NOTE 17:- INCOME TAXES

Tax rates in U.S:

The Company is subject to U.S. federal tax at the rate of 21%.

On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was signed into law making significant changes to U.S. income tax law. These changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings (the “E&P”) as of December 31, 2017.

The one-time transition tax is based on the Company’s total post-1986 earnings and profits (E&P). The Company has elected to pay its transition tax over the eight-year period provided in the TCJA.

Additionally, the TCJA requires certain Global Intangible Low Taxed Income (“GILTI”) earned by controlled foreign corporations (“CFCs”) to be included in the gross income of the CFCs’ U.S. shareholder. GAAP allows the Company to either: (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”); or (ii) factor such amounts into its measurement of deferred taxes (the “deferred method”).

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As a result, the Company previously provided a provisional estimate of the effect of the TCJA in its financial statements.

In 2017, the Company calculated its best estimate of the impact of the TCJA in its year end income tax provision in accordance with its understanding of the TCJA and guidance available as of the date of the respective filing and as a result recorded $19.2 million as an additional income tax expense in the period in which the legislation was enacted.

In August, September and December 2018, the Internal Revenue Service (“IRS”) issued proposed regulations related to the one-time transition tax and GILTI. Due to the timing of the enactment and the complexity in applying the provisions of the TCJA, changes made in fourth quarter 2018 to the Company’s provisional amounts are based on the Company’s analysis of the TCJA and additional guidance issued by the U.S. Treasury Department, IRS, FASB, and other standard-setting and regulatory bodies.

In the fourth quarter of 2018, upon further analyses of the TCJA and proposed regulations by the U.S. Department of the Treasury and the IRS, the Company completed its analysis to determine the effect of the TCJA with respect to the on-time transition tax and recorded a reduction of $1,297 as of December 31, 2018. Additionally, the Company finalized its decision on treating the tax effects of GILTI as a period expense, evaluated the impact of the proposed regulations related to GILTI and recorded a provision in the amount of $12,043 for such GILTI tax.

As of December 31, 2018, the U.S. Treasury Department and the Internal Revenue Service (“IRS”) are still in the process of issuing various TCJA regulations. Accordingly, future adjustments to the financial statements may be necessary as regulations are issued and when the Company files its fiscal year 2018 tax returns with the IRS and foreign tax authorities in the current fiscal year.

Kokam is subject to Korean tax on progressive tax rates of up to 22%.

Corporate tax in Israel:

Taxable income of Israeli companies was subject to corporate tax at the rate of 25% in the year ended June 30, 2016.

The Israeli subsidiary is also eligible for tax benefits as further described in note 17k.

In December 2016, the Israeli Parliament approved the Economic Efficiency Law 2016 (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), which reduces the corporate income tax rate to 24% effective from January 1, 2017 and to 23% effective from January 1, 2018 onwards.

Carryforward tax losses:

As of December 31, 2018, the Company has no federal or state carryforward tax losses.

As of December 31, 2018, the Israeli subsidiary has no carryforward tax losses.

As of December 31, 2018, Kokam has carryforward tax losses of $18,887.

Deferred income taxes:

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The Company’s Israeli subsidiary’s tax-exempt profit from Benefited Enterprises is permanently reinvested, as the Company’s management and the Board of Directors has determined that the Company does not currently intend to distribute dividends. Therefore, deferred taxes have not been provided for such tax-exempt income. The Company intends to continue to reinvest these profits and does not currently foresee a need to distribute dividends out of such tax-exempt income. Therefore, no deferred taxes have been provided in respect of such tax-exempt income as the undistributed tax-exempt income is essentially permanent in duration.

The Company may incur additional tax liability in the event of intercompany dividend distributions by some of its subsidiaries. Such additional tax liability in respect of these subsidiaries has not been provided for in the Financial Statements as the Company’s management and the Board of Directors has determined that the Company intends to reinvest earnings of its subsidiaries indefinitely.

