| Income Taxes | NOTE 17: — INCOME TAXES
a. Corporate income tax rate in
Israel:
Taxable income of Israeli companies is subject to income tax at the
rate of 26.5% in 2015 and 25% in 2014 and 2013.
b. Tax benefits under the Law for the
Encouragement of Industry (Taxes), 1969:
The Company is an “industrial company” as defined by
this law and, as such, is entitled to certain income tax benefits,
mainly accelerated depreciation in respect of machinery and
equipment (as prescribed by regulations published under the
Inflationary Adjustments Law) and the right to claim public
issuance expenses, amortization of patents and other intangible
property rights as deductions for tax purposes.
c. Tax benefits under the Law for the
Encouragement of Capital Investments, 1959 (“the Investments
Law”):
Various production and development facilities of the Company have
been granted “Approved Enterprise” and “Benefited
Enterprise” status, which provides certain benefits,
including tax exemptions and reduced tax rates for a defined
period. The benefits available to an Approved Enterprise and
Benefited Enterprise relate only to taxable income attributable to
the specific investment program and are conditioned upon terms
stipulated in the Investments Law and the related regulations and
the criteria set forth in the applicable certificate of approval
(for an Approved Enterprise). If the Company does not fulfill these
conditions, in whole or in part, the benefits can be cancelled and
the Company may be required to refund the benefits, in an amount
linked to the Israeli consumer price index plus interest.
The Company qualifies as a foreign investors’ company, or
FIC. FICs are entitled to further reductions in the tax rate
normally applicable to Approved or Benefited Enterprises, depending
on the level of foreign ownership. The tax rate ranges between 10%
(when foreign ownership is 90% or more) to 25% (when the foreign
ownership is below 49%).
The Company has three active plans, two Approved Enterprises under
the Alternative Benefits Programs (Plans 3-4 and Plan 5) and one
Benefited Enterprise (Plan 6), granting us a package of benefits,
subject to compliance with applicable requirements. Under Plan 3-4
(benefit period starting 2003), the Company was entitled to an
exemption from corporate income tax on undistributed profits for a
period of two years following implementation of the plan and to a
reduced tax rate of between 10% and 25% (depending on the level of
foreign investment) for an additional thirteen years thereafter.
Under Plan 5 (benefit period starting 2007), the Company was
entitled to an exemption from corporate income tax on undistributed
profits for a period of two years following implementation of such
plan and to a reduced tax rate of 10% to 25% (depending on the
level of foreign investment) for eight additional years thereafter.
We filed a request for an additional five years of reduced tax
rates for such plan. Approval is still pending. Under Plan 6
(benefit period starting 2010), the Company was entitled to an
exemption from corporate income tax on undistributed profits for a
period of two years and a reduced tax rate of 10% to 25% (depending
on the level of foreign investment) for eight additional years
thereafter.
The entitlement to these benefits is conditional upon the Company
fulfilling the requirements of the Investments Law, regulations
published thereunder and the certificate of approval for the
specific investments in the case of Approved Enterprises. In the
event of failure to comply with these requirements, the benefits
may be reduced or canceled and the Company may be required to
refund the amount of the benefits it received, in whole or in part,
including linkage and interest. As of March 31, 2015,
Management believes that the Company complied with all of the
aforementioned requirements.
If the Company pays a dividend, the source of which is income
derived from the Approved and/or Benefited Enterprises during the
tax exempt period, the Company will be subject to corporate tax at
the rate ordinarily applicable to the Approved/Benefited Enterprise
from which it was exempt, on the gross amount of such dividend.
The Company has decided not to declare dividends out of such
tax-exempt income. Accordingly, no deferred income taxes have been
provided on income attributable to the Company’s Approved
and/or Benefited Enterprises.
For the years ended March 31, 2015 and 2014, income not
eligible for Approved and/or Benefited Enterprise benefits is taxed
at the regular corporate income tax rate (either 26.5% or 25%, see
above).
d. The New Incentives
Regime—Amendment 68 to the Investment Law
Under Amendment 68 to the Investment Law (“Amendment
68”), upon an irrevocable election made by a company, a
uniform corporate tax rate will apply to all qualifying industrial
income of such company (an “Industrial Company”), as
opposed to the previous law’s incentives, which were limited
to income from Approved/Benefited Enterprises during the benefits
period. Under the law, when the election is made, the uniform tax
rate for 2014 and onwards will be 9% in areas in Israel designated
as Development Zone A and 16% elsewhere in Israel. The profits of
these Industrial Companies will be freely distributable as
dividends, subject to withholding tax of 20% or lower, under an
applicable tax treaty. Certain “Special Industrial
Companies” that meet more stringent criteria (significant
investment, R&D or employment thresholds), and will enjoy
further reduced tax rates of 5% in Zone A and 8% elsewhere. In
order to be classified as a “Special Industrial
Company,” the approval of three governmental authorities in
Israel is required. We did not elect to apply for Amendment 68 in
tax year 2015 or 2014.
