| Income Taxes | Note 9. Income Taxes a. Deferred Tax Assets and Liabilities The components of the Company’s deferred tax assets and liabilities as of December 31, 2021 and 2020 were as follows: December 31, 2021 2020 (U.S. $ in thousands) Deferred tax assets Tax losses carry forwards $ 671,458 $ 645,318 Inventory related 4,210 3,892 Intangible assets 12,783 19,081 Provision for employee related obligations 1,186 557 Stock-based compensation 9,528 7,507 Deferred revenue 2,257 1,871 Property, plant and equipment 630 835 Allowance for credit losses 143 249 Foreign currency losses 358 278 Research and development credit carry forwards 15,933 16,693 Gross deferred tax assets 718,486 696,281 Valuation allowance (693,120 ) (661,979 ) Total deferred tax assets 25,366 34,302 Deferred tax liabilities Intangibles assets (12,533 ) (21,567 ) Property, plant and equipment (17,991 ) (2,847 ) Other items (882 ) (4,344 ) Total deferred tax liabilities (31,406 ) (28,758 ) Net deferred tax assets (liabilities) $ (6,040 ) $ 5,544 The Company’s deferred tax assets and liabilities are classified in the consolidated balance sheets as follows: December 31, 2021 2020 (U.S. $ in thousands) Deferred tax assets (under "Other non-current assets") $ 1,301 $ 5,586 Deferred tax liabilities 7,341 42 Net deferred tax assets (liabilities) $ (6,040 ) $ 5,544 As of Decem ber
31, 2021 and 2020 the Company had tax net operating losses carry-forward of
approximately $628.5 million
and $607.3 million, respectively. In addition, the Company incurred capital
losses of $2,203.2 million in 2020 due to a legal reorganization of certain
entities in the group. Those tax losses carry-forward resulted in deferred
tax assets of approximat ely $671.5 mil lion
and $645.3 million, as of December 31, 2021 and 2020, respectively. As a result
of losses incurred in the last few years, and since the near-term realization
of these assets is uncertain, the Company recorded a full valuation
allowance for its deferred tax assets that are not likely to be realized. Significant judgment is required in
determining any valuation allowance recorded against deferred tax assets. In
assessing the need for a valuation allowance, the Company considered all
available evidence, including past operating results, the most recent
projections for taxable income, and prudent and feasible tax planning
strategies. The Company reassess its valuation allowance periodically and if
future evidence allows for a partial or full release of the valuation
allowance, a tax benefit will be recorded accordingly. A reconciliation of the beginning and ending balances of valuation allowance is as follows: Valuation allowance U.S. $ in thousands Balance at January 1, 2019 $ 152,659 Decrease (888 ) Balance at December 31, 2019 151,771 Additions 524,215 Decrease (14,007 ) Balance at December 31, 2020 661,979 Additions 31,141 Balance at December 31, 2021 $ 693,120 Included in the net deferred tax are net operating
loss and credit ca rryovers of $159.2 mi llion
which expire in years ending from December 31, 2022 through December 31, 2041,
whereas some losses may be carried forward indefinitely, as discussed
below. On December 22, 2017, the Tax Cuts and
Jobs Act (the “Act”) U.S. GAAP requires that the impact of tax
legislation be recognized in the period in which the law was enacted. In 2017,
the Company revalued its valuation allowance and deferred tax assets at the
statutory 21% rate that is in effect in 2018 and forward. The provisional
impact of this rate change was recorded in the fourth quarter of 2017 and there
was a reduction of $65.6 million in the valuation allowance, offset by a
reduction of $65.6 million in the deferred tax assets. The accounting was
completed in the fourth quarter of 2018. The Act introduced new intangible income
rules, Global Intangible Low-Taxed Income (GILTI) and Foreign Derived
Intangible Income (FDII). The Company has analyzed the impact of GILTI/FDII and
determined that no impact can be recorded due to the U.S. subsidiaries’ net
operating losses. Thus, the Company cannot elect to include these amounts in
the measurement of its deferred taxes under U.S. GAAP. On March 27, 2020, the Coronavirus Aid, Relief and
Economic Security Act (the “CARES Act”) was enacted into law in response to the
economic fallout of the COVID-19 pandemic in the United States. Among the
many business-related provisions, some of which related to non-income taxes,
were changes made to net operating losses (NOLs). The CARES Act amended
Internal Revenue Code Section 172(b)(1) for tax years beginning in 2018, 2019
and 2020, requiring taxpayers to carry back NOLs arising in those years to the
five preceding tax years, unless the taxpayer elects to waive or reduce the
carryback period. To the extent unused as a carryback, these NOLs are now
carried forward indefinitely. The CARES Act suspended the Tax Cuts and
Jobs Act’s 80% limitation on NOL deductions for tax years beginning in 2018,
2019 and 2020. The 80% limitation will be reinstated for tax years
