Note 9 - Taxes on Income:
a. The Company and its Israeli subsidiaries:
1) Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (hereafter - the law)
Expansion projects of the Company and certain of its subsidiaries have been granted the status of "approved enterprise" under the law. Since the Company is over 49% foreign-owned, income derived from these enterprises during a period of 10 years from the year in which these enterprises first realize taxable income, provided the maximum period to which it is restricted by law has not elapsed, is subject to corporate tax at the rate of 20%.
Additional expansion projects of the Company and of certain subsidiaries were granted "approved enterprise" status, for which the companies elected to apply for alternative tax benefits - waiver of grants in return for tax exemption; such tax exemption is for a limited period, having regard to the area in which the enterprises are located. During the remainder of the benefits period (until expiration of 10 years), corporate tax of 20% as above is to apply. The periods of tax benefits in respect of approved enterprises entitled to the said benefits commenced in 1991-1999. Final approvals in respect of certain expansion programs have not yet been received. In the event of the distribution of dividends from the said tax-exempt income, the amount distributed will be subject to 20% tax (see also note 1i(2)).
The law also allows accelerated depreciation on buildings, machinery and equipment used by the "approved enterprise" during five tax years.
The entitlement to the above benefits is conditional upon the companies' fulfilling the conditions stipulated by the law, regulations published thereunder and the instruments of approval for the specific investments in approved enterprises. In the event of failure to comply with these conditions, the benefits may be cancelled and the companies may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences and interest.
2) Measurement of results for tax purposes
Results for tax purposes are measured on the real basis - adjusted for the increase in the Israeli CPI. As explained in note 1a(2), the financial statements are presented in dollars. The difference between the change in the Israeli CPI and the NIS/U.S. dollar exchange rate - both on annual and cumulative bases - causes a difference between taxable income and income reflected in these financial statements.
3) Tax benefits under the Law for the Encouragement of Industry (Taxation), 1969
The Company and certain of its subsidiaries are "industrial companies" under the above law. In accordance with this law and certain regulations, the companies are entitled to claim depreciation at increased rates. Under this law, the Company files consolidated tax returns with certain subsidiaries.
4) Tax rates applicable in Israel to income from other sources
Income not eligible for "approved enterprise" benefits mentioned in (1) above is taxed at the regular rate of 36%.
b. Deferred income taxes:
1) The composition of the deferred taxes and the changes therein in 1999 and 1998 are as follows:
| |
In respect of balance sheet items |
|
| |
Depreciable
fixed
assets |
Inventories |
Provisions
for employee
rights upon
retirement and
vacation pay |
Unrealized
income from
intercompany
sales |
Other - net |
In respect
of net
operating
loss
carryforwards* |
Total |
| |
U.S. $ in thousands |
| Balance at January 1, 1998 |
30,032 |
1,048 |
(2,628) |
(1,947) |
4,719 |
(16,518) |
14,706 |
| Changes in 1998: |
|
|
|
|
|
|
|
| Amounts carried to income |
9,437 |
716 |
47 |
(2,598) |
(8,331) |
3,968 |
3,239 |
| Other - net** |
(769)
 |
(83)
|
(791)
|
|
782
|
(514)
|
(1,375)
|
| Balance at December 31, 1998 |
38,700 |
1,681 |
(3,372) |
(4,545) |
(2,830) |
(13,064) |
16,570 |
| Changes in 1999: |
|
|
|
|
|
|
|
| Amounts carried to income |
3,167 |
(1,630) |
759 |
(550) |
1,613 |
(74) |
3,285 |
| Other - net** |
(757)
|
(967)
|
(2,460)
|
40
|
(7,300)
|
(762)
|
(12,206)
|
| Balance at December 31, 1999 |
41,110
|
(916)
|
(5,073)
|
(5,055)
|
(8,517)
|
(13,900)
|
7,649
|
* Most can be utilized with no expiration date.
** These changes relate to differences resulting from translation of the financial statements of subsidiaries drawn up in non-dollar currencies and to deferred taxes of subsidiaries consolidated for the first time, upon acquisition.
2) The deferred taxes are presented in the balance sheets as follows:
| |
December 31 |
| |
1999 |
1998 |
| |
U.S. $ in thousands |
Among current assets
|
(24,038) |
(16,602) |
| As a non-current liability |
31,687
|
33,172
|
| |
7,649
|
16,570
|
c. Income before taxes on income is composed as follows:
| |
Year ended December 31 |
| |
1999 |
1998 |
1997 |
| |
U.S. $ in thousands |
The Company and subsidiaries
in Israel |
84,411 |
52,488 |
115,682 |
| Subsidiaries outside Israel |
77,551
|
46,357
|
23,934
|
| |
161,962
|
98,845
|
139,616
|
d. Taxes on income included in the income statements:
1) As follows:
| |
Year ended December 31 |
| |
1999 |
1998 |
1997 |
| |
U.S. $ in thousands |
| Current: |
|
|
|
| In Israel |
16,435 |
15,810 |
18,633 |
| Outside Israel |
24,615
|
11,839
|
(658)*
|
| |
41,050
|
27,649
|
17,975
|
| Deferred: |
|
|
|
| In Israel |
(340) |
59 |
10,514 |
| Outside Israel |
3,625
|
3,180
|
10,238*
|
| |
3,285
|
3,239
|
20,752
|
| |
44,335
|
30,888
|
38,727
|
* Net of a tax benefit of approximately $ 7 million, resulting mainly from a change in the tax laws in the United States in 1997 making certain expenses deductible on the accrual basis; prior to 1997, these expenses were deductible on a cash basis. This change did not affect the total tax expenses of the group, since an amount similar to the amount of the reduction in current taxes has been charged to deferred taxes.
2) A reconciliation of the theoretical tax expense, assuming all income is taxed at the regular rates applicable to income of companies in Israel (see a(4) above) and the actual tax expense, is as follows:
| |
Year ended December 31 |
| |
1999 |
1998 |
1997 |
| |
U.S. $ in thousands |
| Income before taxes on income, per |
|
|
|
| consolidated statements of income |
161,962
|
98,845
|
139,616
|
| Theoretical tax expense |
58,306 |
35,584 |
50,262 |
Tax benefit arising from reduced tax rate as
an "approved enterprise" |
(10,509)
|
(4,808)
|
(11,377)
|
| |
47,797 |
30,776 |
38,885 |
Decrease in tax arising from
different tax rates applicable to
non-Israeli subsidiaries |
(14,718) |
(5,352) |
(9,345) |
Increase (decrease) in taxes resulting from
permanent differences: |
|
|
|
| Tax exempt income |
(897) |
(1,432) |
(632) |
| Disallowable deductions |
10,899 |
3,348 |
10,242 |
| Difference between income reported for tax |
|
|
|
| purposes and income for financial reporting |
|
|
|
| purposes (see also a(2) above) - net |
1,110 |
846 |
1,470 |
| Other - net |
144 |
2,702 |
(1,893) |
| Taxes on income in the consolidated |
|
|
|
| statements of income |
44,335 |
30,888 |
38,727 |
| Effective tax rate |
27% |
31% |
28% |
e. Tax assessments
The Company has received final tax assessments through tax year 1994. The subsidiaries have received final tax assessments through tax years 1990-1994.
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