Note 18 - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 18 — INCOME TAXES

U.S. and foreign components of income from continuing operations, before income taxes and equity in income (losses) of investees consisted of:

	Year Ended December 31,
	2019		2018		2017
	(Dollars in thousands)
U.S	$	14,187	$	14,097	$	13,680
Non-U.S. (foreign)		123,116		123,084		157,050
Total income from continuing operations, before income taxes and equity in losses	$	137,303	$	137,181	$	170,730

The components of the provision (benefit) for income taxes, net are as follows:

	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Current:
Federal	$	—		$	0		$	43,935
State		172			381			43
Foreign		16,969			14,992			11,186
Total current income tax expense	$	17,141		$	15,373		$	55,164
Deferred:
Federal		(12,179	)		(6,886	)		(55,718	)
State		4,671			(2,595	)		(3,284	)
Foreign		35,980			28,841			25,502
Total deferred tax provision (benefit)		28,472			19,360			(33,500	)
Total Income tax provision	$	45,613		$	34,733		$	21,664

Reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31,
	2019			2018			2017
U.S. federal statutory tax rate		21.0	%		21.0	%		35.0	%
Impact of federal tax reform		0.0			2.6			(12.4	)
Transition tax inclusion		—			(5.7	)		42.1
Foreign tax credits		(22.8	)		(4.2	)		(50.5	)
Withholding tax		10.4			5.9			34.1
Valuation allowance - U.S		(3.7	)		(17.2	)		(22.6	)
State income tax, net of federal benefit		3.7			1.0			1.1
Uncertain tax positions		2.1			2.1			—
Effect of foreign income tax, net		9.7			5.6			(10.7	)
Production tax credits		(5.0	)		(3.1	)		(1.2	)
Subpart F income		0.5			0.5			1.7
Tax on global intangible low-tax income		16.9			18.6			—
Intra-entity transfers of assets other than inventory		0.3			(2.1	)		—
Other, net		0.1			0.3			(3.9	)
Effective tax rate		33.2	%		25.3	%		12.7	%

The net deferred tax assets and liabilities consist of the following:

	December 31,
	2019			2018
	(Dollars in thousands)
Deferred tax assets (liabilities):
Net foreign deferred taxes, primarily depreciation	$	(88,508	)	$	(57,202	)
Depreciation		(21,958	)		(30,500	)
Intangible drilling costs		(1,405	)		7,370
Net operating loss carryforward - U.S.		45,307			65,020
Tax monetization transaction		(30,964	)		(17,104	)
Right-of-use assets		(3,715	)		—
Lease liabilities		3,755			—
State and Investment tax credits		813			813
Production tax credits		100,524			90,913
Foreign tax credits		92,497			58,072
Withholding tax		(15,539	)		(8,052	)
Stock options amortization		1,409			1,440
Basis difference in partnership interest		(39,622	)		(36,516	)
Excess business interest		6,189			—
Accrued liabilities and other		1,013			624
		49,796			74,878
Less - valuation allowance		(17,412	)		(22,441	)
Total	$	32,384		$	52,437

The following table presents a reconciliation of the beginning and ending valuation allowance:

	2019			2018			2017
	(Dollars in thousands)
Balance at beginning of the year	$	22,441		$	77,571		$	116,234
Additions to valuation allowance		15,437			4,747			46,560
Release of valuation allowance		(20,466	)		(59,877	)		(85,223	)
Balance at end of the year	$	17,412		$	22,441		$	77,571

At December 31, 2019, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $132.7 million, of this amount, $127.9 million was generated before 2018 and expires between 2032 and 2037.  The remaining $4.8 million was generated after 2017 and is available to be carried forward for an indefinite period.

At December 31, 2019, the Company had production tax credits (“PTCs") in the amount of $100.5 million.  These PTCs are available for a 20-year period and expire between 2022 and 2039. At December 31, 2019, the Company had U.S. foreign tax credits (“FTCs”) in the amount of $92.5 million.  These FTCs are available for a 10-year period and begin to expire in 2022.

