Protagonist Therapeutics, Inc Income Taxes Disclosure
Note 15. Income Taxes
The Company recorded income tax expense of $1.3 million for the year ended December 31, 2020. During the second quarter of 2020, the Company’s Australia subsidiary sold beneficial rights to discovery intellectual property to its U.S. entity, and the U.S. entity reimbursed the Australia subsidiary for certain direct development costs. Upon completion of the sale, the Company analyzed tax planning strategies and future income and concluded that a full valuation allowance is necessary for its Australia subsidiary. Income tax expense for the year ended December 31, 2020 reflects this sale of intellectual property rights, cost reimbursements and related adjustments to the deferred tax asset, establishing a valuation allowance and certain uncertain unrecognized tax benefits. The Company continues to maintain a full valuation allowance against its U.S. net deferred tax assets due to the uncertainty surrounding the realization of such assets.
The Company recorded an income tax benefit of $0.7 million for the year ended December 31, 2019 primarily due to research and development tax credits and the recognition of deferred tax assets in Protagonist Australia.
The Company recorded an income tax benefit of $0.8 million for the year ended December 31, 2018 from the recognition of deferred tax assets in Protagonist Australia.
The following table presents domestic and foreign components of net loss before income taxes (in thousands):
Year Ended December 31, | |||||||||
| 2020 |
| 2019 |
| 2018 | ||||
Domestic | $ | (71,073) | $ | (72,271) |
| $ | (37,511) | ||
Foreign |
| 6,228 |
| (5,607) |
|
| (2,212) | ||
Total net loss before taxes | $ | (64,845) | $ | (77,878) |
| $ | (39,723) | ||
The federal, state and foreign components of the income tax expense (benefit) are summarized as follows:
Year Ended December 31, | |||||||||
2020 | 2019 | 2018 | |||||||
Current: | |||||||||
Federal | $ | — | $ | — | $ | — | |||
State | — | — | — | ||||||
Foreign | (88) | 84 | — | ||||||
Total current tax (benefit) expense | (88) | 84 | — | ||||||
Deferred: | |||||||||
Federal | — | — | — | ||||||
State | — | — | — | ||||||
Foreign | 1,393 | (775) | (799) | ||||||
Total deferred tax expense (benefit) | 1,393 | (775) | (799) | ||||||
Total income tax expense (benefit) | $ | 1,305 | $ | (691) | $ | (799) | |||
The effective tax rate of the provision for income taxes differs from the federal statutory rate as follows:
Year Ended December 31, |
| ||||||
| 2020 |
| 2019 |
| 2018 |
| |
Federal statutory income tax rate |
| 21.0 | % | 21.0 | % | 21.0 | % |
State taxes, net of federal benefit |
| 1.9 |
| 1.2 |
| 7.0 |
|
Research and development credits | 6.5 | 4.3 | (1.3) | ||||
Foreign tax rate difference |
| (0.9) |
| 0.7 |
| 0.4 |
|
Change in valuation allowance |
| (34.3) |
| (23.8) |
| (22.2) |
|
Other |
| 3.8 |
| (2.5) |
| (2.9) |
|
Provision (benefit) for income taxes |
| (2.0) | % | 0.9 | % | 2.0 | % |
The components of the deferred tax assets are as follows (in thousands):
December 31, | ||||||
| 2020 |
| 2019 | |||
Deferred tax assets: |
| |||||
Net operating loss carryforwards | $ | 50,272 | $ | 39,907 | ||
Depreciation and amortization |
| 1,237 |
| 318 | ||
Accruals/other |
| 5,332 |
| 5,454 | ||
Operating lease liability | 1,252 | 1,516 | ||||
Research and development and foreign credits |
| 14,856 |
| 8,038 | ||
Total deferred tax assets |
| 72,949 |
| 55,233 | ||
Deferred tax liabilities: | ||||||
Operating right-of-use asset | (1,040) | (1,269) | ||||
Total deferred tax liabilities | (1,040) | (1,269) | ||||
Valuation allowance |
| (71,909) |
| (52,531) | ||
Net deferred tax assets | $ | — | $ | 1,433 | ||
Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company has established a valuation allowance to offset U.S. deferred tax assets as of December 31, 2020, 2019 and 2018 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The Company has also established a valuation allowance to offset Australian deferred tax assets as of December 31, 2020. The valuation allowance increased by approximately $19.4 million, $18.5 million and $8.2 million during the years ended December 31, 2020, 2019 and 2018, respectively.
Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. As a result of such ownership changes, the annual limitation may result in the expiration of net operating losses and credits before utilization. The Company performed a Section 382 analysis through December 31, 2020. The Company has experienced ownership changes in the past and in the current year. The ownership changes will not result in a limitation that will materially reduce the total amount of net operation loss carryforwards and credits that can be utilized. Subsequent ownership changes may affect the limitation in future years.
At December 31, 2020, the Company had $222.8 million of federal net operating loss carryforwards and $214.3 million of state net operating loss carryforwards. $78.7 million of the federal net operating loss carryforwards will begin to expire in 2033, if not utilized, and the remaining $144.1 million have no expiration. The state net operating loss carryforwards will begin to expire in 2035, if not utilized.
At December 31, 2020, the Company also had accumulated Australian tax losses of AUD 3.7 million ($2.8 million) available for carry forward against future earnings which, under relevant tax laws, do not expire but may be limited under certain circumstances.
As of December 31, 2020, the Company had $12.3 million of federal and $4.8 million of state research and development tax credit carryforwards available to reduce future income taxes. The federal research and development tax credits will begin to expire in 2035, if not utilized. The state research and development tax credits have no expiration date.
As of December 31, 2020, the Company had AUD 3.6 million ($2.8 million) of Australian research and development tax credit carryforwards available to reduce future income taxes. The Australian research and development tax credits have no expiration date.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Year Ended December 31, | |||||||||
| 2020 |
| 2019 |
| 2018 | ||||
Balance at beginning of year | $ | 16,631 | $ | 9,466 |
| $ | 5,414 | ||
(Decreases) increases based on tax positions related to prior years |
| (3,799) |
| 184 |
|
| 108 | ||
Increases based on tax positions related to current year |
| 7,053 |
| 6,981 |
|
| 3,944 | ||
Balance at end of year | $ | 19,885 | $ | 16,631 |
| $ | 9,466 | ||
At December 31, 2020, the Company had unrecognized tax benefits of $19.9 million, which are subject to a valuation allowance and would not affect the effective tax rate if recognized. The Company does not anticipate that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes, as necessary. Management determined that no accrual for interest or penalties was required as of December 31, 2020, 2019 and 2018.
The Company files income tax returns in the United States federal jurisdiction, the State of California and Australia. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. The Company’s tax returns remain open for examination for all years.
The Company’s Australia subsidiary had an accumulated deficit at December 31, 2020 and, accordingly, no provision has been provided thereon for any unremitted earnings.
The Company has elected to recognize any potential global intangible low-taxed income (“GILTI”) obligation as an expense in the period it is incurred.
2020 Tax Law Updates
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted and signed into law in response to the COVID-19 pandemic. GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date. The CARES Act includes changes to the tax provisions that benefits business entities and makes certain technical corrections to the 2017 Tax Cuts and Jobs Act. The tax relief measures for businesses include a five-year net operating loss carryback, suspension of the annual deduction limitation of 80% of taxable income from net operating losses generated in a tax year beginning after December 31, 2017, changes in the deductibility of interest, acceleration of alternative minimum tax credit refunds, payroll tax relief, technical corrections on net operating loss carryforwards for fiscal year taxpayers and allows accelerated deduction qualified improvement property. The CARES Act also provides other non-tax benefits to assist those impacted by the pandemic. The Company evaluated the impact of the CARES Act and determined that there is no material impact to the for the year ended December 31, 2020.
On June 29, 2020, California Assembly Bill 85 was signed into law. The legislation suspends the California net operating loss deductions for 2020, 2021, and 2022 for certain taxpayers and imposes a limitation of certain California tax credits for 2020, 2021, and 2022. The legislation disallows the use of California net operating loss deductions if the taxpayer recognizes business income and its adjusted gross income is greater than $1,000,000. The carryover periods for net operating loss deductions disallowed by this provision will be extended. Additionally, any business credit will only offset a maximum of $5,000,000 of California tax. Given the Company’s loss position in the current year, the new legislation will not impact the current year provision. The Company will continue to monitor possible California net operating loss and credit limitations in future periods.
On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law, including further COVID-19 economic relief and the extension of certain expiring tax provisions. The relief package includes a tax provision clarifying that businesses with forgiven Paycheck Protection Program loans can deduct regular business expenses that are paid for with the loan proceeds. Additional pandemic relief tax measures include an expansion of the employee retention credit, enhanced charitable contribution deductions, and a temporary full deduction for business expenses for food and beverages provided by a restaurant. The provisions are not impactful for the Company as it has not participated in previous COVID-19 economic relief measures.
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2020 | Mar 10, 2021 | Showing above |
| 2019 | Mar 10, 2020 | |
| 2018 | Mar 12, 2019 | |
| 2017 | Mar 7, 2018 | |
| 2016 | Mar 7, 2017 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.