e. Measurement of taxable income under
the Income Tax (Inflationary Adjustments) Law, 1985 of Israel:
With respect to the Israeli entity, commencing in taxable year
2003, the Company elected to measure its taxable income and file
its tax returns in U.S. dollars in keeping with Israeli Income Tax
Regulations, 1986 (Principles Regarding the Management of Books of
Account of Foreign Invested Companies and Certain Partnerships and
the Determination of Their Taxable Income). Such an election is
binding to the Company for three years. Accordingly, commencing
taxable year 2003, results for tax purposes are measured in
U.S. Dollar terms. After the initial three-year term, the
Company must make the election on an annual basis. Through taxable
year 2014, the Company has consistently elected, for tax purposes,
to measure its earnings in U.S. dollars.
f. Income from continuing and
discontinued operations before income taxes is comprised of the
following:
Year ended March 31,
2015 2014 2013
Domestic (Israel) $ 250,979 $ 190,233 $ 65,934
Foreign (North America, the Cayman Islands, Ireland and the
U.K.) 329,914 253,355 268,735
Income from continuing and discontinued operations before taxes $ 580,893 $ 443,588 $ 334,669
g. Taxes on income are comprised of the
following:
Year ended March 31,
2015 2014 2013
Current taxes $ 166,466 $ 106,561 $ 93,165
Prior years’ benefits (20 ) (124 ) (6,544 )
Deferred income benefits (70,387 ) (23,708 ) (18,822 )
$ 96,059 $ 82,729 $ 67,799
Domestic $ 25,881 $ 16,852 $ 1,139
Foreign 70,178 65,877 66,660
$ 96,059 $ 82,729 $ 67,799
Included within current and deferred income tax expense are
benefits relating to investment tax credits at Taro Canada of $909,
$1,439 and $1,320 for the years ended March 31, 2015, 2014 and
2013, respectively. Taro Canada uses the “flow-through”
method and therefore records the benefits in earnings in the period
the tax credits are utilized.
h. Reconciliation of the statutory tax
rate of the parent company in Israel to the effective consolidated
tax rate:
Year ended March 31,
2015 2014 2013
Statutory tax rate (In Israel) 26.5 % 25.0 % 25.0 %
(Decrease) increase in effective tax rate due to:
Tax benefits from reduced tax rates under benefit programs (7.0 %) (5.0 %) (4.0 %)
Different tax rates applicable to non-Israeli subsidiaries (4.0 %) (2.0 %) 1.0 %
Uncertain tax positions, net 1.0 % 1.0 % (3.0 %)
Taxes (benefits) from prior years 0.0 % 0.0 % 1.0 %
Effective consolidated tax rate 16.5 % 19.0 % 20.0 %
i. Current taxes are calculated at the
following rates:
Year ended March 31,
2015 2014 2013
On Israeli operations (not including “Approved
Enterprise”) 26.5 % 25.0 % 25.0 %
On U.S. operations * 35.5 % 35.0 % 35.0 %
On Canadian operations * 25.0 % 25.0 % 25.0 %
On U.K. operations * 21.0 % 23.0 % 24.0 %
On Ireland operations * 12.5 % 12.5 % 12.5 %
* The U.S., Canadian, U.K., and Irish
subsidiaries are taxed on the basis of the tax laws prevailing in
their countries of residence. The Canadian subsidiary qualifies for
research and development tax credits and manufacturing and
processing credits, thereby reducing its effective tax rate.
j. Deferred income taxes:
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 and carryforward losses.
