Note 17 - Income Taxes

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 17 — INCOME TAXES

U.S. and foreign components of income from continuing operations, before income taxes and equity in income (losses) of investees consisted of:

	Year Ended December 31,
	2021		2020		2019
	(Dollars in thousands)
U.S	$	37,032	$	43,273	$	14,187
Non-U.S. (foreign)		66,519		125,444		123,116
Total income from continuing operations, before income taxes and equity in losses	$	103,551	$	168,717	$	137,303

The components of the provision (benefit) for income taxes, net are as follows:

	Year Ended December 31,
	2021			2020			2019
	(Dollars in thousands)
Current:
Federal	$	—		$	0		$	—
State		400			363			172
Foreign		25,096			61,574			16,969
Total current income tax expense	$	25,496		$	61,937		$	17,141
Deferred:
Federal		(3,267	)		22,682			(12,179	)
State		9,301			7,277			4,671
Foreign		(6,680	)		(24,893	)		35,980
Total deferred tax provision (benefit)		(646	)		5,066			28,472
Total Income tax provision	$	24,850		$	67,003		$	45,613

Reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31,
	2021			2020			2019
U.S. federal statutory tax rate		21.0	%		21.0	%		21.0	%
Foreign tax credits		(0.4	)		(0.3	)		(22.8	)
Withholding tax		6.0			4.4			10.4
Valuation allowance - U.S.		(10.4	)		3			(3.7	)
State income tax, net of federal benefit		8.8			3.8			3.7
Uncertain tax positions		3.6			(7.5	)		2.1
Effect of foreign income tax, net		(5.2	)		8.5			9.7
Production tax credits		(4.2	)		(1.8	)		(5	)
Subpart F income		0.0			0.2			0.5
Tax on global intangible low-tax income		9.3			11.1			16.9
Intra-entity transfers of assets other than inventory		(1.8	)		(0.4	)		0.3
Noncontrolling interest		(2.5	)		(1.6	)		(0.4	)
Other, net		(0.1	)		(0.7	)		0.5
Effective tax rate		24.0	%		39.7	%		33.2	%

The net deferred tax assets and liabilities consist of the following:

	December 31,
	2021			2020
	(Dollars in thousands)
Deferred tax assets (liabilities):
Net foreign deferred taxes, primarily depreciation	$	(54,899	)	$	(66,452	)
Depreciation		(62,996	)		(23,835	)
Intangible drilling costs		(11,501	)		(6,689	)
Net operating loss carryforward - U.S.		32,848			35,346
Tax monetization transaction		(62,533	)		(46,449	)
Right-of-use assets		(5,101	)		(3,753	)
Lease liabilities		5,148			3,846
State and Investment tax credits		813			813
Production tax credits		108,103			103,592
Foreign tax credits		92,240			92,077
Withholding tax		(20,521	)		(12,416	)
Stock options amortization		2,106			1,510
Basis difference in partnership interest		(45,683	)		(41,818	)
Excess business interest		13,662			10,971
Sale and leaseback transaction		64,070			—
Other assets		10,169			—
Accrued liabilities and other		4,161			6,777
Total		70,086			53,520
Less - valuation allowance		(11,298	)		(22,193	)
Total, net	$	58,788		$	31,327

The following table presents a reconciliation of the beginning and ending valuation allowance:

	2021			2020
	(Dollars in thousands)
Balance at beginning of the year	$	22,193		$	17,412
Additions to valuation allowance		2,029			20,214
Release of valuation allowance		(12,924	)		(15,433	)
Balance at end of the year	$	11,298		$	22,193

At December 31, 2021, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $57.3 million, all of which was generated before 2018 and expires by 2038.

At December 31, 2021, the Company had PTCs in the amount of $108.1 million. These PTCs are available for a 20-year period and begin to expire in 2022. At December 31, 2021, the Company had U.S. foreign tax credits (“FTCs”) in the amount of $92.2 million.  These FTCs are available for a 10-year period and begin to expire in 2022.

At December 31, 2021, the Company had state NOL carryforwards of approximately $297.7 million, $294.4 million which expire between 2025 and 2040 and $2.8 million are available to be carried forward for an indefinite period. At December 31, 2021, the Company had state tax credits in the amount of $1.0 million. These state tax credits are available to be carried forward for an indefinite period.

The Company has recorded deferred tax assets for net operating losses, foreign tax credits, and production tax credits.  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. Based upon available evidence of the Company’s ability to generate additional taxable income in the future and historical losses in prior years, a valuation allowance in the amount of $11.3 million and $22.2 million is recorded against the U.S. deferred tax assets as of December 31, 2021 and 2020, respectively, as it is more likely than not that the deferred tax assets will not be realized.  The overall decrease in the valuation allowance of $10.9 million is due to a decreased valuation allowance related to FTCs, partially offset by a valuation allowance increase related to PTCs,. The Company is maintaining a valuation allowance of $11.3 million against a portion of the U.S. FTCs and PTCs, capital loss carryforward, and state NOLs that are expected to expire before they can be utilized in future periods.

