Note 11 - Income Taxes
| A. | The Company and its Israeli subsidiaries |
| 1. | Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985 |
The Company and one of its Israeli subsidiaries are foreign invested companies, and have elected, commencing January 1, 2007, to maintain their books and records in U.S. dollars for income tax purposes, as permitted under the tax regulations.
| 2. | The Law for the Encouragement of Industry (taxes), 1969 |
The Company believes that it qualifies as an “Industrial Company” under the Law for the Encouragement of Industry. The principal tax benefits for the Company are the deductibility of costs in connection with public offerings and amortization of certain intangibles.
| 3. | Corporate tax rate |
Presented hereunder are the standard tax rates in Israel in the years 2015-2017:
2017 – 24%
2016 – 25%
2015 – 26.5%
Current taxes for the reported periods are calculated according to the tax rates presented above.
On January 4, 2016, the statutory tax rate was changed to 25% following a reduction of a corporate tax by the Israeli government. Furthermore, on December 22, 2016, the Israeli government passed a law under which the corporate tax rate will be reduced from 25% to 23% in two steps. The first reduction was to a rate of 24% as from January 2017 and the second reduction will be to a rate of 23% as from January 2018.
The deferred tax balances as at December 31, 2017 were calculated according to the new tax rates, at the tax rate expected to apply on the date of reversal.
| 4. | Benefits under the Law for the Encouragement of Capital Investments |
According to the Law for the Encouragement of Capital Investments – 1959 (the “Law”), as amended, two tax tracks exist, a preferred enterprise and a special preferred enterprise, which mainly provide a uniform and reduced tax rate for all the Company’s income entitled to benefits. The tax rates on preferred income as from the 2014 tax year are as follows: 9% for Development Area A and 16% for the rest of the country. Furthermore, an enterprise that meets the definition of a special preferred enterprise is entitled to benefits for a period of 10 consecutive years and a reduced tax rate of 5% in Development Area A and of 8% in the rest of the country. In addition, companies in Development Area A are entitled to the grants track and are entitled to receive benefits under this track and under the tax benefits track at the same time. Such benefits will apply upon reaching taxable income. On December 22, 2016, the Israeli parliament passed a law that reduces the tax rate on preferred income for companies located in Development Area A from 9% to 7.5%, commencing on January 1, 2017. Additional amendments to the Law became effective in January 2017 (the “2017 Amendment”). Under the 2017 Amendment, subject to certain conditions, income derived by Preferred Companies from ‘Preferred Technological Enterprises’ or "PTE" (as defined in the 2017 Amendment), would be subject to reduced corporate tax rates of 7.5% in Development Area A and 12% elsewhere.
The Law also provides that no tax will apply to a dividend distributed out of preferred income to a shareholder that is an Israeli resident company. A tax rate of 20% shall apply to a dividend distributed out of preferred income to an individual shareholder or foreign resident, subject to double taxation prevention treaties.
The Company currently meets the conditions provided in the Law for inclusion in the scope of the tax benefits track.
| B. | Non-Israeli subsidiaries are taxed based on the income tax laws in their country of residence. |
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “US Tax Legislation”) was enacted in the United States. Except for certain provisions, the Tax Legislation is effective for tax years beginning on or after January 1, 2018. The Tax Legislation significantly revises several sections of the U.S. Internal Revenue Code including, among other things, lowering the corporate income tax rate from 35% to 21% effective January 1, 2018, limiting deductibility of interest expense and implementing a territorial tax system that imposes a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The main effect on the Company’s U.S. subsidiary is the lowering the corporate income tax rate from 35% to 21%, which is not expected to have a material effect on the Company’s financial statements.