Taxes that would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing deferred income taxes, as the Company’s management and the Board of Directors has determined that the Company’s intention to hold, and not to realize, these investments.

Significant components of the Company’s deferred tax liabilities and assets are as follows:

	December 31,
	2018			2017		2016

Deferred tax assets, net:

Research and Development carryforward expenses	$	9,482		$	5,380	$	908
Carryforward tax losses		4,155			-		-
Stock based compensation expenses		3,160			1,622		1,039
Inventory Impairment		1,471			-		-
Allowance and other reserves		4,340			1,338		868

Total deferred tax assets, net	$	22,608		$	8,340	$	2,815

Deferred tax liabilities, net:
Purchase price allocation adjustments		(9,408	)		-		-

Total deferred tax liabilities, net	$	(9,408	)	$	-	$	-

Recorded as:
Deferred tax assets, net	$	14,699		$	8,340	$	2,815
Deferred tax liabilities, net		(1,499	)		-		-
Net deferred tax assets	$	13,200		$	8,340	$	2,815

Uncertain tax positions:

	December 31,
	2018			2017		2016
Balance at January 1,	$	579		$	249	$	-
Increases related to current year tax positions		8,499			330		249
Decreases related to prior year tax positions		(579	)		-		-
Balance at December 31,	$	8,499		$	579	$	249

Income before taxes are comprised as follows:

	Year ended December 31,				Six months ended December 31,		Year ended June 30,
	2018		2017		2016		2016

Domestic	$	13,405	$	7,461	$	3,165	$	3,758
Foreign		123,718		92,783		27,433		68,472

	$	137,123	$	100,244	$	30,598	$	72,230

Taxes on income (tax benefit) are comprised as follows:

	Year ended December 31,						Six months ended December 31,		Year ended June 30,
	2018			2017			2016		2016
Current taxes:
U.S. Federal & State	$	13,894		$	19,889		$	1,047	$	1,737
Foreign		2,276			1,639			518		263
Total current taxes		16,170			21,528			1,565		2,000

Deferred taxes:
U.S. Federal & State		(1,284	)		(42	)		507		(1,380	)
Foreign		(5,809	)		(5,414	)		3,145		(4,999	)
Total deferred taxes		(7,093	)		(5,456	)		3,652		(6,379	)

Income taxes, net	$	9,077		$	16,072		$	5,217	$	(4,379	)

Reconciliation of theoretical tax expense to actual tax expense:

The differences between the statutory tax rate of the Company and the effective tax rate are primarily accounted for by the non-recognition of tax benefits from accumulated net carryforward tax losses among the Company and various subsidiaries due to uncertainty of the realization of such tax benefits.

A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company, and the actual tax expense (benefit) as reported in the consolidated statements of operations is as follows:

	Year ended December 31,						Six months ended December 31,			Year ended June 30,
	2018			2017			2016			2016

Income before taxes, as reported in the consolidated statements of operations	$	137,123		$	100,244		$	30,598		$	72,230

Statutory tax rate		21	%		34	%		34	%		34	%
Theoretical tax benefits on the above amount at the US statutory tax rate		28,796			34,083			10,403			24,558
Income tax at rate other than the U.S. statutory tax rate		(26,861	)		(34,734	)		(5,396	)		(30,229	)
Tax Cuts and Jobs Act of 2017		8,062			18,735			-			-
Non-deductible expenses		(644	)		(1,545	)		164			1,514
Other individually immaterial income tax items, net		(276	)		(467	)		46			(222	)

Actual tax expense (tax benefit)	$	9,077		$	16,072		$	5,217		$	(4,379	)

Tax assessments:

As of December 31, 2018, the Company and certain of its subsidiaries filed U.S. federal and various state and foreign income tax returns. The statute of limitations relating to the consolidated U.S. federal income tax return is closed for all tax years up to and including 2014. Net operating losses generated in years prior to 2015 and carried forward are available to adjustment and subject to the statute of limitation provisions of such year when the net operating losses were utilized.