At December 31, 2019, the Company had state NOL carryforwards of approximately $277.9 million, $275.5 million which expire between 2025 and 2039 and $2.4 million are available to be carried forward for an indefinite period. At December 31, 2019, the Company had state tax credits in the amount of $0.8 million. These state tax credits are available to be carried forward for an indefinite period.

The Company has recorded deferred tax assets for net operating losses, foreign tax credits, and production tax credits.  Realization of the deferred tax assets and tax credits is dependent on generating sufficient taxable income in appropriate jurisdictions prior to expiration of the NOL carryforwards and tax credits. Based upon available evidence of the Company’s ability to generate additional taxable income in the future and historical losses in prior years, a valuation allowance in the amount of $17.4 million and $22.4 million is recorded against the U.S. deferred tax assets as of December 31, 2019 and 2018, respectively, as it is more likely than not that the deferred tax assets will not be realized.  The overall decrease in the valuation allowance of $5.0 million is due to full utilization of foreign tax credits that generated the valuation allowance at December 31, 2018, which were offset by increased valuation allowance related to production tax credits. The Company is maintaining a valuation allowance of $17.4 million against a portion of the U.S. production tax credits and state NOLs that are expected to expire before they can be utilized in future periods.

On April 24, 2018, the Company acquired 100% of stock of USG for approximately $110 million.  Under the acquisition method of accounting, the Company recorded a net deferred tax asset of $1.7 million comprised primarily of federal and state NOLs netted against deferred tax liabilities for partnership basis differences and fixed assets.  The total amount of acquired federal and state NOLs, which are subject to limitations under Section 382, were $115.2 million and $49.9 million, respectively.  A valuation allowance of $2.1 million has been recorded against such acquired state NOLs, as it is more likely than not that the deferred tax asset will not be realized.

On December 22, 2017, the U.S. government signed into law the Tax Act.  The Tax Act made significant changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) the transition of U.S. international taxation from a worldwide tax system to a territorial system (GILTI, BEAT, Dividends Received Deduction); (3) one-time transition tax on undistributed earnings of foreign subsidiaries as of December 31, 2017;  (4) eliminating the corporate alternative minimum tax; (5) creating a new limitation on deductible interest expense; and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

The FASB released guidance Staff Q&A, Topic 740, No. 5, that states a company can make an accounting policy election to either recognize deferred taxes related to GILTI or to provide for the GILTI tax expense in the year the tax is incurred as a period cost.  The Company has elected to treat any GILTI inclusions as a period cost.

The following table presents the deferred taxes on the balance sheet as of the dates indicated:

	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Non-current deferred tax assets	$	129,510		$	113,760		$	57,337
Non-current deferred tax liabilities		(97,126	)		(61,323	)		(61,961	)
Non-current deferred tax assets, net		32,384			52,437			(4,624	)
Uncertain tax benefit offset (1)		(95	)		(95	)		(95	)
	$	32,289		$	52,342		$	(4,719	)

(1) The non-current deferred tax asset has been reduced by the uncertain tax benefit of $0.1 million in accordance with ASU 2013-11, Income Taxes.

At December 31, 2019, the Company is no longer indefinitely reinvested with respect to the earnings of its foreign subsidiaries due to forecasted changes in cash needs and the impact of U.S. tax reform.  The Company has accrued withholding taxes that would be owed upon future distributions of such earnings, with the exception of a certain balance of earnings held in Israel.  Accordingly, during 2019, the Company included a foreign income tax expense of $13.9 million related to foreign withholding taxes on future distributions of foreign earnings.

At December 31, 2018, the Company asserted indefinite reinvestment of undistributed earnings of foreign subsidiaries, other than OSL and as a result, did not record a DTL on the future tax impacts of their remittances.

During 2017, the Company changed its intention to reinvest certain undistributed earnings of Ormat Systems Ltd., a wholly owned subsidiary in Israel.  In the prior year, the Company distributed $396.0 million, of which $300.0 million was received in December 2017 and the remaining $96.0 million was received in December 2018.  The Company recorded the tax impact of the distribution received in 2018 as part of the 2017 financials, including the 15% Israeli withholding tax in the amount of $14.4 million and corresponding foreign tax credit tax benefit, net of valuation allowance.