| C. | Deferred income taxes: |
| December 31 | December 31 | |||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
|
Carryforward losses |
$ | 45,239 | $ | 45,450 | ||||
| Other | 785 | 1,000 | ||||||
| Total gross deferred tax assets | 46,024 | 46,450 | ||||||
| Less – valuation allowance | (46,024 | ) | (46,450 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
| Deferred tax liability - | ||||||||
| Other | (500 | ) | (373 | ) | ||||
| Net deferred tax liability | $ | (500 | ) | $ | (373 | ) | ||
The net changes in the total valuation allowance for each of the years ended December 31, 2017, 2016 and 2015, are comprised as follows:
| Year ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Balance at beginning of year | $ | 46,450 | $ | 52,431 | $ | 50,450 | ||||||
| Additions during the year from Continuing operations | 413 | 764 | 2,047 | |||||||||
| Changes due to amendments to tax laws and applicable future tax rates, see Note 11A(3) | (518 | ) | (6,408 | ) | - | |||||||
| Discontinued operations - see Note 1B | (239 | ) | (382 | ) | (67 | ) | ||||||
| Tax from previous years | (312 | ) | - | - | ||||||||
| Exchange rate differences on carryforward losses | 244 | 33 | - | |||||||||
| Adjustments to beginning-of-the-year balance due to utilization of carryforward losses in certain subsidiaries | (16 | ) | - | - | ||||||||
| Other changes | 2 | 12 | 1 | |||||||||
| Balance at end of year | $ | 46,024 | $ | 46,450 | $ | 52,431 | ||||||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences or carry-forwards are deductible. Based on the level of historical taxable losses, management has reduced the deferred tax assets with a valuation allowance to the amount it believes is more likely than not to be realized.
| D. |
As of December 31, 2017, the operating loss carry-forwards and capital loss carry-forwards relating to Israeli companies amounted to $171,309 and $22,089, respectively. Operating losses in Israel may be carried forward indefinitely to offset against future taxable operational income. Under the Income Tax (Inflationary Adjustments) Law, 1985, and based on the Company’s election (see Note 11A(1)), tax loss carry-forwards are denominated in U.S. dollars. |
Net operating losses relating to non-Israeli companies aggregate $3,415, which will expire as follows: 2026 - $2,882 and 2027- $533.
| E. | The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiaries that arose in 2017 and prior years, because the Company considers these earnings to be indefinitely reinvested. These undistributed earnings will be taxed upon distribution, if at all. A deferred tax liability will be recognized when the Company can no longer demonstrate that it plans to indefinitely reinvest these undistributed earnings. As of December 31, 2017, the undistributed earnings of these foreign subsidiaries were $4,021. It is impracticable to determine the additional taxes payable when these earnings are remitted. |
| F. | No current or net deferred taxes were recorded in Israel. Non-Israeli income tax expense included in the consolidated statements of operations are as follows: |
| Year ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Current | $ | (27 | ) | $ | (24 | ) | $ | - | ||||
| Deferred | (47 | ) | (58 | ) | (122 | ) | ||||||
| Income tax expense | $ | (74 | ) | $ | (82 | ) | $ | (122 | ) | |||
Income tax expense for the years ended December 31, 2017, 2016 and 2015, differed from the amounts computed by applying the Israeli statutory tax rates of 24%, 25% and 26.5% to loss from continuing operations before taxes on income, as a result of the following:
| Year ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Computed “expected” income tax benefit | $ | 386 | $ | 572 | $ | 1,953 | ||||||
| Decrease in income tax benefit resulting from: | ||||||||||||
| Change in valuation allowance, net | (413 | ) | (764 | ) | (2,047 | ) | ||||||
| Nondeductible stock-based compensation related to options issued to employees | (61 | ) | (60 | ) | (123 | ) | ||||||
| Other nondeductible expenses | (22 | ) | (16 | ) | (96 | ) | ||||||
| Tax from previous years | (13 | ) | 110 | - | ||||||||
| Other | 49 | 76 | 191 | |||||||||
| Reported income tax expense | $ | (74 | ) | $ | (82 | ) | $ | (122 | ) | |||
| G. | Income (loss) from continuing operations before taxes on income consists of the following: |
| Year ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Israel | $ | (2,023 | ) | $ | (2,924 | ) | $ | (7,683 | ) | |||
| Non-Israel | 414 | 637 | 313 | |||||||||
| $ | (1,609 | ) | $ | (2,287 | ) | $ | (7,370 | ) | ||||
| H. | Unrecognized tax benefits |
As of December 31, 2017, 2016 and 2015, the Company did not have any unrecognized tax benefits. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
For the years ended December 31, 2017, 2016 and 2015, no interest and penalties related to unrecognized tax benefits have been accrued.
The Company and its major subsidiaries file income tax returns in Israel, Poland and South Africa. With few exceptions, the income tax returns of the Company and its major subsidiaries
are open to examination by the Israeli and the respective foreign tax authorities for the tax years beginning in 2012.