INCOME TAXES

12 Months Ended

Dec. 31, 2019

INCOME TAXES:

The components of income (loss) before taxes on income are as follows:



	Year ended December 31,
	2019		2018		2017
	(in thousands)
United States	$	36,683	$	19,526	$	(21,528	)
Foreign	187,246		92,685		(375		)
Income (loss) before taxes on income	$	223,929	$	112,211	$	(21,903	)

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



	Year ended December 31,
	2019		2018			2017
	(in thousands)
Current:
U.S. federal	$	4,009	$	1,306		$	(617	)
State and local	571		512			632
Foreign	3,609		4,648			(261		)
Total current	8,189		6,466			(246		)
Deferred:
U.S. federal	5,187		(17,487		)	—
State and local	613		(12,283		)	—
Foreign	4,845		1,257			(2,232		)
Total deferred	10,645		(28,513		)	(2,232		)
Provision for (benefit from) taxes on income	$	18,834	$	(22,047	)	$	(2,478	)

At December 31, 2019 and 2018, significant deferred tax assets and liabilities are as follows:



	December 31,
	2019			2018
	(in thousands)
Deferred tax assets:
Net operating loss and credit carryforwards	$	28,936		$	42,345
Share-based compensation	10,559			7,241
Lease liabilities	7,315			—
Reserves and accruals	2,768			6,620
Other	4,030			7,069
Gross deferred tax assets	53,608			63,275
Valuation allowance	(5,971		)	(8,152		)
Total deferred tax assets	47,637			55,123
Right of use assets	(6,630		)	—
Intangible assets	(4,021		)	(4,463		)
Others	(480		)	—
Total deferred tax liabilities	(11,131		)	(4,463		)
Net deferred tax assets	$	36,506		$	50,660

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regards to the future realization of deferred tax assets for each jurisdiction. During the year ended December 31, 2018, the Company released $32.1 million of valuation allowance against the deferred tax assets primarily related to NOL carryforwards and tax credit carryforwards related to its U.S. subsidiaries. After the discontinuation of the Company’s 1550nm silicon photonics development activities in the first quarter of fiscal 2018, the Company expects its U.S. subsidiaries will have sufficient taxable income in the future to utilize the deferred tax assets before they expire. The Company continued to provide a valuation allowance against the deferred tax assets related to capital loss carryforwards on the consolidated balance sheet as of December 31, 2019 due to uncertainty concerning realization of these deferred tax assets.

At December 31, 2019, the Company had NOL carryforwards of approximately $138.4 million in Israel, $56.5 million in the U.S. for federal tax purposes, $46.2 million in the U.S. for state tax purposes and $5.7 million in Denmark. The U.S. NOL carryforwards for federal tax purposes will expire from 2024 to 2037, and the U.S. NOL carryforwards for state tax purposes will expire from 2020 to 2037. The non-U.S. NOL carryforwards have no expiration date.

The Company has not provided for Israeli income and foreign withholding taxes on $40.4 million of its non-Israeli subsidiaries' undistributed earnings as of December 31, 2019. The Company currently has no plans to repatriate those funds and intends to indefinitely reinvest them in its non-Israeli operations. The amount of the unrecognized deferred tax liability for temporary differences related to investments in non-Israeli subsidiaries that were essentially permanent in duration as of December 31, 2019 was $9.3 million.

The reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:



	December 31,
	2019		2018		2017
Tax at statutory rate	21.0	%	21.0	%	35.0	%
Tax at rates other than the statutory rate	(15.6	)	(14.2	)	(4.8	)
Valuation allowance	—		(29.1	)	47.3
Net change in tax reserves	2.8		4.1		8.0
Adjustment of deferred tax balances following changes in tax rates	—		—		(71.8	)
Other, net	0.2		(1.4	)	(2.4	)
Provision for (benefit from) taxes on income	8.4	%	(19.6	)%	11.3	%

