NOTE 13: TAXES ON INCOME

a. A number of the Company’s operating subsidiaries are taxed at rates lower than U.S. rates.

1. Irish Subsidiaries

The Irish operating subsidiary qualified for a 12.5% tax rate on its trade. Interest income earned by the Irish subsidiary is taxed at a rate of 25%. As of December 31, 2016, the open tax years, subject to review by the applicable taxing authorities for the Irish subsidiary, are 2011 and subsequent years.

2. Israeli Subsidiary

The Israeli subsidiary has been granted “Approved Enterprise” and “Benefited Enterprise” status under the Israeli Law for the Encouragement of Capital Investments. For such Approved Enterprises and Benefited Enterprises, the Israeli subsidiary elected to apply for alternative tax benefits—the waiver of government grants in return for tax exemptions on undistributed income. Upon distribution of such exempt income, the Israeli subsidiary will be subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise’s or Benefited Enterprise’s income. Such tax exemption on undistributed income applies for a limited period of between two to ten years, depending upon the location of the enterprise. During the remainder of the benefits period (generally until the expiration of ten years), a corporate tax rate not exceeding 25% will apply.

The Israeli subsidiary is a foreign investor company, or FIC, as defined by the Investment Law. FICs are entitled to further reductions in the tax rate normally applicable to Approved Enterprises and Benefited Enterprises. Depending on the foreign ownership in each tax year, the tax rate can range between 10% (when foreign ownership exceeds 90%) to 20% (when foreign ownership exceeds 49%). There can be no assurance that the subsidiary will continue to qualify as an FIC in the future or that the benefits described herein will be granted in the future.

The Company’s Israeli subsidiary’s tax-exempt profit from Approved Enterprises and Benefited Enterprises is permanently reinvested as the Company’s management has determined that the Company does not currently intend to distribute dividends. Therefore, deferred taxes have not been provided for such tax-exempt income. The Company intends to continue to reinvest these profits and does not currently foresee a need to distribute dividends out of such tax-exempt income.

Income not eligible for Approved Enterprise benefits or Benefited Enterprise benefits is taxed at a regular rate, which was 25% in 2016, 26.5% in 2015 and 26.5% in 2014.

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 on January 1, 2017 and to 23% effective on January 1, 2018.

The Israeli subsidiary elected to compute taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Setting their Taxable Income), 1986. Accordingly, the taxable income or loss is calculated in U.S. dollars. Applying these regulations reduces the effect of the foreign exchange rate (of NIS against the U.S. dollar) on the Company’s Israeli taxable income.

As of December 31, 2016, the open tax years, subject to review by the applicable taxing authorities for the Israeli subsidiary, are 2011 and subsequent years.

3. French Subsidiaries

The French operating subsidiaries qualified for a 33.33% tax rate on its profits. As of December 31, 2016, the open tax years, subject to review by the applicable taxing authorities for the French subsidiaries, are 2014 and subsequent years.

b. Taxes on income comprised of:

 

		Year ended December 31,
		2014				2015				2016
Domestic taxes:
Current		$	7			$	115			$	6
Deferred			2,987				—				—
Foreign taxes:
Current			314				2,212				3,932
Deferred			(456	)			(1,213	)			(613	)
		$	2,852			$	1,114			$	3,325
Income (loss) before taxes on income:
Domestic		$	(2,379	)		$	(3,360	)		$	(3,488	)
Foreign			4,412				10,741				19,913
		$	2,033			$	7,381			$	16,425

c. Reconciliation between the Company’s effective tax rate and the U.S. statutory rate:

 

		Year ended December 31,
		2014				2015				2016
Income before taxes on income		$	2,033			$	7,381			$	16,425
Theoretical tax at U.S. statutory rate			691				2,510				5,585
Foreign income taxes at rates other than U.S. rate			(489	)			(958	)			(1,831	)
Approved and benefited enterprises benefits (*)			(785	)			(1,653	)			(2,767	)
Subpart F			394				434				538
Non-deductible items			723				349				682
Non-taxable items			(230	)			(481	)			(505	)
Changes in uncertain tax position			(920	)			—				505
Changes in valuation allowance			3,356				839				1,212
Other, net			112				74				(94	)
Taxes on income		$	2,852			$	1,114			$	3,325
(*) Basic and diluted earnings per share amounts of the benefit resulting from the “Approved Enterprise” and “Benefited Enterprise” status		$	0.04			$	0.08			$	0.13

d. Deferred taxes on income:

Significant components of the Company’s deferred tax assets are as follows:

 

		As at December 31,
		2015				2016
Deferred tax assets
Operating loss carryforward		$	9,066			$	9,638
Accrued expenses			1,165				1,128
Temporary differences related to R&D expenses			1,052				1,435
Equity-based compensation			2,625				2,685
Tax credit carry forward			875				1,237
Other			529				562
Total gross deferred tax assets			15,312				16,685
Valuation allowance			(12,740	)			(13,780	)
Net deferred tax assets		$	2,572			$	2,905
Deferred tax liabilities
Intangible assets		$	915			$	621
Other			29				32
Total deferred tax liabilities		$	944			$	653
Net deferred tax assets (*)		$	1,628			$	2,252

(*) Net deferred taxes for the years ended December 31, 2015 and 2016 are all from foreign jurisdictions.

 

Changes in valuation allowances on deferred tax assets result from management’s assessment of the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards prior to expiration. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The net change in the valuation allowance primarily reflects an increase in deferred tax assets on net operating and other temporary differences for which full valuation allowance is recorded.

The Company does not have a provision for U.S. Federal income taxes on the undistributed earnings of its international subsidiaries because such earnings are considered to be indefinitely reinvested. The Company would recognize a deferred income tax liability if it was determined that such earnings are no longer indefinitely reinvested. At December 31, 2016, undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $146,172. The determination of the amount of additional taxes related to the distribution of these earnings is not practicable. In addition, the Company operates within multiple taxing jurisdictions involving complex issues, and it has provisions for tax liabilities on investment activities as appropriate.

e. Uncertain tax positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits based on the provisions of FASB ASC No. 740 is as follows:

 

		Year ended December 31,
		2015				2016
Beginning of year		$	2,859			$	3,076
Additions for current year tax positions			217				232
Additions for prior year’s tax positions			—				476
Balance at December 31		$	3,076			$	3,784

As of December 31, 2015 and 2016, there were $3,076 and $3,784, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. As of December 31, 2015 and 2016, the Company had accrued interest related to unrecognized tax benefits of $54 and $130, respectively. The Company did not accrue penalties during the years ended December 31, 2015 and 2016.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. The Company does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements with tax authorities, the likelihood and timing of which are difficult to estimate.

f. Tax loss carryforwards:

As of December 31, 2016, CEVA and its subsidiaries had net operating loss carryforwards for federal income tax purposes of approximately $10,066, which are available to offset future federal taxable income. Of that amount, $8,662 is due to excess tax benefits from stock option exercises. Excess tax benefits related to stock option exercises cannot be recognized until realized through a reduction of current taxes payable. Such loss carryforwards begin to expire in 2030.

 

As of December 31, 2016, CEVA and its subsidiaries had net operating loss carryforwards for California income tax purposes of approximately $6,952, which are available to offset future California taxable income. Of that amount, $5,581 is due to excess tax benefits from stock option exercises. Excess tax benefits related to stock option exercises cannot be recognized until realized through a reduction of current taxes payable. Such loss carryforwards begin to expire in 2017.

As of December 31, 2016, CEVA’s Irish subsidiary had foreign operating losses of approximately $62,306, which are available to offset future taxable income indefinitely. A full valuation allowance was provided in relation to those carryforward tax losses due to the uncertainty of their utilization in the foreseeable future. As of December 31, 2016, CEVA’s French subsidiaries had foreign operating losses of approximately $3,875, which are available to offset future taxable income indefinitely.

g. Tax returns:

CEVA files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, CEVA is no longer subject to U.S. federal income tax examinations by tax authorities, and state and local income tax examinations, for the years prior to 2010.