NOTE 12: TAXES ON INCOME

a. A number of the Company’s operating subsidiaries are taxed at rates lower than U.S. rates.

1. Irish Subsidiaries

The Irish operating subsidiary qualified for a 12.5% tax rate on its trade. Interest income earned by the Irish subsidiary is taxed at a rate of 25%. As of December 31, 2013, the open tax years, subject to review by the applicable taxing authorities for the Irish subsidiary, are 2009 and subsequent years.

2. Israeli Subsidiary

The Israeli subsidiary has been granted “Approved Enterprise” and “Benefited Enterprise” status under the Israeli Law for the Encouragement of Capital Investments. For such Approved Enterprises and Benefited Enterprises, the Israeli subsidiary elected to apply for alternative tax benefits—the waiver of government grants in return for tax exemptions on undistributed income. Upon distribution of such exempt income, the Israeli subsidiary will be subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise’s or Benefited Enterprise’s income. Such tax exemption on undistributed income applies for a limited period of between two to ten years, depending upon the location of the enterprise. During the remainder of the benefits period (generally until the expiration of ten years), a corporate tax rate not exceeding 25% will apply.

The Israeli subsidiary is a foreign investor company, or FIC, as defined by the Investment Law. FICs are entitled to further reductions in the tax rate normally applicable to Approved Enterprises and Benefited Enterprises. Depending on the foreign ownership in each tax year, the tax rate can range between 10% (when foreign ownership exceeds 90%) to 20% (when foreign ownership exceeds 49%). There can be no assurance that the subsidiary will continue to qualify as an FIC in the future or that the benefits described herein will be granted in the future.

The Company’s Israeli subsidiary’s tax-exempt profit from Approved Enterprises and Benefited Enterprises is permanently reinvested. Therefore, deferred taxes have not been provided for such tax-exempt

income, as 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.

Income not eligible for Approved Enterprise benefits or Benefited Enterprise benefits is taxed at a regular rate, which was 25% in 2013.

On July 30, 2013, the Israeli Parliament (the Knesset) passed a law which was designated to increase the tax levy in the years 2013 and 2014. Among other things, the law increases the Israeli corporate tax rate from 25% to 26.5%, and commencing on January 1, 2014, increases the tax rate to 20% on dividends from sources under the Law for the Encouragement of Capital Investment, 1959.

The Israeli subsidiary elected to compute their taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Setting their Taxable Income), 1986. Accordingly, the taxable income or loss is calculated in U.S. dollars. Applying these regulations reduces the effect of the foreign exchange rate (of NIS against the U.S. dollar) on the Company’s Israeli taxable income.

CEVA’s Israeli subsidiary has received final tax assessments through 2005. As of December 31, 2013, the open tax years, subject to review by the applicable taxing authorities for the Israeli subsidiary, are 2010 and subsequent years.

b. The provision for income taxes is as follows:


	Year ended December 31,
	2011			2012			2013
Domestic taxes:
Current	$	1,452		$	727		$	(37	)
Deferred		(1,024	)		(742	)		(1,127	)
Foreign taxes:
Current		2,899			1,993			2,016
Deferred		(419	)		84			(64	)

	$	2,908		$	2,062		$	788

Income (loss) before taxes on income:
Domestic	$	542		$	(1,651	)	$	(4,315	)
Foreign		20,928			17,398			11,788

	$	21,470		$	15,747		$	7,473

c. Reconciliation between the Company’s effective tax rate and the U.S. statutory rate:


	Year ended December 31,
	2011			2012			2013
Income before taxes on income	$	21,470		$	15,747		$	7,473

Theoretical tax at U.S. statutory rate		7,515			5,511			2,541
Foreign income taxes at rates other than U.S. rate		(5,622	)		(3,957	)		(2,610	)
Subpart F		221			529			633
Non-deductible items		355			346			169
Valuation allowance		(545	)		(380	)		(111	)
Other, net		984			13			166

Taxes on income	$	2,908		$	2,062		$	788

Effective tax rate		14	%		13	%		11	%

d. Deferred taxes on income:

Deferred taxes on income reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:


	As at December 31,
	2012			2013
Deferred tax assets
Operating loss carryforward	$	8,498		$	8,544
Accrued expenses		414			490
Temporary differences related to R&D expenses		992			1,045
Equity-based compensation		1,435			2,085
Other		639			774

Total gross deferred tax assets		11,978			12,938
Valuation allowance		(8,735	)		(8,526	)

Net deferred tax assets	$	3,243		$	4,412

Deferred tax liabilities
Other	$	200		$	73

Total gross deferred tax liabilities	$	200		$	73

Net deferred tax assets (*)	$	3,043		$	4,339

(*)	Net deferred tax for the year ended December 31, 2012 from domestic and foreign jurisdictions was $1,851 and $1,192, respectively.

Net deferred tax for the year ended December 31, 2013 from domestic and foreign jurisdictions was $2,999 and $1,340, respectively.

The Company and its subsidiaries provide valuation allowances for deferred tax assets resulting principally from the carryforward of tax losses. Management currently believes that it is more likely than not that the deferred tax regarding the carryforward of losses and certain accrued expenses will not be realized in the foreseeable future.

The Company does not have a provision for U.S. Federal income taxes on the undistributed earnings of its international subsidiaries because such earnings are considered to be indefinitely reinvested. Determination of the amount of income tax liability that would be incurred is not practical. In addition, the Company operates within multiple taxing jurisdictions involving complex issues, and it has provisions for tax liabilities on investment activities as appropriate.

e. Uncertain tax positions

The Company accounts for its income tax uncertainties in accordance with FASB ASC No. 740 which clarifies the accounting for uncertainties in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits based on the provisions of FASB ASC No. 740 is as follows:


	Year ended December 31,
	2012			2013
Beginning of year	$	3,054		$	3,520
Additions for current year tax positions		187			116
Additions for prior year’s tax positions		614			—
Reductions for prior year’s tax positions		(335	)		(73	)

Balance at December 31	$	3,520		$	3,563

As of December 31, 2012 and 2013, there were $3,520 and $3,563, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. As of December 31, 2012 and 2013, the Company had accrued interest related to unrecognized tax benefits of $48 and $226, respectively. The Company did not accrue penalties during the years ended December 31, 2012 and 2013.

f. Tax loss carryforwards:

As of December 31, 2013, CEVA and its subsidiaries had net operating loss carryforwards for federal income tax purposes of approximately $4,338, which are available to offset future federal taxable income. Of that amount, $3,644 is due to excess tax benefits from stock option exercises. Excess tax benefits related to stock option exercises cannot be recognized until realized through a reduction of current taxes payable. Such loss carryforwards begin to expire in 2030.

As of December 31, 2013, CEVA and its subsidiaries had net operating loss carryforwards for California income tax purposes of approximately $4,764, which are available to offset future California taxable income. Such loss carryforwards begin to expire in 2014. As of December 31, 2013, CEVA and its subsidiaries had foreign operating losses only in CEVA’s Irish subsidiary of approximately $64,102, which are available to offset future taxable income. Such foreign operating losses can be carried forward indefinitely for tax purposes. A full valuation allowance was provided in relation to those carryforward tax losses due to the uncertainty of their utilization in the foreseeable future.

g. Tax returns:

CEVA files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, CEVA is no longer subject to U.S. federal income tax examinations by tax authorities, and state and local income tax examinations, for the years prior to 2009.