Note 25 – Income Taxes

A.	Components of the Income Taxes

	For the Year Ended December 31,
	2018			2017		2016
	$ Thousands
Current taxes on income
In respect of current year*		1,878			64,291		1,687
In respect of prior years		(48	)		44		92
Deferred tax income
Creation and reversal of temporary differences		9,669			8,474		473
Total taxes on income		11,499			72,809		2,252

No previously unrecognized tax benefits were used in 2016, 2017 or 2018 to reduce our current tax expense.

Current taxes on income in 2017 include $61 million taxes payable in connection with a restructuring to simplify the holding structure of some of the companies remaining in the Kenon group subsequent to the Inkia transaction. As a result of this restructuring (which was substantially completed in January 2018), Kenon holds its interest in OPC directly. Kenon does not expect any further tax liability in relation to any future sales of its interest in OPC.

B.	Reconciliation between the theoretical tax expense (benefit) on the pre-tax income (loss) and the actual income tax expenses

	For the Year Ended December 31,
	2018			2017			2016
	$ Thousands
Profit/(loss) from continuing operations before income taxes		461,968			(135,636	)		(426,900	)
Statutory tax rate		17.00	%		17.00	%		17.00	%
Tax computed at the statutory tax rate		78,535			(23,058	)		(72,573	)

Increase (decrease) in tax in respect of:
Elimination of tax calculated in respect of the Group’s share in losses of associated companies		18,215			20,924			31,651
Income subject to tax at a different tax rate		2,632			63,446			(2,548	)
Non-deductible expenses		6,752			12,850			41,960
Exempt income		(97,664	)		(7,006	)		-
Taxes in respect of prior years		(48	)		44			92
Changes in temporary differences in respect of which deferred taxes are not recognized		(4	)		4,285			1,419
Tax losses and other tax benefits for the period regarding which deferred taxes were not recorded		2,883			350			2,449
Differences between the measurement base of income reported for tax purposes and the income reported in the financial statements		-			13			-
Other differences		198			961			(198	)
Taxes on income included in the statement of profit and loss		11,499			72,809			2,252

C.	Deferred tax assets and liabilities

Deferred tax assets and liabilities recognized

The deferred taxes are calculated based on the tax rate expected to apply at the time of the reversal as detailed below. Deferred taxes in respect of subsidiaries were calculated based on the tax rates relevant for each country.

The deferred tax assets and liabilities are derived from the following items:

	Property plant and equipment			Employee benefits			Carryforward of losses and deductions for tax purposes			Other*			Total
	$ thousands
Balance of deferred tax asset (liability) as at January 1, 2017		(207,493	)		1,711			84,735			(79,203	)		(200,250	)
Changes recorded on the statement of profit and loss		(13,940	)		(1,097	)		(13,919	)		15,845			(13,111	)
Changes recorded to equity reserve		-			882			-			(7,024	)		(6,142	)
Translation differences		(10,046	)		24			4,397			1,253			(4,372	)
Impact of change in tax rate		575			-			-			-			575
Sale of subsidiaries		140,736			(1,520	)		(39,764	)		71,095			170,547
Balance of deferred tax asset (liability) as at December 31, 2017		(90,168	)		-			35,449			1,966			(52,753	)
Changes recorded on the statement of profit and loss		4,532			68			(14,695	)		134			(9,961	)
Changes recorded to equity reserve		-			-			-			(104	)		(104	)
Translation differences		6,344			(2	)		(1,972	)		13			4,383
Balance of deferred tax asset (liability) as at December 31, 2018		(79,292	)		66			18,782			2,009			(58,435	)

This amount includes deferred tax arising from derivative instruments, intangibles, undistributed profits, non-monetary items and trade receivables distribution.

The deferred taxes are presented in the statements of financial position as follows:

	As at December 31,
	2018			2017
	$ Thousands
As part of non-current assets		632			-
As part of non-current liabilities		(59,067	)		(52,753	)
		(58,435	)		(52,753	)

Income tax rate in Israel is 23%, 24% and 25% for the years ended December 31, 2018 and December 31, 2017 and 2016, respectively.

On January 4, 2016, Amendment 216 to the Income Tax Ordinance (New Version) – 1961 (hereinafter – “the Ordinance”) was passed in the Knesset. As part of the amendment, OPC’s and Hadera’s income tax rate was reduced by 1.5% to a rate of 25% as from 2016. Furthermore, on December 22, 2016 the Knesset plenum passed the Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016, by which, inter alia, the corporate tax rate would be reduced from 25% to 23% in two steps. The first step will be to a rate of 24% as from January 2017 and the second step will be to a rate of 23% as from January 2018.

As a result of reducing the tax rate to 25%, the deferred tax balances as at January 4, 2016 were calculated according to the new tax rate specified in the Law for the Amendment of the Income Tax Ordinance, at the tax rate expected to apply on the reversal date.

In Singapore, under its one-tier corporate taxation system, profits are taxed at the corporate level at 17% and this is a final tax. Dividends paid by a Singapore resident company under the one-tier corporate tax system should not be taxable.

A Company is liable to pay tax in Singapore on income that is:

· Accrued in or derived from Singapore; or

· Received in Singapore from outside of Singapore.

Certain categories of foreign sourced income including,

· dividend income;

· trade or business profits of a foreign branch; or

· service fee income derived from a business, trade or

· profession carried on through a fixed place of operation in a foreign jurisdiction.

may be exempted from tax in Singapore.

Tax exemption should be granted when all of the three conditions below are met:

The highest corporate tax rate (headline tax rate) of the foreign jurisdiction from which the income is received is at least 15% at the time the foreign income is received in Singapore;

The foreign income had been subjected to tax in the foreign jurisdiction from which they were received (known as the "subject to tax" condition). The rate at which the foreign income was taxed can be different from the headline tax rate; and

The Tax Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore.

The Comptroller will regard the "subject to tax" condition as having met if the income is exempt from tax in the foreign jurisdiction due to tax incentive granted for substantive business activities carried out in that jurisdiction.

Extension of safe habour under Singapore Budget 2016

Singapore does not impose taxes on disposal gains, which are considered to be capital in nature, but imposes tax on income and gains of a trading nature. As such, whenever a gain is realized on the disposal of an asset, the practice of the IRAS is to rely upon a set of commonly-applied rules in determining the question of capital (not taxable) or revenue (taxable). Under Singapore tax laws, any gains derived by a divesting company from its disposal of ordinary shares in an investee company between June 1, 2012 and May 31, 2022 (extended from May 31, 2017 to May 31, 2022) are generally not taxable if, immediately prior to the date of such disposal, the divesting company has held at least 20% of the ordinary shares in the investee company for a continuous period of at least 24 months.