2.12 Income Taxes

Please refer to ASC 740-10-30-16 [through] 30-25, ASC 740-10-55-39 [through] 55-48, and ASC 740-10- 55-120 [through] 55-123 for guidance.

Please consider expanding your disclosure to provide a more comprehensive discussion and analysis of the specific positive and negative evidence you considered in determining the realizability of the material components of your deferred tax assets. In this regard, we note the Company is in a cumulative three year net loss position at the [fiscal year-end]. Please tell us how you concluded that no significant valuation allowance was needed.

We note your disclosure that due to cumulative previous losses incurred by the Company, the Company is unable to conclude it is more likely than not to realize its deferred tax asset in excess of the deferred tax liability and accordingly, the Company has recorded a full valuation allowance as of [the end of fiscal year 1] and [the end of the second quarter of fiscal year 2]. We also note you have recorded net income for [fiscal year 1] and [the first two quarters of fiscal year 2]. Please ensure you consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. Refer to ASC 740-10-30-16 through 30-25 for guidance. Additionally, please revise future filings to discuss the factors that impact your estimates and judgment regarding the realizability of your deferred tax asset and the measurement of your valuation allowance. Refer to ASC 740-10-50-21 for guidance.

We note that there have been significant changes in your effective tax rate in recent periods. Specifically, the effective rate was [A]% for [year 1], [B]% for [year 2], and [C]% for the [first through third quarters of year 3]. There appear to be multiple factors contributing to these fluctuations which include foreign losses in [Country X] with no tax benefits, tax benefits on the repatriation of foreign earnings, additional tax expense related to an underaccrual and tax expense on a settlement with [foreign] tax authorities. Please address the following:

• In your discussion of the effective tax rate, please quantify the extent to which each significant factor contributed to the fluctuation in the effective tax rate from period to period;
• Please help us better understand the nature of the additional expense recorded related to the underaccrual of tax expense and in a settlement with [foreign] authorities, including what periods the underaccrual and settlement relate to and the extent to which these factors impact the effective tax rate; and
• Please help us better understand why you are generating tax benefits rather than incurring tax expense on the repatriation of foreign earnings pursuant to ASC 740.

Please provide us with a breakdown of the tax differential and non-deductible expense line items included in the effective tax rate reconciliation and tell us what consideration you gave to Rule 4-08(h)(2) of Regulation S-X to provide a further quantitative breakdown of such amounts. Also, considering the significant changes in the effective tax rate, please tell us what consideration you gave to providing an expanded discussion of the factors that impacted your tax provision. In this regard, we note the disclosures . . . only address the impact for the change in the valuation allowance and not the changes in the line items noted herein.

We note from your tax rate reconciliation . . . that foreign income taxed at lower rates significantly impacted your effective tax rates in each of the reported periods. Please revise future filings to provide greater insight into the nature of this reconciling item, including the primary taxing jurisdictions where your foreign earnings are derived and the relevant statutory rates in those jurisdictions. Disclose any incentivized tax rates you have been granted and briefly describe the factual circumstances of any tax holidays, the per share effects of the tax holiday, and the date upon which any special tax status terminates. Refer to ASC 740-10-50-12 and SAB Topic 11.C.

Please tell us each of the individual components of the [X]% and [Y]% benefits in your “other, net” reconciling item in your rate reconciliations for [year 2] and [year 1], respectively.

Revise your discussions of income taxes in this note and in MD&A in future filings to disclose the estimated annual effective tax rate used in computing your year-to-date provision for income taxes. Refer to ASC 740-270-25 and ASC 740-270-50.

Please disclose a reconciliation using percentages or dollar amounts of the reported amount of income tax expense attributable to continuing operations for the year to the amount of income tax expense that would result from applying domestic federal statutory tax rates. Refer to ASC 740-10-50-12.

In [year 1] and [year 2], you completed intra-entity asset transfers to [Entity A] that resulted in [an $X] million tax benefit in [year 2]. Please provide us a summarized analysis supporting your accounting treatment for these transactions, including key terms governing each transfer of intellectual property, the nature and amount of consideration paid by [A] and relevant tax regulations. Describe and quantify the methods and key assumptions that you used to determine fair values for the transferred assets. Explain your basis for not recognizing a taxable gain corresponding to the stepped-up tax basis arising from these transactions. Refer us to the technical guidance upon which you relied. Please provide us with proposed disclosure to be included in future filings. In addition, provide us with copies of the supporting Asset Transfer Agreements.

You disclose that the $[X] million intangible asset recorded as of [the end of the first quarter] includes $[X] million of costs capitalized to record an offset to a deferred tax liability related to the exercise of your option to acquire an exclusive license from [Entity Y] related to patent rights and know-how to develop and commercialize compounds and products for [Item Z]. You also disclose . . . that this deferred tax liability was created when [Y] sold its license and know-how to you for stock in a transaction under Section 351 of the Internal Revenue Code (Section 351 transaction) which treats the acquisition of the license and know-how as a tax-free exchange. Please provide us with a detailed analysis explaining how you determined that this transaction met the requirements to be considered a tax-free exchange under Section 351. In this regard, it would appear that under Section 351 an exchange would be considered tax free if (a) the property was exchanged solely for stock of the company and (b) immediately after the exchange the transferor controlled the company via 80% or more ownership of voting stock. Based on your beneficial ownership table on . . . your Form S-1 filed [one month after the end of the second quarter], it appears that [Y] owns only [X]% of your outstanding shares.

Please describe the nature of the foreign tax restructuring in [year 1] that gave rise to the $[X] million in deferred tax assets and revise your disclosures to describe the restructuring. Also, confirm whether these are the same deferred tax assets of your [foreign] subsidiary . . . that would give rise to an income tax benefit in excess of $[Y] million if the valuation allowance were released. If they are the same, revise your disclosures to clarify.

[Y]ou disclose that the deferred tax liability associated with the in-process research and development intangible asset from your acquisition of [Company A] is not considered positive evidence of future income in part because it is an indefinite-lived intangible asset. Please tell us why you did not record some income tax benefit outside acquisition accounting under ASC 805-740-30-3 associated with any net operating loss generated in [year 1]. In this regard, we note that net operating losses since the enactment of the Tax Cuts and Jobs Act do not expire. In your response, tell us the amount of net operating loss generated in [year 1].

Refer to your table presentation of deferred income tax assets and liabilities where we note the line item [related to] Section 174 . . . resulting in a deferred tax asset of approximately $[X] million at [fiscal year-end]. Please expand your disclosures to explain the meaning of this new deferred tax asset and its treatment for income tax accounting purposes. We note that revisions to Section 174 of the Internal Revenue Code, as part of the 2017 Tax Cuts and Jobs Act, went into effect for tax years beginning after December 31, 2021 and [pertain] to eliminating the immediate expensing of research and experimental expenditures (“R&E”) and require taxpayers to capitalize their R&E expenditures and software development cost over a period of years.

Please tell us and revise to disclose the components of income (loss) before income tax expense (benefit) as either domestic or foreign, if material. See Rule 4-08(h) of Regulation S-X.

Please tell us your consideration for disclosing the cumulative amount of undistributed foreign earnings that are considered indefinitely reinvested in accordance with ASC 740-30-50-2 in light of your disclosure that you intend to indefinitely reinvest your undistributed foreign earnings.

We note that the line item “other impact of foreign operations” in your effective tax rate reconciliation has grown significantly. To the extent any of the items in this amount exceed the 5% disclosure threshold in Rule 4-08(h)(2) of Regulation S-X, please revise to disclose these amounts separately.