021, the Company renegotiated a license agreement that resulted in lower royalty projections for its Dutch subsidiary. The revised royalty projections required establishment of a valuation allowance on net operating loss deferred tax assets that were no longer expected to be realizable. The valuation allowance also increased in 2021 due to the Company’s expectation that state R&D credits will not be utilized.
As of December 31, 2021, the Company had the following net operating loss and tax credit carryforwards, which if not utilized, will expire as follows:
TypeAmountYear
Federal net operating loss carryforwards$4,147  2030-2033
Federal R&D and orphan drug credit carryforwards$592,710  2024-2041
State net operating loss carryforwards$230,500  2023-2041
Dutch net operating loss carryforwards$48,903  Indefinite
Not included in the table above are $137.3 million of state research credit carryovers that will carry forward indefinitely.
The Company’s net operating losses and credits could be subject to annual limitations due to ownership change limitations provided by IRC Section 382 and similar state provisions. An annual limitation could result in the expiration of net operating losses and tax credit carryforward before utilization. There are limitations on the tax attributes of acquired entities however, the Company does not believe the limitations will have a material impact on the utilization of the net operating losses or tax credits.
The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50% likely of being realized upon ultimate settlement.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2021 and 2020, is as follows:
December 31,
20212020
Balance at beginning of period$182,564 $168,748 
Additions based on tax positions related to the current year
23,499 16,481 
(Deletions) Additions for tax positions of prior years(786)(2,527)
Lapse of statute of limitations(182)(138)
Balance at end of period$205,095 $182,564 
Included in the balance of unrecognized tax benefits as of December 31, 2021 were potential benefits of $196.7 million that, if recognized, would affect the effective tax rate. The Company’s policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items in the income tax expense. The total amount of accrued interest and penalties was not significant as of December 31, 2021. The Company believes it will not have any material decreases in its previously unrecognized tax benefits within the next twelve months.
The Company files income tax returns in the U.S., Ireland and various foreign jurisdictions. The U.S. and foreign jurisdictions have statute of limitations ranging from three to five years. However, carryforward tax attributes that were generated in 2014 and earlier may still be adjusted upon examination by tax authorities.
U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This excess totaled approximately $16.3 million as of December 31, 2021, which will be indefinitely reinvested; deferred income taxes have not been provided on such foreign earnings.