Note 13 - Income Tax

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Income Tax Disclosure [Text Block]

13. INCOME TAX

The Company is not subject to income or other taxes in the Cayman Islands. However, subsidiaries are subject to taxes of the jurisdiction where they are located.

Loss before income taxes consisted of:

(In Thousands)

	Years Ended December 31
	2016			2015			2014
Cayman Islands	$	(4,156	)	$	(19,183	)	$	(18,943	)
Foreign		2,228			2,728			5,070
	$	(1,928	)	$	(16,455	)	$	(13,873	)

Income tax expense consisted of:

(In Thousands)

	Years Ended December 31
	2016			2015		2014
Current	$	2,289		$	2,651	$	1,106
Deferred		(1,231	)		1,989		78
Income tax expense	$	1,058		$	4,640	$	1,184

The Company and its subsidiaries file separate income tax returns. The applicable statutory income tax rate in the Cayman Islands was

zero

for the Company for the years being reported. The reconciliation between the provision for income taxes at the statutory rate and the provision for income taxes at the effective tax rate is as follows:

(In Thousands)

	Years Ended December 31
	2016			2015		2014
Tax expense at statutory rate	$	-		$	-	$	-
Increase (decrease) in tax resulting from:
Differences between Cayman and foreign tax rates		449			675		989
Changes in deferred income tax assets and liabilities		(1,249	)		1,976		(72	)
Adjustments to prior years’ taxes		33			20		23
Changes in valuation allowances for deferred income tax assets		18			13		150
Withholding taxes on repatriation of subsidiary profits		1,669			1,757		-
Other		138			199		94
	$	1,058		$	4,640	$	1,184

The deferred income tax assets and liabilities as of

December

31,

2016

and

2015

consisted of the following:

(In Thousands)

	December 31
	2016			2015
Deferred income tax assets
Research and development credits	$	5,979		$	5,933
Net operating loss carryforwards		161			195
Depreciation and amortization		269			277
Accrued vacation and other expenses		25			56
		6,434			6,461
Valuation allowance		(6,250	)		(6,232	)
Total net deferred income tax assets	$	184		$	229
Deferred income tax liabilities
Withholding taxes on repatriation of subsidiary profits	$	920		$	2,188
Unrealized foreign exchanges		10			18
	$	930		$	2,206

The valuation allowance shown in the table above relates to net operating losses, credit carryforwards and temporary differences for which the Company believes that realization is not more than likely. The valuation allowance increased by

$18,000,

$13,000,

and

$150,000

for the years ended

December

31,

2016,

2015,

and

2014,

respectively. The changes in the valuation allowance in

2016,

2015,

and

2014,

were primary due to the fluctuations in R&D credits from O

2

Micro Inc. that could not be utilized.

As of

December

31,

2016,

O

2

Micro, Inc. had U.S. federal and state research and development credit carryforwards of approximately

$5,284,000

and

$6,840,000,

respectively. The US federal research and development credit will expire from

2022

through

2036

if not utilized, while the state research and development credit will never expire. Utilization of the research and development credits

may

be subject to significant annual limitation due to the ownership change limitations provided by the U.S. Internal Revenue Code of

1986

and similar provisions in the State of California’s tax regulations. The annual limitation

may

result in the expiration of federal research and development credits before utilization.

As of

December

31,

2016,

the Company’s subsidiary had U.S. net operating loss carryforwards for federal and state tax purpose of

$383,000

and

$526,000,

respectively, which will expire, if not utilized beginning in

2033

and

2028.

To better position itself for the future growth phase, the Company considered the repatriation of the earnings from subsidiaries in Taiwan and China beginning in the

second

quarter of

2015.

As a result, deferred tax liabilities from withholding tax for the unremitted earnings in Taiwanese and Chinese subsidiaries have been recorded for

$920,000

and

$2,188,000

as of

December

31,

2016

and

2015,

respectively.

The Company files income tax returns in various foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities for years prior to

2011

because of the statute of limitations.