NOTE 8:—TAXES ON INCOME

     

a.      Tax rates applicable to the Company:

        1.           Corporate Tax rate in Israel:

        Taxable income of the Company is subject to the Israeli corporate tax of 24% for 2017.

        In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.

     

        2.           Corporate tax rate in U.S.:

        Taxable income of the Company is subject to U.S. federal statutory income tax rate of 35.0% for 2017.

        On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law and the new legislation contains several key tax provisions, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018, among others. The impact of the Tax Act resulted in re-measurement of deferred tax assets based on the rates as they are expected to be reversed in the future. This re-measurement was fully offset by a valuation of allowance (which is de minimus) resulting in no impact to the Company's income tax expense for year ended December 31 2017. The Company's subsidiaries in the United States do not have any foreign subsidiaries, and therefore, the remaining provisions of the Tax Act have no material impact on the Company's results.

     

b.      Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the "Law"):

        On April 1, 2005, an amendment to the Law came into effect ("the Amendment") and has significantly changed the provisions of the Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise's income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.

        During 2013, the Company elected 2012 as a "Year of Election" to receive "Beneficiary Enterprise" status.

        Under the Law and its Amendment, the Company is entitled to various tax benefits, defined by this law, under the "Alternative Benefits" track as a Beneficiary Enterprise.

        Pursuant to the beneficiary program, the Company is entitled to a tax benefit period of seven to ten years on income derived from this program as follows: the Company is fully tax exempt for a period of the first two years and for the remaining five to eight subsequent years is subject to tax at a rate of 10%-25% (based on the percentage of foreign ownership of the Company).

        The benefit period begins in the year in which taxable income is first earned, limited to 12 years from the Year of Election.

        If dividends are distributed out of tax exempt profits, the Company will then become liable for tax at the rate applicable to its profits from the Beneficiary Enterprise in the year in which the income was earned, as if it had not chosen the alternative track of benefits.

        The dividend recipient is subject to withholding tax at the rate of 15% applicable to dividends from Beneficiary enterprises, if the dividend is distributed during the tax benefits period or within twelve years thereafter. This limitation does not apply to a foreign investors' company. The Company currently has no plans to distribute dividends and intends to retain future earnings to finance the development of its business.

        The above benefits are conditioned upon the fulfillment of the conditions stipulated by the Law and regulations published thereunder, including certain restrictions on manufacturing outside of Israel. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest and linked to changes in the Israeli CPI.

        As a result of the amendment, tax-exempt income generated under the provisions of the Law will subject the Company to taxes upon distribution or liquidation and the Company may be required to record a deferred tax liability with respect to such tax-exempt income.

        Through December 31, 2017 and 2016, the Company had not generated income under the provision of the Law.

Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendments 68 and 71):

        In December 2010, the "Knesset" (Israeli Parliament) passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011 ("the Amendment"), which prescribes, among others, amendments in the Law. The Amendment became effective as of January 1, 2011. According to the Amendment, the benefit tracks in the Law were modified and a flat tax rate applies to the Company's entire privileged income under its status as a privileged company with a privileged enterprise. Commencing from the 2011 tax year, the Company can elect (without possibility of reversal) to apply the Amendment in a certain tax year and from that year and thereafter, it will be subject to the amended tax rates. According to the Amendment, the tax rate on preferred income from a preferred enterprise in 2014 and thereafter will be 16% (in development area A—9%). The Amendment also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise's earnings as above will be subject to tax at a rate of 20%. The Company estimates that the effect of the change in tax rates will not have a material impact on the consolidated financial statements.

Amendment to the Law for the couragement of Capital Investments, 1959 ("Amendment 73")

        In December 2016, the Knesset passed Amendment 73 to the Investment Law which included a number of changes to the Investment Law regimes. Certain changes were scheduled to come into effect beginning January 1, 2017, provided that regulations are promulgated by the Finance Ministry to implement the "Nexus Principles" based on OECD guidelines recently published as part of the Base Erosion and Profit Shifting (BEPS) project. The regulations were approved on May 1, 2017, and accordingly, these changes have come into effect.

Applicable benefits under the new regime include:

        Introduction of a benefit regime for "Preferred Technology enterprises", granting a 12% tax rate in central Israel on income deriving from Intellectual Property, subject to a number of conditions being fulfilled, including a minimal amount or ratio of annual R&D expenditures and R&D employees, as well as having at least 25% of annual income derived from exports. Preferred Technological Enterprise ("PTE") is defined as an enterprise which meets the aforementioned conditions and for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion.

        A 12% capital gains tax rate on the sale of a preferred intangible asset to a foreign affiliated enterprise, provided that the asset was initially purchased from a foreign resident at an amount of NIS 200 million or more.

        A withholding tax rate of 20% for dividends paid from PTE income (with an exemption from such withholding tax applying to dividends paid to an Israeli company). Such rate may be reduced to 4% on dividends paid to a foreign resident company, subject to certain conditions regarding percentage of foreign ownership of the distributing entity.

        The Company estimates that the effect of the change in tax rates will not have a material impact on the consolidated financial statements.

     

c.      Losses for tax purposes:

        The Company has accumulated net operating losses for Israeli income tax purposes as of December 31, 2017 of approximately $102,808. The net operating losses may be carried forward and offset against taxable income in the future for an indefinite period.

     

d.      Deferred income taxes:

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:

                                                                                                                                                                                    

        In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are utilized. Based on consideration of these factors, the Company recorded a full valuation allowance at December 31, 2017 and 2016.

     

e.      Loss (income) before taxes on income consists of the following:

                                                                                                                                                                                    

 

f.      The main reconciling item between the statutory tax rate of the Company and the effective tax rate is the recognition of valuation allowance in respect of deferred taxes relating to accumulated net operating losses carried forward due to the uncertainty of the realization of such deferred taxes.

g.      Uncertain tax positions:

        A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:

                                                                                                                                                                                    

        As of December 31, 2017, the Company is subject to Israeli income tax audits for the tax years 2014 through 2017 and Inc. and Holdings are subject to U.S. federal income tax audits for the tax years of 2012 through 2017.

     

h.      Taxes on income for the years ended December 31, 2017 and 2016 are comprised mainly of taxes incurred as a result of the implementation of the cost plus services agreement with Inc. and Holdings, offset by tax credits for qualified research and development activities, that the Company is entitled to in 2017.