March 31,
2015 2014
Deferred tax assets:
Net operating loss carryforward $ 10,379 $ 12,347
Deferred revenue 34,834 23,343
Property, plant, and equipment 921 1,224
Accrued expenses 131,524 91,603
Bad debt allowance 39 38
Amortization and impairment 5,406 5,917
Other, net 32,259 12,695
Total deferred tax assets 215,362 147,167
Valuation allowance for deferred tax assets (11,301 ) (13,573 )
Net deferred tax assets 204,061 133,594
Deferred tax liabilities:
Property, plant, and equipment (1,901 ) (1,739 )
Other, net (261 ) (343 )
Total deferred tax liabilities (2,162 ) (2,082 )
Net deferred tax assets $ 201,899 $ 131,512
Domestic $ 12,721 $ 9,990
Foreign 189,178 121,522
$ 201,899 $ 131,512
The deferred income taxes are presented in the balance sheet as
follows:
March 31,
2015 2014
Among current assets (“other receivables and prepaid
expenses”) $ 199,908 $ 128,689
Long-term deferred income tax assets 4,153 4,905
Among short-term liabilities (261 ) (343 )
Among long-term liabilities (1,901 ) (1,739 )
$ 201,899 $ 131,512
k. Carryforward tax losses:
1. The Company:
As of March 31, 2015, the Company has no carryforward net
operating losses. As of March 31, 2015 the Company has
carryforward capital losses of approximately $74,000. Such losses
can only be used to offset capital gains.
2. Canadian subsidiary:
As of March 31, 2015, this subsidiary has no carryforward
losses.
3. U.K. subsidiary:
As of March 31, 2015, this subsidiary has carryforward tax
losses of $10,638, which may be carried forward and offset against
taxable income for an indefinite period in the future. As discussed
in Note 2.u, there is a full valuation allowance provided against
these losses.
4. Irish subsidiary:
As of March 31, 2015, this subsidiary has carryforward losses
of $68,185. Taro Ireland commenced trade in 2006 and therefore has
satisfied any expiration deadlines. As discussed in Note 2.u, a
full valuation allowance is provided against these losses.
5. U.S. subsidiary:
As of March 31, 2015, this subsidiary has no carryforward tax
losses.
6. Hungarian subsidiary:
As of March 31, 2015, this subsidiary has no carryforward
losses.
l. The Company’s Board of
Directors has determined that its U.S. subsidiary will not pay any
dividend as long as such payment will result in any tax expense for
the Company.
m. At March 31, 2015, deferred
income taxes were not provided for on a cumulative total of
$766,152 of the undistributed earnings of Taro Canada, which are
not taxable provided earnings remain undistributed. Taro Canada
intends to invest these earnings indefinitely in its
operations.
n. Foreign withholding taxes have been
accrued as necessary by the Company and its subsidiaries.
o. Tax assessments:
The Company completed its tax assessments with the Israeli tax
authorities for years through 2009. The Company’s tax
provision was adequate to satisfy these assessments. The Company
may be subject to examination by the Israeli tax authorities for
years 2010 and onward. The Company believes that its tax provision
is adequate to satisfy any assessments resulting from examinations
related to these years.
The Company completed its tax assessments with the U.S. tax
authorities for the years through March 31, 2013. The
Company’s tax provision was adequate to satisfy these
assessments. Taro U.S.A. is currently under examination for the
year ending 2014. The Company believes that its tax provision is
adequate to satisfy any assessments resulting from examination
related to these years.
The Company completed its tax assessments with the Canadian tax
authorities for the years through 2010. The Company’s tax
provision was materially adequate to satisfy these assessments.
Taro Canada remains subject to examination by the Canadian tax
authorities for years after 2010. The Company believes that its tax
provision is adequate to satisfy any assessments resulting from
examinations related to these years.
p. Uncertain tax positions:
The Company adopted FASB ASC Section 740-10-25,
“ Income Taxes-Overall-Recognition,”
March 31,
2015 2014 2013
Unrecognized tax exposure at beginning of year $ 6,858 $ 6,634 $ 13,828
Increases as a result of positions taken in prior period 129 146 1,912
Decreases as a result of positions taken in prior period (462 ) (1,815 ) (115 )
Increases as a result of positions taken in current period 2,501 1,893 1,495
Decreases due to settlements with tax authorities (60 )
— (10,216 )
Decreases due to expiration of statute of limitations
—
— (270 )
Unrecognized tax exposure at end of year $ 8,966 $ 6,858 $ 6,634
The total amount of interest and penalties recognized on the
Consolidated Statement of Operations for the years ended
March 31, 2015, 2014 and 2013, were ($230), $751, and
($2,730), respectively. The total amount of interest and penalties
recognized on the consolidated balance sheet at March 31, 2015
and 2014 were $550 and $2,567, respectively.
The total amount of unrecognized tax benefits, which would impact
the effective tax rate if recognized, was $8,966 and $6,858 at
March 31, 2015 and 2014, respectively. |