Uncertain tax positions

The Company is subject to income taxes in the United States (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company's tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite evidence supporting the position. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered probable.

At December 31, 2019 and 2018, there are $14.6 million and $11.8 million of unrecognized tax benefits, respectively, that if recognized would reduce the effective tax rate . Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as a component of income tax provision in the consolidated statements of operations and comprehensive income.

A reconciliation of the Company's unrecognized tax benefits is as follows:

	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Balance at beginning of year	$	8,820		$	6,357		$	4,609
Additions based on tax positions taken in prior years		104			293			5
Additions based on tax positions taken in the current year		2,314			2,446			2,580
Reduction based on tax positions taken in prior years		(615	)		(276	)		(837	)
Balance at end of year	$	10,623		$	8,820		$	6,357

 The Company and its U.S. subsidiaries file consolidated income tax returns for federal and state (where applicable) purposes. As of December 31, 2019, the Company has not been subject to U.S. federal or state income tax examinations.

The Company remains open to examination by the Internal Revenue Service for the years 2002-2019 and by local state jurisdictions for the years 2004-2019. These examinations may lead to ordinary course adjustments or proposed adjustments to the Company's taxes or the Company's net operating losses with respect to years under examination as well as subsequent periods.

The Company’s foreign subsidiaries remain open to examination by the local income tax authorities in the following countries for the years indicated:

Israel	2015	-	2019
Kenya	2013	-	2019
Guatemala	2015	-	2019
Honduras	2015	-	2019
Guadeloupe	2017	-	2019
New Zealand	2012	-	2019

Management believes that the liability for unrecognized tax benefits is adequate for all open tax years based on its assessment of many factors, including among others, past experience and interpretations of local income tax regulations. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. As a result, it is possible that federal, state and foreign tax examinations will result in assessments in future periods. To the extent any such assessments occur, the Company will adjust its liability for unrecognized tax benefits. The Company is not able to reasonably estimate the amount of unrecognized tax benefits that will be reduced within the next twelve months.

Tax benefits in the United States

The U.S. government encourages production of electricity from geothermal resources through certain tax subsidies.  On February 9, 2018 the Bipartisan Budget Act of 2018 was enacted extending the PTC and ITC in lieu of PTCs for geothermal projects that began construction before 2018. On December 20, 2019, the Tax Extenders Bill was enacted, further extending the PTC and ITC in lieu of PTCs. Therefore, geothermal projects that begin construction before 2021 and meet certain other “beginning of construction” rules qualify for PTCs for their first 10-years of operations; alternatively, the owner of the project may elect to claim the ITC in lieu of PTCs.  In either case, under current tax rules for tax credits, any unused tax credit has a 1-year carry back and a 20-year carry forward.

If the Company claims the ITC, the Company’s “tax base” in the plant that it can recover through bonus or accelerated depreciation (if elected) must be reduced by half of the ITC.  If the Company claims the PTC, there is no reduction in the tax basis for depreciation.  Whether the Company claims the PTC or the ITC in lieu of PTC, for assets acquired and placed in service after September 27, 2017, the Company is eligible to expense 100% of the cost of qualified property (“bonus depreciation”).  In later years, the first-year bonus depreciation deduction phases down, as follows:

● 80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.

● 60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025.

● 40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.

● 20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.

The Company could also elect in lieu of bonus deprecation to depreciate most of its "tax base" in the plant for tax purposes over five years on an accelerated basis, meaning that more of the cost may be deducted in the first few years than during the remainder of the depreciation period.

Income taxes related to foreign operations

Guatemala — The enacted tax rate is 25%. Orzunil, a wholly owned subsidiary, was granted a benefit under a law which promotes development of renewable power sources. The law allows Orzunil to reduce the investment made in its geothermal power plant from income tax payable, which currently reduces the effective tax rate to zero. Ortitlan, another wholly owned subsidiary, was granted a tax exemption for a period of ten years ending August 2017. Starting August 2017, Ortitlan pays income tax of 7% on its Electricity revenues.

