NOTE 13: 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, 2014, the open tax years, subject to review by the applicable taxing authorities for the Irish subsidiary, are 2010 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 as the Company’s management 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.

Income not eligible for Approved Enterprise benefits or Benefited Enterprise benefits is taxed at a regular rate, which was 26.5% in 2014.

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% commencing on January 1, 2014.

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.

As of December 31, 2014, the open tax years, subject to review by the applicable taxing authorities for the Israeli subsidiary, are 2011 and subsequent years.

3. French Subsidiaries

The French operating subsidiaries qualified for a 33.33% tax rate on its profits. As of December 31, 2014, the open tax years, subject to review by the applicable taxing authorities for the French subsidiaries, are 2010 and subsequent years.

b. Taxes on income comprised of:


	Year ended December 31,
	2012			2013			2014
Domestic taxes:
Current	$	727		$	(37	)	$	7
Deferred		(742	)		(1,127	)		2,987
Foreign taxes:
Current		1,993			2,016			314
Deferred		84			(64	)		(456	)

	$	2,062		$	788		$	2,852

Income (loss) before taxes on income:
Domestic	$	(1,651	)	$	(4,315	)	$	(2,379	)
Foreign		17,398			11,788			4,412

	$	15,747		$	7,473		$	2,033

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


	Year ended December 31,
	2012			2013			2014
Income before taxes on income	$	15,747		$	7,473		$	2,033

Theoretical tax at U.S. statutory rate		5,511			2,541			691
Foreign income taxes at rates other than U.S. rate		(2,023	)		(1,057	)		(489	)
Approved and benefited enterprises benefits (*)		(1,934	)		(1,553	)		(785	)
Subpart F		529			633			394
Non-deductible items		592			433			723
Non-taxable items		—			—			(230	)
Decrease in uncertain tax position		—			(73	)		(920	)
Valuation allowance		(380	)		(111	)		3,356
Other, net		(233	)		(25	)		112

Taxes on income	$	2,062		$	788		$	2,852

Effective tax rate		13	%		11	%		140	%

(*) Basic and diluted earnings per share amounts of the benefit resulting from the “Approved Enterprise” and “Benefited Enterprise” status	$	0.08		$	0.07		$	0.04

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,
	2013			2014
Deferred tax assets
Operating loss carryforward	$	8,544		$	8,933
Accrued expenses		490			706
Temporary differences related to R&D expenses		1,045			922
Equity-based compensation		2,085			2,563
Tax credit carry forward		622			800
Other		152			273

Total gross deferred tax assets		12,938			14,197
Valuation allowance		(8,526	)		(11,930	)

Net deferred tax assets	$	4,412		$	2,267

Deferred tax liabilities
Other	$	73		$	26
Intangible assets		—			1,843

Total gross deferred tax liabilities	$	73		$	1,869

Net deferred tax assets (*)	$	4,339		$	398

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

Net deferred tax for the year ended December 31, 2014 from domestic and foreign jurisdictions was $0 and $398, respectively.

Changes in valuation allowances on deferred tax assets result from management’s assessment of the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards prior to expiration. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. During 2014, the Company increased the valuation allowance by $3,404 mainly due to a change in the estimation for taxable income in future years of the Company’s U.S operations.

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,
	2013			2014
Beginning of year	$	3,520		$	3,563
Additions for current year tax positions		116			216
Decrease as a result of a lapse of applicable statute of limitations		(73	)		(920	)

Balance at December 31	$	3,563		$	2,859

As of December 31, 2013 and 2014, there were $3,563 and $2,859, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. As of December 31, 2013 and 2014, the Company had accrued interest related to unrecognized tax benefits of $226 and $39, respectively. The Company did not accrue penalties during the years ended December 31, 2013 and 2014.

f. Tax loss carryforwards:

As of December 31, 2014, CEVA and its subsidiaries had net operating loss carryforwards for federal income tax purposes of approximately $3,929, which are available to offset future federal taxable income. Of that amount, $3,876 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, 2014, CEVA and its subsidiaries had net operating loss carryforwards for California income tax purposes of approximately $6,315, which are available to offset future California taxable income. Of that amount, $3,424 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 2015.

As of December 31, 2014, CEVA’s Irish subsidiary had foreign operating losses of approximately $63,422, which are available to offset future taxable income indefinitely. A full valuation allowance was provided in relation to those carryforward tax losses due to the uncertainty of their utilization in the foreseeable future. As of December 31, 2014, CEVA’s French subsidiaries had foreign operating losses of approximately $2,105, which are available to offset future taxable income indefinitely.

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 2010.