beginning after 2020, for NOLs arising in tax years after 2017. The Company believes that all future
profits of its subsidiaries will be indefinitely reinvested or that there is no
expectation to distribute any taxable dividends from these subsidiaries. The
determination of the amount of the unrecognized deferred tax liability related
to the undistributed earnings is estimated as an immaterial amount. b. Provision for Income Taxes Loss (income) before income taxes for the years ended December 31, 2021, 2020 and 2019 was as follows: 2021 2020 2019 (U.S. $ in thousands) Domestic $ (50,193 ) $ (381,935 ) $ (11,895 ) Foreign (16,644 ) (74,636 ) 4,751 $ (66,837 ) $ (456,571 ) $ (7,144 )
The components of income taxes for the years ended December 31, 2021, 2020 and 2019 were as follows: 2021 2020 2019 (U.S. $ in thousands) Current Domestic $ (14,146 ) $ 4,992 $ 3,392 Foreign 2,141 (3,902 ) 2,524 (12,005 ) 1,090 5,916 Deferred Domestic 8,745 (4,112 ) (2,007 ) Foreign (646 ) (13,372 ) (386 ) 8,099 (17,484 ) (2,393 ) Total income taxes $ (3,906 ) $ (16,394 ) $ 3,523 A reconciliation of the statutory income tax rate and the effective income tax rate for the years ended December 31, 2021, 2020 and 2019 is set forth below: 2021 2020 2019 Statutory tax rate 23.0 % 23.0 % 23.0 % Reduced tax rate under Israeli benefit programs 6.2 (1.4 ) 18.0 Goodwill impairment - (17.5 ) - Stock-based compensation expense (3.5 ) (0.5 ) (21.0 ) Non-deductible acquisition expenses (0.1 ) - (1.4 ) Earnings taxed under foreign law 10.8 (4.1 ) (14.9 ) Valuation Allowance (42.7 ) 3.1 - Changes in uncertain tax positions 17.9 1 (59.8 ) Deferred Tax due to different tax rates (6.1 ) 0.1 11.2 Non recurring Capital gain - - 11.5 Withholding tax (0.1 ) - (1.7 ) Other 0.4 (0.1 ) (2.6 ) Effective income tax rate 5.8 % 3.6 % (48.9 )% Uncertain tax positions 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 its belief that its tax return positions are fully
supportable. The Company adjusts these reserves in light of changing facts and
circumstances, such as the outcome of a tax audit or changes in the tax law.
The provision for income taxes includes the impact of reserve provisions and
changes to reserves that are considered appropriate. A reconciliation of the beginning and ending balance of uncertain tax positions is as follows: 2021 2020 2019 (U.S. $ in thousands) Balance at beginning of year $ 23,389 $ 25,517 $ 22,044 Additions for tax positions related to the current year 3,826 312 2,336 Foreign currency impact 2,918 3,017 1,353 Adjustments for tax positions related tax settlements (26,685 ) - - Reduction of reserve for statute expirations (433 ) (5,457 ) (216 ) Balance at end of year $ 3,015 $ 23,389 $ 25,517 The Company’s accrual for estimated
interest and penalties was $0.87 million as of December 31, 2021. The Company
does not expect uncertain tax positions to change significantly over the next
twelve months. The Company is subject to income taxes in the U.S., various states, Israel and certain other foreign jurisdictions. The Company files income tax returns in various jurisdictions with varying statutes of limitations. Tax returns of Stratasys Inc. submitted in the United States through 2013 tax year are considered to be final following the completion of the Internal Revenue Service examination. Tax returns of Stratasys Ltd. submitted in Israel through the 2019 tax year are considered to be final following the completion of the Israeli Tax Authorities examination upon audit. The expiration of the statute of limitations related to the various other foreign and state income tax returns that the Company and its subsidiaries file vary by state and foreign jurisdictions. c. Basis of taxation: The enacted statutory tax rates applicable to the Company’s major subsidiaries outside of Israel are as follows: Company incorporated in the U.S.— Federal tax rate of approximately 21%. Company incorporated in Germany—tax rate of approximately 29%. Company incorporated in Hong Kong—tax rate of approximately 16.5%. A significant portion of the Company’s income is taxed in Israel. The following is a summary of how the Company’s income is taxed in Israel: Corporate tax rates in Israel for 2018 and thereafter is 23%. The Company elected to compute its 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 Company’s taxable income or loss is calculated in U.S. dollars. Applying these regulations reduces the effect of foreign exchange rate fluctuations (of the NIS in relation to the U.S. dollar) on the Company’s Israeli taxable income. Tax benefits under the Law for Encouragement of Capital Investments, 1959 (the “Investment Law”) Various industrial projects of the Company have been granted “Approved Enterprise” and “Beneficiary Enterprise” status, which provided certain benefits, including tax exemptions for undistributed income and reduced tax rates. Income not eligible for Approved Enterprise and Beneficiary Enterprise benefits is taxed at the regular corporate rate, which was 23% in 2021. The Company is a Foreign Investors 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 Beneficiary Enterprises, depending on the level of foreign ownership. When foreign (non-Israeli) ownership equal or exceeds 90%, the Approved Enterprise and Beneficiary Enterprise income is either tax-exempt for a limit period between two to ten years depending on the location of the enterprise or taxable at a tax rate of 10% for a 10-year period. The Company cannot assure that it will continue to qualify as a FIC in the future or that the benefits described herein will be granted in the future. The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at the lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply. On
