Note 9 - Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below:
| December 31, 2017 |
December 31, 2016 |
|||||||
| US$ thousands |
US$ thousands |
|||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards | 35,044 | 49,151 | ||||||
| Other | 2,203 | 2,891 | ||||||
| Total gross deferred tax assets | 37,247 | 52,042 | ||||||
| Less – valuation allowance | (32,750 | ) | (49,630 | ) | ||||
| Net deferred tax assets | 4,497 | 2,412 | ||||||
| Deferred tax liabilities: | ||||||||
| Property and equipment | 9 | 11 | ||||||
| Other | 50 | (248 | ) | |||||
| Unproved oil and gas properties | (4,556 | ) | (2,175 | ) | ||||
| Total gross deferred tax liabilities | (4,497 | ) | (2,412 | ) | ||||
| Net deferred tax asset | — | — | ||||||
On December 22, 2017, H.R. 1, formally known as the Tax Cuts and Jobs Act (the “Act”) was enacted into law. The Act provides for significant tax law changes and modifications with varying effective dates. The major change that affects the Company is reducing the corporate income tax rate from 35% to 21%. As a result of the reduction to the federal corporate income tax rate, the Company has re-measured our deferred tax assets and liabilities at the new rate which are expected to reverse in the future.
There are other provisions in the code with regard to foreign income repatriation, but since the Company does not have foreign income to bring back to the United States, these provisions are not applicable at the present time. The major change was the reduction in the corporate rate which the Company properly applied toward our deferred taxes at December 31, 2017.
In assessing the likelihood of the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets, including net operating losses, is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax carry forwards are utilizable.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $166,878,000 prior to the expiration of some of the net operating loss carry forwards between 2022 and 2038. Based upon the level of historical taxable losses since the Company’s inception, management believes that the Company will not likely realize the benefits of these deductible differences and tax carry forwards and thus, full valuation allowances have been recorded at December 31, 2017 and 2016.
At December 31, 2017, the Company has available federal net operating loss carry forwards of approximately $166,878,000 to reduce future U.S. taxable income.
Income earned from activities in Israel is subject to regular Israeli tax rates. For Israeli tax purposes, exploration costs on unproved properties are expensed. Tax losses can be carried forward indefinitely. At December 31, 2017, the Company has available net operating loss carry forwards of approximately $125,894,000 to reduce future Israeli taxable income.
Reconciliation between the theoretical tax benefit on pre-tax reported (loss) and the actual income tax expense:
|
Year ended December 31, 2017 |
Year ended December 31, 2016 |
Year ended December 31, 2015 | ||||||||||
| US$ thousands |
US$ thousands |
US$ thousands |
||||||||||
| Pre-tax loss as reported | (9,989 | ) | (8,515 | ) | (7,306 | ) | ||||||
| U.S. statutory tax rate | 34 | % | 34 | % | 34 | % | ||||||
| Theoretical tax expense | (3,396 | ) | (2,895 | ) | (2,484 | ) | ||||||
| Increase in income tax expense resulting from: | ||||||||||||
| Permanent differences | 5 | 5 | 3 | |||||||||
| Change in tax rate | 20,267 | — | — | |||||||||
| Other differences | 4 | — | — | |||||||||
| Change in valuation allowance | (16,880 | ) | 2,890 | 2,481 | ||||||||
| Income tax expense | — | — | — | |||||||||
The Company has no material unrecognized tax benefit which would favorably affect the effective income tax rate in future periods and does not believe there will be any significant increases or decreases within the next twelve months. No interest or penalties have been accrued.
The Company has not received final tax assessments since incorporation. In accordance with the US tax regulations, the U.S. federal income tax returns remain subject to examination for the years beginning in 2014.
The Israeli branch has not received final tax assessments since incorporation. In accordance with the Israeli tax regulations, tax returns submitted up to and including the 2012 tax year can be regarded as final.