Note 11 - Income Taxes

6 Months Ended

Jun. 30, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE

11

— INCOME TAXES

As further described in Note

1

and in connection with the closing of the SCPPA PPA portfolio agreement, during the

second

quarter of

2017

the Company changed its assertion related to permanent reinvestment of foreign unremitted earnings in Ormat Systems, its Israeli fully owned subsidiary. Accordingly, a deferred tax liability in the amount of $

110.5

million was recorded which represents the estimated tax impact of future repatriation of the unremitted foreign earning in Ormat Systems at the statutory U.S. tax rate of

35%.

Additionally, the Company accrued

$53.9

million for the estimated Israeli withholding taxes expected when Ormat Systems remits its earnings to the U.S. The Company also recorded a deferred tax asset in the amount of

$109.6

million for foreign tax credits related to taxes already paid by Ormat Systems on such earnings in Israel.

Realization of the deferred tax assets and tax credits is dependent on generating sufficient taxable income in appropriate jurisdictions prior to expiration of the NOL carryforwards and tax credits. In prior periods and through

March 31, 2017

the Company had maintained a valuation allowance against its net deferred tax asset balance in the US. As of

March 31, 2017

such valuation allowance was

$109.6

million. Based upon new available evidence of the Company’s ability to generate additional taxable income in the U.S. due to the closing of the SCPPA PPA portfolio and the Company’s permanent reinvestment of unremitted earnings assertion change with respect to Ormat Systems Ltd.,

$62.0

million of valuation allowance was released against the U.S. deferred tax assets, as it is more likely than

not

that the deferred tax assets will be utilized. 

However, the Company is maintaining a valuation allowance of

$40.8

million against a portion of the U.S. foreign tax credits that are expected to expire before they can be utilized in future periods.  Additionally, the Company recorded a specific valuation allowance of

$7

million attributable to current year projected activity as this will need to be held back and recognized throughout the year as current year income is earned for a total valuation allowance of

$48

million as of

June 30, 2017.

This valuation allowance is based upon management’s estimates of future taxable income. Although the degree of variability inherent in the estimates of future taxable income is significant and subject to change in the near term, management believes that the estimate is adequate. However, the amount of deferred tax asset considered realizable could change in the near term if estimates which require significant judgment of future taxable income during the carryforward period are increased or decreased.  Accordingly, the estimated valuation allowance is continually reviewed and as adjustments to the valuation allowance become necessary, such adjustments will be reflected in current earnings.

The Company

’s effective tax rate for the

three

months ended

June 30, 2017

and

2016

was

14.2%

and

23.2%,

respectively, and

17.7%

and

23.1%

for the

six

months ended

June 30, 2017

and

2016,

respectively. The effective rate differs from the federal statutory rate of

35%

for the

six

months ended

June 30, 2017

due to: (i) a partial valuation allowance release against the Company’s U.S. deferred tax assets as described above in respect of net operating loss (“NOL”) carryforwards (see below) offset by withholding taxes related to the assertion change on the Company’s permanent reinvestment of foreign unremitted earnings in Ormat Systems also as described above, (ii) lower tax rate in Israel of

16%,

partially offset by a tax rate in Kenya of

37.5%;

and (iii) a tax credit and tax exemption related to the Company’s subsidiaries in Guatemala and Honduras. The effect of the tax credit and tax exemption for the

three

months ended

June 30, 2017

and

2016

was

$0.8

million and

$1.1

million, respectively, and for the

six

months ended

June 30, 2017

and

2016

was

1.7

million and

2.3

million, respectively.

As described above, t

he Company is currently in a net deferred tax asset position with a partial valuation allowance against the Company’s foreign tax credits that are expected to expire before they can be utilized in future periods. As of

December 31, 2016,

the Company had U.S. Federal NOL carryforwards of approximately

$299.6

million, which expire between

2029

 and

2036,

 and state NOL carryforwards of approximately

$244.7

million, which expire between

2018

and

2036

which are available to reduce future taxable income. The Company's investment tax credits (“ITCs”) in the amount of

$0.7

million at

December 31, 2016

are available for a

20

-year period and expire between

2022

and

2024.

The Company's production tax credits (“PTCs”) in the amount of

$82.5

million at

December 

31,

2016

are available for a

20

-year period and expire between

2026

and

2036.

The Company also has offsetting deferred tax liabilities in the U.S.

The total amount of undistributed earnings of foreign subsidiaries related to Ormat Systems for income tax purposes was approximately

$367

million at

December 31, 2016.

Although the Company plans to repatriate undistributed earnings related to Ormat Systems to support expected capital expenditure requirements in the U.S., based upon its plans to increase its operations outside of the U.S., it is the Company

’s intention to reinvest undistributed earnings of its other foreign subsidiaries and thereby indefinitely postpone their remittance, given that the Company’s requires existing and future cash to fund the anticipated investment and development activities as well as debt service requirements in those jurisdictions. In addition, the Company believes that existing and anticipated cash flows as well as borrowing capacity in the U.S. and cash to be remitted to the U.S. from Ormat Systems will be sufficient to meet its needs in the U.S. Accordingly,

no

provision has been made for foreign withholding taxes or U.S. income taxes with respect to its foreign subsidiaries, other than Ormat Systems, which

may

become payable if undistributed earnings of foreign subsidiaries were paid as dividends to the Company. The additional taxes on that portion of undistributed earnings in those other jurisdictions which is available for dividends are

not

practicably determinable. If plans change the Company

may

be required to accrue and pay U.S. taxes to repatriate these funds.

The Company is subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating tax positions and determining the position for income taxes. Reserves are established to tax-related uncertainties based on estimates of whether, and the extent to which additional taxes will be due. As of

June 30, 2017,

the Company is unaware of any potentially significant uncertain tax positions for which a reserve has

not

been established.

As previously reported by the Company, the Kenya Revenue Authority (“KRA”) conducted an audit related to the Company

’s operations in Kenya for fiscal years

2012

and

2013.

On

June 20, 2017, 

the Company has signed a Settlement Agreement with the KRA under which it paid approximately

$2.6

million in principal for full settlement of all claims raised by the KRA during the audit. The principal amount that was paid in

June 2017 

was recorded as an addition to the cost of the power plants and is qualified for investment deduction at

150%

under the terms of the Settlement Agreement. Additionally, as per the Settlement Agreement, the Company submitted a request for waiver on the applied interest in the amount of approximately

$1.2

million, for which the Company recorded a provision to cover such a potential exposure.