NOTE

14:

TAXES ON INCOME

The provision for income taxes is as follows:

	Year ended December 31,
	2018			2017			2016
Domestic taxes

Federal taxes:
Current	$	-		$	-		$	-

State taxes:
Current		3			2			3

Foreign taxes:
Current	$	943		$	368		$	264
Deferred		(2,814	)		(462	)		327

		(1,871	)		(94	)		591

Taxes on income (tax benefit)	$	(1,868	)	$	(92	)	$	594

Income (loss) before taxes is comprised as follows:

	Year ended December 31,
	2018			2017			2016

Domestic	$	(2,825	)	$	(4,128	)	$	(2,188	)
Foreign		(1,000	)		1,033			7,595

	$	(3,825	)	$	(3,095	)	$	5,407

A reconciliation between the Company’s effective tax rate assuming all income is taxed at statutory tax rate applicable to the income of the Company and the U.S. statutory rate is as follows:

	Year ended December 31,
	2018			2017			2016


Income (loss) before taxes on income	$	(3,825	)	$	(3,095	)	$	5,407

Theoretical tax expenses (tax benefit) at U.S. statutory tax rate (21% for 2018 and 35% for 2017 and 2016)	$	(803	)	$	(1,083	)	$	1,892
State taxes, net of federal benefit		3			2			3
Foreign income taxed at rates other than the U.S. rate (including deferred taxes that were not provided, valuation allowance and current adjustment and interest on uncertain tax position liability)		(1,767	)		(808	)		(2,580	)
Nondeductible equity-based compensation expenses		542			816			695
Valuation allowance in U.S.		157			984			583
Other		-			(2	)		1

	$	(1,868	)	$	(92	)	$	594

Deferred income taxes 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.

	December 31,
	2018			2017

Reserves and accruals	$	284		$	1,202
Equity-based compensation		1,621			922
Intangible assets		184			320
Carryforward tax losses		6,715			4,368
Other		858			229

Total deferred tax assets		9,662			7,041
Valuation allowance		(6,082	)		(5,998	)

Total deferred tax assets		3,580		$	1,043



Deferred tax liabilities, net
Acquired intangible assets		195			565
Acquired carryforward tax losses		(44	)		(141	)

Total deferred tax liabilities, net	$	151		$	424

Management believes that part of the deferred tax assets will

not

be realized based on current levels of future taxable income and potentially refundable taxes. Accordingly, a valuation allowance in the amount of

$6,082

and

$5,998

was recognized as of

December 31, 2018

and

2017,

respectively.

2017,

the Tax Cuts and Jobs Act of

2017

(the “TCJA”) was signed into law in the U.S. Changes include, but are

not

limited to, a corporate tax rate decrease from

35%

21%

effective for tax years beginning after

December 31, 2017.

In accordance with ASC

740,

the Company recorded

$2,500

of deferred tax expense in connection with the remeasurement of certain deferred tax assets and liabilities. This was fully offset by a valuation allowance. Accordingly, there was

net impact on the Company’s income tax expense for the year ended

December 31, 2017.

The remaining provisions of the TCJA have

material impact on the Company's results of operations.

December 22, 2018

marked the end of the measurement period for purposes of SAB

118,

and the Company concluded that

change was required based on its initial assessment.

As of

December 31, 2018,

the Company had cash and cash equivalents, marketable securities and time deposits of approximately

$123,900.

Out of total cash, cash equivalents, marketable securities and time deposits of

$123,900,

$113,100

was held by foreign subsidiaries of the Company. The Company intends to permanently reinvest earnings of its foreign operations and its current operating plans do

not

demonstrate a need to repatriate foreign earnings to fund the Company’s U.S. operations. However, if these funds were needed for the Company’s operations in the United States, the Company would be required to accrue and pay taxes in several countries to repatriate these funds. The determination of the amount of additional taxes related to the repatriation of these earnings is

not

practicable, as it

may

vary based on various factors such as the location of the cash and the effect of regulation in the various jurisdictions from which the cash would be repatriated.

Uncertain tax positions:

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

	201 8			2017			2016

Gross unrecognized tax benefits at January 1,	$	1,273		$	1,023		$	1,711
Decreases in tax positions for previous years		-			(268	)		(918	)
Increases in tax positions for current year		776			306			396
Increase in tax positions for previous years		-			131			-
Change in interest and linkage related to tax positions		(9	)		81			(166	)

Gross unrecognized tax benefits at December 31,	$	2,040		$	1,273		$	1,023

The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was

$2,040

and

$1,273

December

31,

2018

and

2017,

respectively. The Company accrues interest and penalties relating to unrecognized tax benefits in its provision for income taxes. At

December

31,

2018

and

2017,

the Company had accrued interest and penalties related to unrecognized tax benefits of

$115

and

$68,

respectively.