Israel — The Company’s operations in Israel through its wholly owned Israeli subsidiary, Ormat Systems Ltd. (“Ormat Systems”), are taxed at the regular corporate tax rate of 24% in 2017 and 23% in 2018 and thereafter. 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. In January 2011, new legislation amending the Investment Law was enacted. Under the new legislation, a uniform rate of corporate tax would apply to all qualified income of certain industrial companies, as opposed to the current 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 16% in 2014 and thereafter. Ormat Systems decided to irrevocably comply with the new law starting in 2011. In the event of distribution of a cash dividend out of retained earnings which were tax exempt due to prior benefits, Ormat Systems would have to pay tax in respect of the amount distributed. Since the exemptions are contingent upon nondistribution of dividends and since upon liquidation the Company will have to pay a 25% tax on exempt income, Ormat Systems recorded deferred tax liability at the rate of 25% in respect of the tax exempt income in 2004-2008. In the event that Ormat Systems fails to comply with the program terms, the tax benefits may be canceled and it may be required to refund the amount of the benefits utilized, in whole or in part, with the addition of linkage differences and interest.

Kenya - The Company’s operations in Kenya are taxed at the rate of 37.5%. On September 11, 2015, Kenya's Income Tax Act was amended pursuant to certain provisions of the recently adopted Finance Act, 2015. Among other matters, these amendments retain the enhanced investment deduction of 150% under Section 17B of the Income Tax Act, extend the period for deduction of tax losses from 5 years to 10 years under Sections 15(4) and 15(5) of the Income Tax Act, and amend the effective date from January 1, 2016 to January 1, 2015 under Sections 15(4) and 15(5) of the Income Tax Act.

Tax audit in Kenya

The Company received three letters from the Kenya Revenue Authority ("KRA") relating to certain findings in respect of its review of tax years 2013 to 2017 as described below:

The first Letter of Preliminary Findings was received in March 2019, which was followed by a Notice of Assessment during June 2019 in which the KRA demanded approximately $5.6 million from the Company, including interest and penalties in respect of two certain issues relating to its review of tax years 2014 to 2017. In July 2019, the Company responded to the KRA Notice of Assessment primarily objecting to one of the two issues raised in the assessment, consisting of approximately $4.4 million, and asked the KRA to vacate this issue as set forth in its tax assessment letter.

The Company received the second Letter of Preliminary Findings ("the Second Letter of Preliminary Findings") from the KRA in July 2019, which relates to findings from the KRA's audit review for tax years 2013 to 2017. In August 2019, the Company filed its response to the Second Letter of Preliminary Findings, contesting the KRA arguments and requesting that the KRA vacate all issues set forth in its Letter of Preliminary Findings. In December 2019, the KRA submitted its audit assessment letter in relation to the 2013 to 2017 tax years in which it demanded approximately $205 million from the Company, including interest and penalties in respect of the issues included in its Second Letter of Preliminary Findings. In January 2020, the Company responded to the KRA objecting to all the issues raised in the tax assessment for tax years 2013 to 2017 and asked the KRA to vacate all issues set forth in its tax assessment letter.

The Company received the third Letter of Preliminary Findings (the "Third Letter of Preliminary Findings") from the KRA in December 2019 relating to the same tax years in which the KRA set forth an additional demand for approximately $17 million, including interest and penalties, in relation to an additional audit finding which was not previously included in the KRA's assessments. In January 2020, the Company filed a formal objection to the Third Letter of Preliminary Findings, contesting  the KRA's finding.

The Company is currently at different stages of discussions with the KRA on the matters included in the KRA letters of assessment and preliminary findings as described above and believes its tax positions for the issues raised during the audit period is more-likely-than-not sustainable based on technical merits under Kenyan tax law.  As of December 31, 2019, the Company has not recorded any tax reserves related to these demands except for an immaterial amount included in the first Letter of Preliminary Findings.

Guadeloupe - The Company’s operations in Guadeloupe are taxed at a rate of 34.43% in 2017, a maximum rate of 33.3% in 2018, a maximum rate 31% in 2019, a rate of 28% in 2020, 26.5% in 2021 and 25% in 2022.

Honduras - The Company’s operations in Honduras are exempt from income taxes for the first ten years starting at the commercial operation date of the power plant.