On April 24, 2018, the Company acquired 100% of stock of USG for approximately $110 million.  Under the acquisition method of accounting, the Company recorded a net deferred tax asset of $1.7 million comprised primarily of federal and state NOLs netted against deferred tax liabilities for partnership basis differences and fixed assets.  The total amount of acquired federal and state NOLs, which are subject to limitations under Section 382, were $113.9 million and $49.9 million, respectively.  A valuation allowance of $1.8 million has been recorded against such acquired state NOLs, as it is more likely than not that the deferred tax asset will not be realized.

The FASB released guidance Staff Q&A, Topic 740, No. 5, that states a company can make an accounting policy election to either recognize deferred taxes related to GILTI or to provide for the GILTI tax expense in the year the tax is incurred as a period cost.  The Company has elected to treat any GILTI inclusions as a period cost. We have elected and applied the tax law ordering approach when considering GILTI as part of our valuation allowance.

The following table presents the deferred taxes on the balance sheet as of the dates indicated:

	Year Ended December 31,
	2021			2020
	(Dollars in thousands)
Non-current deferred tax assets	$	143,450		$	119,299
Non-current deferred tax liabilities		(84,662	)		(87,972	)
Non-current deferred tax assets, net		58,788			31,327
Uncertain tax benefit offset (1)		(95	)		(95	)
	$	58,693		$	31,232

(1) The non-current deferred tax asset has been reduced by the uncertain tax benefit of $0.1 million in accordance with ASU 2013-11, Income Taxes.

At December 31, 2021, the Company is no longer indefinitely reinvested with respect to the earnings of its foreign subsidiaries due to forecasted changes in cash needs and the impact of U.S. tax reform. The Company has accrued withholding taxes that would be owed upon future distributions of such earnings. Accordingly, as of December 31, 2021, the Company has accrued $17.3 million of foreign withholding taxes on future distributions of foreign earnings.

Uncertain tax positions

The Company is subject to income taxes in the United States (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company's tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite evidence supporting the position. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered probable.

At December 31, 2021 and 2020, there are $5.7 million and $2.0 million of unrecognized tax benefits, respectively, that if recognized would reduce the effective tax rate. Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as a component of income tax provision in the consolidated statements of operations and comprehensive income.

A reconciliation of the Company's unrecognized tax benefits is as follows:

	Year Ended December 31,
	2021			2020
	(Dollars in thousands)
Balance at beginning of year	$	1,673		$	10,623
Additions based on tax positions taken in prior years		9			283
Additions based on tax positions taken in the current year		3,408			1,570
Reduction based on tax positions taken in prior years		(14	)		(10,803	)
Balance at end of year	$	5,076		$	1,673

The Company and its U.S. subsidiaries file consolidated income tax returns for federal and state (where applicable) purposes. As of December 31, 2021, the Company has not been subject to U.S. federal or state income tax examinations.

The Company remains open to examination by the Internal Revenue Service for the years 2002-2019 and by local state jurisdictions for the years 2004-2019. These examinations may lead to ordinary course adjustments or proposed adjustments to the Company's taxes or the Company's net operating losses with respect to years under examination as well as subsequent periods.

The Company’s foreign subsidiaries remain open to examination by the local income tax authorities in the following countries for the years indicated:

Israel	2019 - 2021
Kenya	2018 - 2021
Guatemala	2016 - 2021
Honduras	2015 - 2021
Guadeloupe	2019 - 2021

Management believes that the liability for unrecognized tax benefits is adequate for all open tax years based on its assessment of many factors, including among others, past experience and interpretations of local income tax regulations. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. As a result, it is possible that federal, state and foreign tax examinations will result in assessments in future periods. To the extent any such assessments occur, the Company will adjust its liability for unrecognized tax benefits. The Company is not able to reasonably estimate the amount of unrecognized tax benefits that will be reduced within the next twelve months.

Tax benefits in the United States

The U.S. government encourages production of electricity from geothermal resources through certain tax subsidies.  On February 9, 2018 the Bipartisan Budget Act of 2018 was enacted extending the PTC and ITC in lieu of PTCs for geothermal projects that began construction before 2018. On December 20, 2019, the Tax Extenders Bill was enacted, further extending the PTC and ITC in lieu of PTCs. Therefore, geothermal projects that begin construction before 2021 and meet certain other “beginning of construction” rules qualify for PTCs for their first 10-years of operations; alternatively, the owner of the project may elect to claim the ITC in lieu of PTCs.  In either case, under current tax rules for tax credits, any unused tax credit has a 1-year carry back and a 20-year carry forward. 