The statute of limitations related to tax returns of the Company’s Israeli subsidiary for all tax years up to and including 2012 has lapsed.

The statute of limitations related to tax returns of Kokam for all tax years up to and including 2013 has lapsed.

The statute of limitations related to tax returns of the Company’s German subsidiary, one of its Chinese subsidiaries and Gamatronic UK for all tax years up to and including 2014 has lapsed.

With respect to the Company’s French subsidiary, the statute of limitations related to its tax returns for all tax years up to and including 2015 has lapsed.

The statute of limitations related to tax returns of the Company’s Japanese subsidiary for all tax years up to and including 2017 has lapsed.

With respect to the Company’s Australian, Dutch, UK, Italian, Bulgarian, Turkish, Belgian, Indian, Swedish, Korean, and Romanian subsidiaries as well as its other Chinese subsidiary, the statute of limitations with respect to these entities’ tax returns for all tax years since incorporation has yet to lapse.

The Company believes that it has adequately provided for reasonably foreseeable outcomes related to tax audits and settlements. The final tax outcome of any Company tax audits could be different from that which is reflected in the Company’s income tax provisions and accruals. Such differences could have a material effect on the Company’s income tax provision and net income (loss) in the period in which such determination is made.

Tax benefits for Israeli companies under the Law for the Encouragement of Capital Investments, 1959 (the “Investments Law”):

The Israeli subsidiary elected tax year 2012 as a "Year of Election" for “Benefited Enterprise” status under the Investments Law. According to the Investments Law, the Israeli subsidiary elected to participate in the alternative benefits program which provides certain benefits, including tax exemptions and reduced tax rates. Income not eligible for Benefited Enterprise benefits is taxed at a regular corporate tax rate (which depend on, inter alia, the geographic location in Israel). Upon meeting the requirements under the Investments Law, undistributed income derived from Benefited Enterprise from productive activity will be exempt from tax for two years from the year in which the Israeli subsidiary first has taxable income, provided that 12 years have not passed from the beginning of the year of election.

In the six months ended December 31, 2016, the Israeli subsidiary utilized all of its operating loss carryforwards in Israel and became profitable for tax purposes.

On October 24, 2018, the Company’s Israeli subsidiary received an approval from the Israeli Tax Authorities confirming the applicability of the two-year tax exemption as provided in the Encouragement of Capital Investments Law, 1959 until December 31, 2018.

If dividends (or deemed dividends) are distributed out of tax-exempt profits, the Israeli subsidiary will then become liable for tax, with respect of the gross amount of the dividend at the rate applicable to its profits from the Benefited Enterprise in the year in which the income was earned, at the applicable corporate tax that would otherwise have been payable on such income.

The dividend recipient is subject to withholding tax at the rate of 15% applicable to dividends from Benefited enterprises, or such lower rate as may be provided in an applicable tax treaty, which would generally be withheld at source by the distributing company.

The Israeli subsidiary currently has no plans to distribute dividends and intends to retain future earnings to finance the development of its business.

Through December 31, 2018, the Israeli subsidiary had generated income under the provision of the Investments Law.

As of December 31, 2018, approximately $289,900 was derived from tax exempt profits earned by the Israeli subsidiary “Benefited Enterprises”. The Company has determined that such tax-exempt income will not be distributed as dividends and intends to reinvest the amount of its tax exempt income earned by the Israeli subsidiary. Accordingly, no provision for deferred income taxes has been provided on income attributable to the Israeli subsidiary “Benefited Enterprises” as such income is essentially permanently reinvested.

If the Israeli subsidiary retained tax-exempt income is distributed, the income would be taxed at the applicable corporate tax rate which depends on the foreign ownership in each tax year, and the tax rate can range between 10% (when foreign ownership exceeds 90%) to 25% (when foreign ownership is below 49%).

Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 71):

On August 5, 2013, the Israeli Parliament issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 which consists of Amendment 71 to the Law for the Encouragement of Capital Investments (the “Amendment"). According to the Amendment, the tax rate on preferred income from a preferred enterprise in 2014 and thereafter will be 16% (in development area A (as defined therein and which details specific areas in development in Israel) will be 9%).