The Company's operations in Israel were granted "Approved Enterprise" status by the Investment Center in the Israeli Ministry of Economy and Industry (formerly, the Ministry of Industry Trade and Labor) and "Beneficiary Enterprise" status from the Israeli Income Tax Authority, which makes the Company eligible for tax benefits under the Encouragement Law. Under the terms of the Approved and Beneficiary Enterprise programs, income that is attributable to the Company's operations in Yokneam, Israel, is exempt from income tax commencing fiscal year 2011 through 2021. Income that is attributable to the Company's operations in Tel Aviv, Israel is subject to a reduced income tax rate (generally between 10% and the current corporate tax rate, depending on the percentage of foreign investment in the Company) commencing fiscal year 2013 through 2021. The tax holiday has resulted in a cash tax savings of approximately $53.7 million, $27.9 million and $11.6 million in 2019, 2018, and 2017, respectively, increasing diluted earnings per share by approximately $0.95, $0.49 and $0.23 in the years ended December 31, 2019, 2018, and 2017, respectively.

The following summarizes the activity related to the Company's unrecognized tax benefits:



	December 31,
	2019			2018			2017
	(in thousands)
Gross unrecognized tax benefits, beginning of the period	$	46,541		$	45,154		$	41,460
Increases in tax positions for prior years	2,789			1,377			3,655
Decreases in tax positions for prior years	—			(1,860		)	—
Increases in tax positions for current year	11,784			5,516			8,090
Increases in tax positions acquired or assumed in a business combination	—			—			—
Decreases due to lapses of statutes of limitations	(5,642		)	(3,646		)	(8,051		)
Gross unrecognized tax benefits, end of the period	$	55,472		$	46,541		$	45,154

As of December 31, 2019, 2018 and 2017, the total amount of gross unrecognized tax benefits was $55.5 million, $46.5 million, and $45.2 million, respectively. Of these amounts as of December 31, 2019, 2018 and 2017, $28.6 million, $25.7 million, and $24.6 million, respectively, would reduce our income tax expense and effective tax rate, if recognized.

It is the Company's policy to classify accrued interest and penalties as part of the accrued unrecognized tax benefits liability and record the expense in the provision for income taxes. As of December 31, 2019, 2018 and 2017, the amount of accrued interest and penalties related to unrecognized tax benefits totaled $2.5 million, $2.6 million, and $2.9 million, respectively, which is not included in the table above. For unrecognized tax benefits that existed at December 31, 2019, the Company does not anticipate any significant changes within the next twelve months.

On December 29, 2016, the Israeli government amended the Encouragement Law and legislated a new tax regime - "Preferred Technological Enterprise" regime, under which a company that complies with the terms may be entitled to certain tax benefits. On June 14, 2017, the Israeli government legislated new regulations, stipulating the calculation method of the tax benefits under the Preferred Technological Enterprise regime. The Company expects that its operation in Israel will comply with the terms of the

Preferred Technological Enterprise regime. Therefore, the Company may utilize the tax benefits under this regime after the end of the benefit period of its Approved and Beneficiary Enterprise statuses (i.e., prior to fiscal year 2022, based on the Company’s decision, and for fiscal year 2022 and onwards). Under the new legislation, the majority of the Company’s income from its operations in Yokneam, Israel, will be subject to a corporate rate of 7.5%, while the majority of the income from its operations in Tel-Aviv, Israel, will be subject to a corporate rate of 12%. As a result of the lower tax rates mentioned above, the Company recorded a decrease of approximately $0.2 million in deferred tax assets and a corresponding increase in tax expense during the second quarter of 2017.

As a multinational corporation, the Company conducts business in many countries and is subject to taxation in many jurisdictions. The taxation of the Company's business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against the Company that could materially impact its tax liability and/or its effective income tax rate. As of December 31, 2019, the 2015 through 2018 tax years are open and may be subject to potential examinations in the U.S. The Company has net operating losses in the U.S. from prior tax periods beginning in 2003 which may be subject to examination upon utilization in future tax periods. As of December 31, 2019, the 2014 through 2018 tax years are open and may be subject to potential examinations in Denmark, and the 2015 through 2018 tax years are open and may be subject to potential examinations in Israel. As of December 31, 2019, the income tax returns of the Company and one of its subsidiaries in Israel are under examination by the Israeli Tax Authority for certain years from 2015 to 2018.