November 15, 2021, the Investment Law was amended to provide, on a temporary
basis, a reduced corporate income tax on the distribution or release within a
year from such amendment of tax-exempt profits derived by Approved and
Benefited Enterprises, which we refer to as Exempt Profits. The amount of the
reduced tax will be determined based on a formula. In order to qualify for the
reduction, the Company must invest certain amounts in productive assets and
research and development in Israel. In parallel to the temporary amendment, the
law was also amended to reduce the ability of companies to retain the
tax-exempt profits. Effective August 15, 2021, dividend distributions
will be treated as if made on a pro-rata basis from all types of earnings, including
Exempt Profits. As of December 31, 2021, tax-exempt income
of approximately $198.7 million is attributable to the Company’s various
Approved and Beneficiary Enterprise programs. If such tax-exempt income is
distributed, it would be taxed at the reduced corporate tax rate applicable to
such income, and taxes of approximately $19.9 million would be incurred as
of December 31, 2021. Following recent Israeli court ruling, certain
transactions (such as acquisitions and intercompany loans) may be treated as deemed dividend distributions for
the purpose of the Encouragement Law triggering corporate tax on the respective
amount of the transaction. A January 2011 amendment to the Investment Law (the “2011 Amendment”) created alternative benefit tracks to those previously in place, as follows: an investment grants track designed for enterprises located in certain development zones and two new tax benefits tracks (“Preferred Enterprise” and “Special Preferred Enterprise”), which provide for application of a unified tax rate to all preferred income of the company, as defined in the Investment Law. The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its "Preferred Enterprise" (as such terms are defined in the Investment Law) effective as of January 1, 2011 and thereafter. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental entity, or (ii) a limited partnership that: (a) was registered under the Israeli Partnerships Ordinance, and (b) all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities; which has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company was entitled to a reduced corporate tax rate of 16% with respect to its preferred income attributed to its Preferred Enterprise, unless the Preferred Enterprise was located in a certain development zone, in which case the rate was 9%. In 2017 and thereafter, the corporate tax rate for Preferred Enterprise which is located in a certain development zone was decreased to 7.5%, while the reduced corporate tax rate for other development zones remains 16%. Dividends paid out of preferred income attributed to a Preferred Enterprise is generally subject to withholding tax at source at the rate of 20%, or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply. Tax benefits under the Israeli Law for the Encouragement of Industry (Taxation), 1969 The Company is an “Industrial Company” as defined by the Israeli Law for the Encouragement of Industry (Taxation), 1969, and, as such, is entitled to certain tax benefits including accelerated depreciation, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes. New Tax benefits under the 2017 Amendment that became effective on January 1, 2017. The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and was effective as of January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law. The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income,” as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation, to which we refer as NATI. The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by an Israeli company or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from NATI. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law. Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If such dividends are distributed to a foreign company and other conditions are met, the withholding tax rate will be 4%. In 2021, the Company noticed the Israeli
tax authorities that it waived the Approved / Beneficiary Enterprise regime starting
from tax year 2021. The Company is currently considering its qualification for
the 2017 amendment and the term and degree to which it may be qualified as a
Preferred Technology Enterprise or Special Preferred Technology Enterprise. |
