Note 9 - Income Taxes

The Company had no income tax expense due to the operating loss incurred for the years ended December 31, 2018 and 2017.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), which made broad and complex changes to the U.S. tax code. Certain of these changes may be applicable to the Company, including but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, creating a new limitation on deductible interest expense, eliminating the corporate alternative minimum tax (“AMT”), modifying the rules related to uses and limitations of net operating loss carryforwards generated in tax years ending after December 31, 2017, and changing the rules pertaining to the taxation of profits earned abroad. Changes in tax rates and tax laws are accounted for in the period of enactment. The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we have recorded a decrease related to deferred tax assets of approximately $0.5 million dollars exclusive of the corresponding change in the valuation allowance, for the year ended December 31, 2018. Due to the full valuation allowance on the deferred tax assets, there is no net adjustment to deferred tax expense or benefit due to the reduction of the corporate tax rate.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 are presented below:

	December 31, 2018			December 31, 2017
	US$ thousands			US$ thousands
Deferred tax assets:
Net operating loss carry forwards		39,976			35,044
Other		2,520			2,203
Total gross deferred tax assets		42,496			37,247
Less – valuation allowance		(40,825	)		(32,750	)
Net deferred tax assets		1,671			4,497

Deferred tax liabilities:
Property and equipment		8			9
Other		(269	)		50
Unproved oil and gas properties		(1,410	)		(4,556	)
Total gross deferred tax liabilities		(1,671	)		(4,497	)

Net deferred tax asset		—			—

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 $190,363,000 prior to the expiration of some of the net operating loss carry forwards between 2022 and 2039. 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, 2018 and 2017.

The Company continuously monitors all shareholders that might reach a 5% ownership in the common stock for various purposes, in addition to the I.R.C §382/383 limitation on net operating loss (“NOL”) carryforwards following an ownership change. Sections 382/383 limit the use of corporate NOLs following an ownership change. Section 382(g) defines an ownership change generally as a greater than 50% change in the ownership of stock among certain 5% shareholders over a three-year period. For the tax years during the prior 3 years and including the tax year 2018, there are and have been no 5% shareholders even among public institutional shareholders as evidenced by searches of SEC filings. Thus, there have been no change of stock ownership to trigger sections 382/383.

At December 31, 2018, the Company has available federal net operating loss carry forwards of approximately $190,363,000 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, 2018, the Company has available net operating loss carry forwards of approximately $132,510,000 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, 2018			Year ended December 31, 2017			Year ended December 31, 2016
	US$ thousands			US$ thousands			US$ thousands
Pre-tax loss as reported		(38,511	)		(9,989	)		(8,515	)

U.S. statutory tax rate		21	%		34	%		34	%
Theoretical tax expense		(8,087	)		(3,396	)		(2,895	)

Increase in income tax expense resulting from:

Permanent differences		12			5			5
Change in tax rate		-			20,267			—
Other differences		-			4			—
Change in valuation allowance		8,075			(16,880	)		2,890
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 2015.

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 2013 tax year can be regarded as final.