The Company and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The last examination conducted by U.S. tax authorities was with respect to the Company’s U.S. federal income tax returns for

2014.

The statute of limitations relating to the Company’s consolidated Federal income tax return is closed for all tax years up to and including

2014.

The last examination conducted by the Israeli tax authorities was with respect to the Company’s Israeli income tax returns for the years between

2006

and

2012.

With respect to DSP Israel, the tax returns up to and including

2012

are considered to be final and

not

subject to any audits due to the expiration of the statute of limitations.

A change in the amount of unrecognized tax benefit is reasonably possible in the next

months due to the examination by the German tax authorities of the Company’s German tax returns for

2010–2013.

The Company currently cannot provide an estimate of the range of change in the amount of the unrecognized tax benefits due to the ongoing status of the examination.

Tax benefits under the Law for the Encouragement of Capital Investments,

1959

(“Investment Law”).

The Investment Law provides certain Israeli tax benefits for eligible capital investments in a production facility, as discussed in greater detail below.

April 1, 2005,

an amendment to the Investment Law came into effect (the “Amendment”) and significantly changed the provisions of the Investment Law. Generally, DSP Israel’s investment programs that obtained approval for Approved Enterprise status prior to enactment of the Amendment will continue to be subject to the old provisions of the Investment Law.

The Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies are

longer required to get the Investment Center’s prior approval to qualify for tax benefits. An enterprise that receives tax benefits without the initial approval from the Investment Center is called a “Beneficiary Enterprise,” rather than the previous terminology of “Approved Enterprise” used under the Investment Law. The period of tax benefits for a new Beneficiary Enterprise commences in the “Year of Commencement,” which is the later of: (

) the year in which taxable income was

first

generated by the company, or (

) the year of election.

In addition, under the Amendment, tax benefits are available for production facilities, which generally are required to derive more than

25%

of their business income from export. Furthermore, in order to receive the tax benefits under the Amendment, a company is required to make an investment in the Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the Investment Law.

DSP Israel chose the “alternative benefits” track for all of its investment programs. Accordingly, DSP Israel’s income from an “Approved Enterprise” and “Beneficiary Enterprise” is tax-exempt for a period of

two

four

years and is subject to a reduced corporate tax rate of

10%

25%

(based on the percentage of foreign ownership) for an additional period of

six

eight

years.

DSP Israel’s first, second, third, fourth,

fifth

and

sixth

investment programs, which were completed and commenced operations in

1994,

1996,

1998,

1999,

2002

and

2004,

respectively, were tax exempt for a period of between

two

and

four

years, from the

first

year they had taxable income and were entitled to a reduced corporate tax rate of

10%

25%

(based on the percentage of foreign ownership) for an additional period of between

six

eight

years. As of

2018,

all those investment programs were

longer entitled to a reduced corporate tax rate.

DSP Israel’s

seventh

and

eighth

investment programs have been in operation since

2006

and

2009,

respectively, and entitles DSP Israel to a corporate tax exemption for a period of

two

years and a reduced corporate tax rate of

10%

25%

(based on the percentage of foreign ownership) for an additional period of

eight

years from the

first

year it had taxable income. As of

2017,

the

seventh

investment program was

longer entitled to a reduced corporate tax rate. The period of tax benefits for the

eight

investment program commenced in fiscal year

2018

and will continue until the program expiration by the end of

2020.

Since DSP Israel is operating under more than

one

approval, its effective tax rate is the result of a weighted combination of the various applicable tax rates and tax exemptions and the computation is made for income derived from each investment program on the basis and formulas specified in the Investment Law and the approvals.

During

2006,

DSP Israel received an approval for the erosion of tax basis in respect to its

fifth

and

sixth

investment programs. During

2008,

DSP Israel received an approval for the erosion of tax basis with respect to its second,

third

and

fourth

investment programs. Those approvals resulted in increasing the taxable income attributable to the later investment programs, which are currently in operation and will be taxed at a lower tax rate than the previous investment programs, which in turn will decrease the overall effective tax rate.

