Note 14 - Taxes on Income

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 14: TAXES ON INCOME

a. U.S. tax reform

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including but not limited to: a federal corporate rate reduction from 35% to 21%; creation of the base erosion anti-abuse tax (“BEAT”), introduction of the Global Intangible Low Taxed Income (“GILTI”) provisions; the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system; modifications to the allowance of net business interest expense deductions; modification of net operating loss provisions; changes to 162(m) limitation rules and bonus depreciation provisions. The change to a modified territorial tax system resulted in a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”), with future dividend distributions not subject to U.S. federal income tax when repatriated. A majority of the provisions in the Tax Act became effective January 1, 2018.

In connection with its analysis of the impact of the Tax Act, the Company had $16,053 of Transition Tax inclusion reported on the tax return filed for the year ended December 31, 2017. After the utilization of existing tax net operating loss carryforwards, the Company did not pay additional U.S. federal cash taxes.

The Tax Act added a new code section 951A, which requires a U.S. shareholder of a Controlled Foreign Corporation (“CFC”) to include in current taxable income, its GILTI in a manner similar to Subpart F income. The statutory language also allows a deduction for corporate shareholders equal to 50% of the GILTI inclusion, which would be reduced to 37.5% starting in 2026. In general, GILTI imposes a tax on the net income of foreign corporate subsidiaries in excess of a deemed return on their tangible assets.  The Company is subject to GILTI for 2018 and future periods.  The Company is electing to account for the income tax effects of GILTI as a ‘period cost‘, an income tax expenses in the year the tax is incurred.

For the fiscal year ended 2021, the Company operated at net losses before and after GILTI inclusion and did not pay additional U.S. federal cash taxes. For the fiscal year ended 2022, the Company provisioned to operate at a net loss before the GILTI inclusion and a taxable income position after. However, the Company utilized net operating losses, deductions under Section 250 of the U.S. Internal Revenue Code, and foreign tax credits to offset the tax liability, and did not pay additional U.S. federal cash taxes. For the fiscal year ended 2023, GILTI is not expected to cause the company to be in a taxable income position for the current and future years.

Furthermore, the Tax Act limits the carryover of net operating losses generated after tax years 2017 to 80% of taxable income and eliminates the ability to carryback.  Losses incurred before January 1, 2018 have not changed and are not limited to the 80% of taxable income and will continue to be carried forward 20 years. The Company has fully utilized all pre-2018 net operating losses. Any future net operating losses generated will be carried forward indefinitely and subject to an 80% taxable income limitation.

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

1. Irish Subsidiaries

The Irish operating subsidiaries qualified for a 12.5% tax rate on its trade. Interest income earned by the Irish subsidiaries is taxed at a rate of 25%. As of December 31, 2023, the open tax years, subject to review by the applicable taxing authorities for the Irish subsidiaries, are 2019 and subsequent years.

2. Israeli Subsidiary

The Israeli subsidiary enjoys certain tax benefits in Israel, particularly as a result of the “Approved Enterprise” and the “Benefited Enterprise” status of its facilities and programs through 2019, and the “Technological Preferred Enterprise” status of its facilities and programs since 2020.

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 reduced corporate tax rate not exceeding 23% 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.

In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016, which includes the Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 73) (the “Amendment"), was published. The Amendment, among other things, prescribes special tax tracks for technological enterprises, which are subject to rules that were issued by the Minister of Finance during April 2017.

The new tax track under the Amendment, which is applicable to the Israeli subsidiary, is the “Technological Preferred Enterprise”.  A Technological Preferred Enterprise is an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than 10 billion New Israeli Shekel (“NIS”). A Technological Preferred Enterprise, as defined in the law, which is located in the center of Israel (where our Israeli subsidiary is currently located) is subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A, the tax rate is 7.5%), subject to satisfaction of a number of conditions, including compliance with a minimal amount or ratio of annual Research and development expenditure and Research and development employees, as well as having at least 25% of annual income derived from exports. Any dividends distributed to "foreign companies", as defined in the law, deriving from income from the technological enterprises will be subject to tax at a rate of 4% if foreign entities hold at least 90% of the Company’s common stock.

In light of the Company's decision not to distribute a dividend in the coming year, no tax expenses were recognized in the tax year.

The balance of accumulated income that has not yet been thawed as of December 31, 2023 is 118,512 NIS (approximately $32,675)

In addition, due to a lack of intention to distribute a dividend in a subsidiary that has imprisoned profits, the Company did not recognize as of December 31, 2023 a deferred tax liability against recognition of deferred tax expenses.

Income not eligible for Technological Preferred Enterprise is taxed at a regular rate, which was 23% in 2021, 2022 and 2023.

The Israeli subsidiary elected to compute 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, 2023, the open tax years, subject to review by the applicable taxing authorities for the Israeli subsidiary, are 2020 and subsequent years.

3. French Subsidiary

In 2017, the French government passed a series of tax reforms allowing for the phased reduction in the corporate tax rate. As a result, in 2021, the French operating subsidiary qualified for a 26.5% corporate income tax rate. From 2022 onward, the standard corporate income tax rate was reduced to 25%. 