The Amendment also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise's earnings as above will be subject to tax at a rate of 20%.

Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 73):

In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments (the “2017 Amendment") was published. According to the 2017 Amendment, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).

The Company’s production facilities in Israel are not located in Development Zone A.

The Company notified the ITA of its election to implement the Amendment with effect on and from January 1, 2019.

The 2017 Amendment also prescribes special tax tracks for preferred technological enterprises (“PTE”), which are subject to rules that were issued by the Ministry of Finance.

The new tax tracks under the 2017 Amendment are as follows:

According to the 2017 Amendment, preferred technological enterprise, as defined in the Investments Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%).

A Preferred Company distributing dividends from Preferred Income or income derived from its PTE, would subject the recipient to a tax at the rate of 20% (or lower, if so provided under an applicable tax treaty). To benefit from any lower tax rates under an applicable tax treaty, a non-resident of Israel would need to receive in advance a valid certificate from the ITA allowing for a reduced tax rate, or to file an appropriate tax return with the ITA claiming a refund based on the lower rate under the applicable tax treaty.

The 2017 Amendment further provides that, in certain circumstances, a dividend distributed to a corporate shareholder who is not an Israeli resident for tax purposes, would be subject to a tax at the rate of 4%. Such taxes would generally be withheld at source by the distributing company.

On June 14, 2017, the Encouragement of Capital Investments Regulations (Preferred Technological Income and Capital Gain for Technological Enterprise), 2017 (the “Regulations”) were published. The Regulations applied Action 5 under the Action Plan on Base Erosion and Profit Shifting (BEPS). The Regulations describe, inter alia, the mechanism used to determine the calculation of the benefits under the PTE regime and determine certain requirements relating to documentation of intellectual property for the purpose of the PTE. According to these provisions, a company that complies with the terms under the PTE regime may be entitled to certain tax benefits with respect to income generated during the company’s regular course of business and derived from the preferred intangible asset (as determined in the Investment Law), excluding income derived from intangible assets used for marketing and income attributed to production activity. In the event that intangible assets used for marketing purposes generate over 10% of the PTE’s income, the relevant portion, calculated using a transfer pricing study, would be subject to regular corporate income tax. If such income does not exceed 10%, the PTE will not be required to exclude the marketing income from the PTE’s total income. The Regulations establish a presumption of direct production expenses plus 10% with respect to income related to production, which can be countered by the results of a supporting transfer pricing study. Tax rates applicable to such production income expenses will be similar to the tax rates under the Preferred Enterprise regime to the extent such income would be considered as eligible. In order to calculate the preferred income, the PTE is required to take into account the income and the research and development expenses that are attributed to each single preferred intangible asset. Nevertheless, it should be noted that the transitional provisions allow companies to take into account the income and research and development expenses attributed to all of the preferred intangible assets they have.

The Israeli subsidiary is entitle to the above mentioned preferred technological enterprise benefits and will be subject to tax at a rate of 12% on profits deriving from intellectual property or 7.5% in development area A, under the 2017 Amendment.

Tax Benefits for Research and Development:

Israeli tax law (section 20A to the Israeli Tax Ordinance (New Version), 1961) allows, under certain conditions, a tax deduction for research and development expenses, including capital expenses, for the year in which they are paid. Such expenses must relate to scientific research in industry, agriculture, transportation, or energy, and must be approved by the relevant Israeli government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company’s business and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. As for expenses incurred in scientific research that is not approved by the relevant Israeli government ministry, they will be deductible over a three-year period starting from the tax year in which they are paid. As of December 31, 2018, the Company’s Israeli subsidiary did not obtain such approval.

Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:

The Company’s Israeli subsidiary claim currently to be qualified as ‘industrial company’ as defined by this law and as such, is entitled to certain tax benefits, consisting mainly of accelerated depreciation and amortization of patents and certain other intangible property.