Note 11 - Income Taxes

6 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 11 — INCOME TAXES

The Company’s effective tax rate for the three months ended June 30, 2013 and 2012 was 21.3% and 33.6%, respectively. The Company’s effective tax rate for the six months ended June 30, 2013 and 2012 was 38.3% and 37.6%, respectively. The effective tax rate differs from the federal statutory rate of 35% for the three and six months ended June 30, 2013 primarily due to unbenefited losses in the U.S. and certain foreign jurisdictions, offset by (i) lower tax rates in Israel; and (ii) a tax credit and tax exemption related to the Company’s subsidiaries in Guatemala. The effect of the tax credit and tax exemption for the six months ended June 30, 2013 and 2012, was $1,395,000 and $2,576,000, respectively. The effect of the tax credit and tax exemption for the three months ended June 30, 2013 and 2012, was $444,000 and $1,299,000, respectively.    

At December 31, 2012, the Company had U.S. federal NOL carryforwards of approximately $267.6 million and state NOL carryforwards of approximately $193.4 available to reduce future taxable income, which expire between 2021 and 2032 for federal NOLs and between 2013 and 2032 for state NOLs. Investment tax credits in the amount of $2.0 million at December 31, 2012 are available for a 20-year period and expire between 2022 and 2024. Production tax credits (“PTCs”) in the amount of $69.0 million at December 31, 2012 are available for a 20-year period and expire between 2026 and 2032.

Realization of the deferred tax assets is dependent on generating sufficient taxable income in appropriate jurisdictions prior to expiration of the NOL carryforwards and tax credits. The scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies were considered in determining the amount of valuation allowance. A full valuation allowance was recorded against the U.S. deferred tax assets as of December 31, 2012 and June 30, 2013, as at that point in time, it was more likely than not that the deferred tax assets will not be realized. If sufficient evidence of the Company’s ability to generate taxable income is established in the future, the Company may be required to reduce this valuation allowance, resulting in income tax benefits in its consolidated statement of operations and comprehensive income.

The Company’s subsidiary, Ormat Systems Ltd. (“Ormat Systems”), received “Benefited Enterprise” status under Israel’s Law for Encouragement of Capital Investments, 1959 (the “Investment Law”), with respect to two of its investment programs. As a Benefited Enterprise, Ormat Systems was exempt from Israeli income taxes with respect to income derived from the first benefited investment for a period of two years beginning in 2004, and thereafter such income was subject to reduced Israeli income tax rates, which will not exceed 25% for an additional five years until 2010. Ormat Systems was also exempt from Israeli income taxes with respect to income derived from the second benefited investment for a period of two years beginning in 2007. Thereafter, such income is subject to reduced Israeli income tax rates, which will not exceed 25% for an additional five years until 2013. These benefits are subject to certain conditions, including among other things, that all transactions between Ormat Systems and its affiliates are done on an arm’s length basis, and that the management of Ormat Systems will be located in, and the control will be conducted from, Israel during the entire period of the tax benefits. A change in control of Ormat Systems would need to be reported to the Israel Tax Authority in order for Ormat Systems to maintain the tax benefits. In January 2011, new legislation amending the Investment Law was enacted. Under the new legislation, a uniform rate of corporate tax will apply to all qualified income of certain industrial companies, as opposed to the previous law’s incentives that are limited to income from a “Benefited Enterprise” during their benefits period. According to the amendment, the uniform tax rate applicable to the zone where the production facilities of Ormat Systems are located would be 15% in 2011 and 2012, 12.5% in 2013 and 2014, and 12% in 2015 and thereafter. Under the transitory provisions of the new legislation, Ormat Systems had the option either to irrevocably comply with the new law while waiving benefits provided under the previous law or to continue to comply with the previous law during a transition period with the option to move from the previous law to the new law at any stage. Ormat Systems decided to irrevocably comply with the new law starting in 2011.

In November 2012, new legislation amending the Investment Law was enacted. Under the new legislation, companies that have retained earnings as of December 31, 2011 from Benefited Enterprises may elect by November 11, 2013 to pay a reduced corporate tax rate set forth in the new legislation on such undistributed income and distribute a dividend from such income without being required to pay additional corporate tax with respect to such income. A company that makes this election will be required to make certain investments in its Benefited Enterprise by: (i) purchasing productive assets (other than buildings); (ii) investing in research and development in Israel; and/or (iii) paying salaries of new employees (other than directors and officers of the company) of the Benefited Enterprise. The number of new employees for these purposes will be determined in comparison to the number of employees employed by the Benefited Enterprise at the end of 2011. Such investment must be made over a period of five years commencing in the tax year in which the election is made. The amount of the required investment is determined pursuant to a formula set forth in the new legislation. A company that makes the election allowed under the new legislation cannot later undo its election. As of the date of this quarterly report Ormat Systems has not yet decided whether to make such election.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

	Six Months Ended June 30,
	2013		2012
	(Dollars in thousands)
Balance at beginning of period	$	7,280	$	5,875
Additions based on tax positions taken in prior years		222		837
Additions based on tax positions taken in current year		852		—
Balance at end of period	$	8,354	$	6,712