The Company’s investment programs that generate taxable income are currently subject to an average tax rate of up to approximately

10%

based on a variety of factors, including percentage of foreign ownership and approvals for the erosion of the tax basis of our investment programs. The Company’s average tax rate for its investment programs

may

change in the future due to circumstances outside of its control and therefore, the Company cannot provide any assurances that its average tax rate for its investment programs will continue at an approximate rate of

10%

in the future.

Amendment to the Law for the Encouragement of Capital Investments,

1959

(Amendment

December 2016,

the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the

2017

and

2018

Budget Years),

2016

which includes Amendment

to the Law for the Encouragement of Capital Investments (the

“2016

Amendment") was published. According to the

2016

Amendment, a preferred enterprise located in development area A will be subject to a tax rate of

7.5%

instead of

effective from

January 1, 2017

and thereafter. DSP Israel is

not

located in development area A and the tax rate applicable to preferred enterprises like DSP Israel located in other areas remains at

16%,subject

to the below.

The

2016

Amendment also prescribes special tax tracks for technological enterprises. The new tax tracks under the

2016

Amendment are as follows:

Technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS

billion (

$2.7

billion). A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at a rate of

12%

on profits deriving from intellectual property. DSP Israel is located in the center of Israel.

Any dividends distributed to "foreign companies" as defined in the Law, deriving from income from the technological enterprises, will be subject to a tax rate of

4%.

The Company evaluated the effect of the adoption of the

2016

Amendment on its financial statements and determined to

not

apply for the

2016

Amendment. Rather, the Company has continued to comply with the Law as it was in effect prior to enactment of the

2016

Amendment until the earlier of such time that compliance with the Law prior to enactment of the

2016

Amendment is

longer in the Company’s best interests or until the expiration of its current investment programs. The Company

may

change its position in the future.

The Company is required to comply with the

2016

Amendment subsequent to the expiration of the Company’s current investment programs and for any new qualified investment program after a transitional period. Once the Company is required to comply with the

2016

Amendment, its average tax rate

may

increase.

As of

December 31, 2018,

DSP Israel believed that it met all the conditions required under the plans, which include, among other things, an obligation to invest certain amounts in property and equipment and an obligation to finance a percentage of investments by share capital.

Should DSP Israel fail to meet such conditions in the future, it could be subject to corporate tax in Israel at the standard tax rate (

23%

for

2018

) plus a consumer price index linkage adjustment and interest and could be required to refund tax benefits already received.

As of

December 31, 2018,

approximately

$57,675

was derived from tax exempt profits earned by DSP Israel’s “Approved Enterprises” and “Beneficiary Enterprises.” The Company has determined that such tax-exempt income will

not

be distributed as dividends and intends to reinvest the amount of its tax exempt income earned by DSP Israel. Accordingly,

provision for deferred income taxes has been provided on income attributable to DSP Israel’s “Approved Enterprises” and “Beneficiary Enterprises” as such income is essentially permanently reinvested.

If DSP Israel’s retained tax-exempt income is distributed, the income would be taxed at the applicable corporate tax rate (currently

10%

) as if it had

not

elected the alternative tax benefits under the Investment Law and an income tax liability of approximately

$6,408

would have been incurred as of

December 31, 2018.

DSP Israel’s income from sources other than the “Approved Enterprises” and “Beneficiary Enterprises” during the benefit period will be subject to tax at the effective standard corporate tax rate in Israel (

23%

for

2018

The Law for Encouragement of Industry (Taxation),

1969:

DSP Israel has the status of an “industrial company”, as defined by this law. According to this status and by virtue of regulations published thereunder, DSP Israel is entitled to claim a deduction of accelerated depreciation on equipment used in industrial activities, as determined in the regulations issued under the Inflationary Law. The Company is also entitled to amortize a patent or rights to use a patent or intellectual property that are used in the enterprise's development or advancement, to deduct issuance expenses for shares listed for trading, and to file consolidated financial statements under certain conditions.

Israeli tax rates:

The rate of the Israeli corporate tax is as follows:

2016

–

25%,

2017

–

24%

and

2018

–

23%

Tax rate of

25%

applies to capital gains arising after

January

2003.

The Company has accumulated losses for federal and state tax purposes as of

December 31, 2018

of approximately

$19,378

and

$2,765,

respectively, which

may

be carried forward and offset against future taxable income for an indefinite period. Accumulated losses generated in taxable year

2017

and earlier can be carried forward for a period of

twelve

nineteen

years. DSP Israel has

accumulated losses for tax purposes as of

December 31, 2018,

but has approximately

$25,052

of research and development expense, which

may

be carried forward and offset against future taxable income for an indefinite period.