Since 2021, the Company’s French subsidiary is entitled to a new tax benefit of 10% applied to specific revenues under the French IP Box regime. The French IP Box regime applies to net income derived from the licensing, sublicensing or sale of several IP rights such as patents and copyrighted software, including royalty revenues. This new elective regime requires a direct link between the income benefiting from the preferential treatment and the R&D expenditures incurred and contributing to that income. Qualifying income may be taxed at a favorable 10% CIT rate (plus social surtax, hence 10.3% in total).

As of December 31, 2023, the open tax years subject to review by the applicable taxing authorities for the French subsidiary are 2021 and subsequent years.

c. Taxes on income comprised of:

	Year ended December 31,
	2021			2022			2023
Domestic taxes:
Current	$	5		$	949		$	(1,229	)
Deferred		(5	)		(4,425	)		4,429
Foreign taxes:
Current		11,772			6,647			7,668
Deferred		(4,949	)		14,904			(636	)
	$	6,823		$	18,075		$	10,232
Income (loss) before taxes on income:
Domestic	$	(11,351	)	$	(12,741	)	$	(14,136	)
Foreign		20,571			16,938			5,931
	$	9,220		$	4,197		$	(8,205	)

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

	Year ended December 31,
	2021			2022			2023
Income (loss) before taxes on income	$	9,220		$	4,197		$	(8,205	)
Theoretical tax at U.S. statutory rate		1,936			881			(1,723	)
Foreign income taxes at rates other than U.S. rate		450			(4,644	)		(3,313	)
Technological Preferred Enterprise benefits (*)		836			—			—
Subpart F		192			301			795
Non-deductible items		340			121			195
Non-taxable items		(483	)		(452	)		(527	)
Taxes for prior years		—			(2,257	)		(371	)
Stock-based compensation expense		(1,193	)		267			1,131
Impacts of GILTI		—			6,736			1,877
Tax adjustment in respect of difference tax rate of foreign subsidiary		108			(8,147	)		—
Foreign withholding taxes		648			1,390			—
Changes in valuation allowance		3,364			22,631			13,034
Other, net		625			1,248			(866	)
Taxes on income	$	6,823		$	18,075		$	10,232
(*) Basic and diluted earnings per share amounts of the benefit resulting from:
the “Technological Preferred Enterprise benefits” status	$	0.04		$	—		$	—

e. Deferred taxes on income:

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

	As at December 31,
	2022			2023
Deferred tax assets
Operating loss carryforward	$	11,507		$	18,446
Accrued expenses and deferred revenues		2,605			2,239
Temporary differences related to R&D expenses		14,205			11,562
Equity-based compensation		5,623			7,022
Operating leases		1,626			1,326
Intangible assets		980			253
Tax credit carry forward		17,097			18,609
Other		1,255			1,298
Total gross deferred tax assets		54,898			60,755
Valuation allowance		(44,772	)		(57,806	)
Net deferred tax assets	$	10,126		$	2,949
Deferred tax liabilities
Operating leases	$	1,642		$	1,340
Total deferred tax liabilities	$	1,642		$	1,340
Net deferred tax assets (*)	$	8,484		$	1,609

(*) $4,429 and $0 net deferred taxes for the years ended December 31, 2022 and 2023, respectively, are from domestic jurisdictions.

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 the years ended December 31, 2022 and 2023, the Company concluded that, based on its evaluation of available evidence, it was no longer more likely than not that certain deferred tax assets were recoverable. As a result, the Company recorded a valuation allowance of $15,573 and $4,429 for the years ended December 31, 2022 and 2023, respectively, against its deferred tax assets.

As of December 31, 2023, the Company’s undistributed earnings from non-U.S. subsidiaries are intended to be indefinitely reinvested in non-U.S. operations, and therefore no U.S. deferred taxes liabilities have been recorded.

f. Uncertain tax positions:

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,
	2022			2023
Beginning of year	$	1,610		$	1,633
Additions for current year tax positions		50			—
Reductions for prior year’s tax positions		(27	)		—
Settlement due to a tax audit for prior years		—			(1,171	)
Balance at December 31	$	1,633		$	462

As of December 31, 2022 and 2023, there were $1,633 and $462, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. The Company accrued interest in the amount of $17 relating to unrecognized tax benefits in its provision for income taxes during the year ended December 31, 2023. The Company did not accrue penalties relating to unrecognized tax benefits in its provision for income taxes during the years ended December 31, 2022 and 2023 because such penalties did not have a material impact on the Company’s financial statements.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. The Company does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements with tax authorities, the likelihood and timing of which are difficult to estimate.

g. Tax loss carryforwards:

As of December 31, 2023, Ceva and its subsidiaries had net operating loss carryforwards for federal income tax purposes of approximately $3,132, which are available to offset future federal taxable income indefinitely. As of December 31, 2023, Ceva and its subsidiaries had net operating loss carryforwards for various state income tax purposes of approximately $3,415 which are available to offset taxable income. Such loss carryforwards have an indefinite life.

As of December 31, 2023, Ceva’s Irish subsidiary had foreign operating losses of approximately $48,926, which are available to offset future taxable income indefinitely.

As of December 31, 2023, Ceva’s Israeli subsidiary had foreign operating losses of approximately $32,872, which are available to offset future taxable income indefinitely.

h. 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 2012.