If the Company claims the ITC, the Company’s “tax basis” in the plant that it can recover through bonus or accelerated depreciation (if elected) must be reduced by half of the ITC.  If the Company claims the PTC, there is no reduction in the tax basis for depreciation.  Whether the Company claims the PTC or the ITC in lieu of PTC, for assets acquired and placed in service after September 27, 2017, the Company is eligible to expense 100% of the cost of qualified property (“bonus depreciation”).  In later years, the first-year bonus depreciation deduction phases down, as follows:

● 80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.

● 60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025.

● 40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.

● 20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.

The Company could also elect in lieu of bonus depreciation to depreciate most of its "tax basis" in the plant for tax purposes over five years on an accelerated basis, meaning that more of the cost may be deducted in the first few years than during the remainder of the depreciation period.

Income taxes related to foreign operations

Guadeloupe - The Company’s operations in Guadeloupe are taxed at a maximum rate of 31% in 2019, a rate of 28% in 2020, 26.5% in 2021 and 25% in 2022.

Guatemala — The enacted tax rate is 25%. Orzunil, a wholly owned subsidiary, was granted a benefit under a law which promotes development of renewable power sources. The law allows Orzunil to reduce the investment made in its geothermal power plant from income tax payable, which currently reduces the effective tax rate to zero. Ortitlan, another wholly owned subsidiary, was granted a tax exemption for a period of ten years ending August 2017. Starting August 2017, Ortitlan pays income tax of 7% on its Electricity revenues.

Honduras - The Company’s operations in Honduras are exempt from income taxes for the first ten years starting at the commercial operation date of the power plant, which was in September 2017..

Israel — The Company’s operations in Israel through its wholly owned Israeli subsidiary, Ormat Systems Ltd. (“Ormat Systems”), were taxed at a reduced corporate tax rate of 16% in 2017 and 23% in 2018 and 16% thereafter, under the “Benefited Enterprise” tax regime of the Encouragement of Capital Investments Law, 1959 (the “Investment Law”), with respect to two of its investment programs. In January 2011, new legislation amending the Investment Law by adding, inter alia, the Preferred Enterprise Regime was enacted. Under the Preferred Enterprise Regime, a uniform reduced corporate tax rate would apply to all qualified income of certain industrial companies, as opposed to the Investment Law incentives that are limited to income from a “Benefited Enterprise” during their benefits period. According to the amendment, the uniform tax rate applicable to the zone where the production facilities of Ormat Systems are located would be 16% in 2014 and thereafter. Ormat Systems decided to irrevocably comply with the new law starting in 2011.

On December 29, 2016, the Investment Law was amended (“73 Amendment”), which includes, inter alia, two new tax incentive opportunities. These are the Preferred Technological Enterprise (“PTE”) and Special Preferred Technological Enterprise (“SPTE”). In order to benefit from either of these options, a Company must meet certain qualifications and receive formal approval from the Israel Innovation Authority (“IIA”). The Company received such approval on January 20, 2021, which allowed the Company to use the reduced corporate tax rate of 12% on its "Preferred Technological Income" for the tax years 2018, 2019 and 2020.  The benefit of the reduced corporate tax rate has been reflected in these financial statements.

The Investment Law also included a specific order that allowed companies to distribute earnings that were previously untaxed after paying a reduced corporate tax rate of 10% versus 25% under the prior tax regime. Ormat elected to pay the 10% corporate rate on such previously untaxed earnings during 2021 which now allows such earnings to be dividended.

Kenya - The Company’s operations in Kenya are taxed at the rate of 37.5%.

Tax audit in Israel

On December 28, 2020, the Company entered into a settlement agreement with the Israel Tax Authority ("ITA") in relation to a tax audit for the income tax years 2015 to 2018. The settlement amount for the audit period was $4.3 million and was paid on January 7, 2021. This settlement closes and concludes all years within the audit period.

Tax audit in Kenya

The Company was audited by the Kenya Revenue Authority ("KRA") for income tax years 2013 to 2017 for which it had received during 2019, and 2020 three separate Notices of Assessments ("NoA") detailing different issues relating to certain findings in respect of the KRA review of such years.

On October 19, 2020, the Company entered into a settlement agreement in relation to the second NoA that was issued by the KRA on December 4, 2019 totaling approximately $190 million of proposed adjustments, including interest and penalties. The settlement agreement extended the audit period for the issues addressed within the assessment, to cover the period from 2013 through 2019 and resulted in a total settlement payment of approximately $28 million, including interest and penalties, related to late payment in respect of 2019 taxable income. Additionally, the settlement included a deferral of tax benefits to be utilized in years subsequent to 2019 in an amount of approximately $28 million. The assessment was paid on October 27, 2020.

On December 21, 2020, the Company entered into a settlement agreement with the KRA in relation to the first and third NoA's that were issued by the KRA on June 28, 2019 and May 12, 2020, respectively, totaling approximately $9 million, including interest and penalties.  The total settlement amount reflected in the agreement was $1.5 million, which was paid on December 28, 2020.  This concluded all open audits and NoA with the KRA.