Note 17 - Income Taxes

12 Months Ended

Dec. 31, 2022

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,
	2022		2021		2020
	(Dollars in thousands)
U.S	$	23,709	$	37,032	$	43,273
Non-U.S. (foreign)		71,900		66,519		125,444
Total income from continuing operations, before income taxes and equity in losses	$	95,609	$	103,551	$	168,717

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

	Year Ended December 31,
	2022			2021			2020
	(Dollars in thousands)
Current:
Federal	$	641		$	—		$	—
State		2,227			400			363
Foreign		29,370			25,096			61,574
Total current income tax expense	$	32,238		$	25,496		$	61,937
Deferred:
Federal		(17,179	)		(3,267	)		22,682
State		2,649			9,301			7,277
Foreign		(2,966	)		(6,680	)		(24,893	)
Total deferred tax provision (benefit)		(17,496	)		(646	)		5,066
Total Income tax provision	$	14,742		$	24,850		$	67,003

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

	Year Ended December 31,
	2022			2021			2020
U.S. federal statutory tax rate		21.0	%		21.0	%		21.0	%
Foreign tax credits		(3.8	)		(0.4	)		(0.3	)
Withholding tax		0.2			6.0			4.4
Valuation allowance - U.S.		(9.3	)		(10.4	)		3.0
State income tax, net of federal benefit		5.3			8.8			3.8
Uncertain tax positions		0.9			3.6			(7.5	)
Effect of foreign income tax, net		6.2			(5.2	)		8.5
Production tax credits		(4.0	)		(4.2	)		(1.8	)
Tax on global intangible low-tax income		4.8			9.3			11.1
Noncontrolling interest		(2.2	)		(2.5	)		(1.6	)
Other, net		(3.7	)		(1.9	)		(0.9	)
Effective tax rate		15.4	%		24.0	%		39.7	%

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

	December 31,
	2022			2021
	(Dollars in thousands)
Deferred tax assets (liabilities):
Net foreign deferred taxes, primarily depreciation	$	(49,295	)	$	(54,899	)
Depreciation		50,214			(62,906	)
Intangible drilling costs		(13,855	)		(11,501	)
Net operating loss carryforward - U.S.		26,824			32,848
Tax monetization transaction		(84,585	)		(62,533	)
Right-of-use assets		(5,824	)		(5,101	)
Lease liabilities		5,527			5,148
Production tax credits		109,109			108,103
Foreign tax credits		32,333			92,240
Withholding tax		(21,007	)		(20,521	)
Basis difference in partnership interest		(51,392	)		(45,683	)
Excess business interest		522			13,662
Sale and leaseback transaction		62,939			64,070
Other assets		13,655			12,998
Accrued liabilities and other		5,208			4,161
Total		80,373			70,086
Less - valuation allowance		(2,473	)		(11,298	)
Total, net	$	77,900		$	58,788

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

	2022			2021
	(Dollars in thousands)
Balance at beginning of the year	$	11,298		$	22,193
Additions to valuation allowance		35			2,029
Release of valuation allowance		(8,860	)		(12,924	)
Balance at end of the year	$	2,473		$	11,298

At December 31, 2022, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $42.0 million, all of which was generated before 2018 and expires by 2038.

At December 31, 2022, the Company had PTCs in the amount of $109.1 million.  These PTCs are available for a 20-year period and begin to expire in 2026. At December 31, 2022, the Company had U.S. foreign tax credits (“FTCs”) in the amount of $32.3 million. These FTCs are available for a 10-year period and begin to expire in 2027.

At December 31, 2022, the Company had state NOL carryforwards of approximately $273.3 million, $268.7 million which expire between 2025 and 2042 and $4.6 million are available to be carried forward for an indefinite period. At December 31, 2022, 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 $2.5 million and $11.3 million is recorded against the U.S. deferred tax assets as of December 31, 2022 and 2021, 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 $8.8 million is due to the release of the Company's valuation allowance on FTCs and PTCs. The Company is maintaining a valuation allowance of $2.5 million against a portion of its state NOLs and capital loss carryforward 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,
	2022			2021
	(Dollars in thousands)
Non-current deferred tax assets	$	161,365		$	143,450
Non-current deferred tax liabilities		(83,465	)		(84,662	)
Non-current deferred tax assets, net		77,900			58,788
Uncertain tax benefit offset (1)		(95	)		(95	)
	$	77,805		$	58,693

(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, 2022, 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, 2022, the Company has accrued $16.4 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, 2022 and 2021, there are $6.6 million and $5.7 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,
	2022			2021
	(Dollars in thousands)
Balance at beginning of year	$	5,076		$	1,673
Additions based on tax positions taken in prior years		—			9
Additions based on tax positions taken in the current year		364			3,408
Reduction based on tax positions taken in prior years		(47	)		(14	)
Reduction based on tax positions taken in the current year		(93	)		—
Balance at end of year	$	5,300		$	5,076

The Company and its U.S. subsidiaries file consolidated income tax returns for federal and state (where applicable) purposes. As of December 31, 2022, 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 2002-2021 and by local state jurisdictions for the years 2006-2021. 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	-	2022
Kenya	2018	-	2022
Guatemala	2018	-	2022
Honduras	2017	-	2022
Guadeloupe	2019	-	2022

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

On August 16, 2022, the Inflation Reduction Act (IRA) was signed into law in the United States. The Company believes that the construction and operations of its geothermal power plants, recovered energy-based power plants, battery energy storage systems and solar PV will benefit in the future from the IRA and enhance the economic feasibility of projects in the United States. PTC’s can be generated from 2.75 cents per kWh, once the Wages & Apprenticeship rules are met, and if bonus credit requirements are met the credit could rise up to 3.30 cents per kWh.  ITC’s can be earned on investments from 30.0%, once the Wages & Apprenticeship rules are met, and if bonus credit requirements are met the credit could rise up to 50.0%.  Battery Energy Storage Systems are eligible for ITC for projects placed-in-service after December 31, 2022.  In addition, the Company can now monetize PTC’s and ITC’s earned by transferring the credits to a third party without having to enter into a tax equity transaction.

The Company views the enactment of the IRA as favorable for the overall business climate for its sector. However, the Company continues to evaluate the overall impact and applicability of the IRA to the Company’s current and planned projects and the markets in which it seeks to sell its products.

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%.