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Taxes on Income
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Taxes on Income
Note 16 - Taxes on Income
  A.
Measurement of results for tax purposes under the Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986
   
As a "foreign invested company" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the taxable income or loss and the tax basis of assets and liabilities of the Company’s Israeli operations are denominated in US Dollars.
  B.
Corporate tax rate in Israel
   
The regular corporate tax rate applied to taxable income of Israeli companies is 23% (as from 2018 onwards).
  C.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law")
  1.
On December 29, 2010 the Knesset approved the Economic Policy Law for 2011-2012, which includes an amendment to the Law for the Encouragement of Capital Investments – 1959 (hereinafter – "the Amendment to the Law"). The Amendment to the Law is effective from January 1, 2011 and its provisions will apply to preferred income derived or accrued in 2011 and thereafter by a Preferred Company, per the definition of these terms in the Amendment to the Law.
     
   
Companies can choose to not be included in the scope of the Amendment to the Law and to stay in the scope of the law before its amendment until the end of the benefits period.
 
Under the Amendment to the Law, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all preferred income of such company. The Company elected to apply the uniform corporate tax rate as of 2014.  From 2017 onwards, the uniform tax rate is to be 7.5% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. The company has two facilities in Israel of which one of them is located in Development Zone A. The profits of these Preferred Companies will be freely distributable as dividends, subject to a withholding tax of 20% (or a lower rate under an applicable tax treaty).
Should the Company derive income from sources other than the Preferred Company, such income will be taxable at the regular corporate tax rates for the applicable year.
   
On December 29, 2016 the Israeli Parliament (the "Knesset") enacted the "Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016" in which the Law was also amended (hereinafter: “the Amendment”). The Amendment added new tax benefit tracks for a “preferred technological enterprise” and a “special preferred technological enterprise” which award reduced tax rates to a technological industrial enterprise for the purpose of encouraging activity relating to the development of qualifying intangible assets.
The benefits will be awarded to a “preferred company” that has a “preferred technological enterprise” or a “special preferred technological enterprise” with respect to taxable “preferred technological income” per its definition in the Law.
 
Preferred technological income that meets the conditions required in the law, will be subject to a reduced corporate tax rate of 12%, and if the preferred technological enterprise is located in "Development Area A" in Israel - to a reduced tax rate of 7.5%. A company that owns a special preferred technological enterprise will be subject to a reduced corporate tax rate of 6% regardless of the development area in which the enterprise is located. The Amendment is effective as from January 1, 2017.
On June 14, 2017 the Knesset Finance Committee approved "Encouragement of Capital Investment Regulations (Preferred Technological Income and Capital Gain of Technological Enterprise) – 2017" (hereinafter: “the Regulations”), which provides rules for applying the “preferred technological enterprise” and “special preferred technological enterprise” tax benefit tracks, including the Nexus formula that provides the mechanism for allocating the technological income eligible for the benefits.
Should the Company derive income from sources other than the “preferred technological enterprise”, such income will be taxable at the "Preferred Company" tax rate (for manufacturing activity in Israel) or regular corporate tax rates for the applicable year.
 
As a result of the aforesaid legislation, starting 2021 the Company implement the “preferred technological enterprise” tax benefit track.
 
2. 
In the event of distribution by the Company of dividends out of its retained earnings that were generated prior to the 2014 tax year and were tax exempt under the "Approved Enterprise" or "Benefited Enterprise" status, the Company would be subjected to a maximum of 25% corporate tax on the amount distributed, and a further 15% withholding tax would be deducted from the amounts distributed to the shareholders.
     
   
Out of the Company’s retained earnings as of December 31, 2021, approximately US$ 56,136 thousand are tax-exempt, under our previous "Approved Enterprise" and "Benefited Enterprise" status. If such tax-exempt income is distributed as a dividend (including a liquidation dividend), it would be taxed at the regular corporate tax rate applicable to such profits (subject to a maximum rate of 25%) and an income tax liability of up to approximately US$ US$ 14,034 thousand would be incurred as of December 31, 2021. Based on the 2021 Budget Law, the Company anticipates that any future dividends distributed pursuant to its dividend policy, will impose additional tax liabilities on the Company. The Company intends to reinvest its tax-exempt income. Accordingly, no deferred tax liability has been recognized for income attributable to the Company’s previous "Approved Enterprise" or "Benefited Enterprise" status. If the Company was to declare a dividend from its tax-exempt income, an income tax expense would be recognized in the period a dividend is declared.
     
   

On November 15, 2021, the Israeli Parliament released its 2021-2022 Budget Law (“2021 Budget Law”). The 2021 Budget Law introduces a new dividend ordering rule that apportions every dividend between previously tax-exempt and previously taxed income. Consequently, distributions (including deemed distributions as per Section 51(h)/51B of the Investment Law) may entail additional corporate tax liability to the distributing company. 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. If such tax-exempt income is distributed, it would be taxed at the reduced corporate tax rate applicable to such income.
  D.

Taxation of the subsidiaries
  1.
The subsidiary Silicom Inc. files tax returns with US federal tax authorities and with state tax authorities in the states of New Jersey, California, Virginia, New York, New Mexico, Tennessee, Texas and Illinois.
 
The federal corporate income tax rate is 21%.
     
  2.

The subsidiary Silicom Denmark is taxed according to the tax laws in Denmark, subject to corporate tax of 22%.
     
  3.
The Company has not provided for Israeli income tax and foreign withholding taxes on US$ 8,702 thousand of its non-Israeli subsidiaries' undistributed earnings as of December 31, 2021. The earnings could become subject to tax if earnings are remitted or deemed remitted as dividends or upon sale of a subsidiary.
 
The Company currently has no plans to repatriate those funds and intends to indefinitely reinvest them in its non-Israeli operations. The unrecognized deferred tax liability associated with these temporary differences was approximately US$ 1,537 thousand at December 31, 2021.
  E.

Tax assessments
  1.
For the Israeli jurisdiction the Company has final tax assessments for all years up to and including the tax year ended December 31, 2015.
     
  2.
For the US federal jurisdiction, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2016. For the New Jersey and California state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2015. For the Virginia, Tennessee, New York and New Mexico state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2017. For the Texas state jurisdiction, Silicom Inc. has open tax assessments for the years 2018 through 2020. For the Illinois state jurisdiction, Silicom Inc. has open tax assessment for the year 2020.
     
  3.
For the Danish jurisdiction, Silicom Denmark has final tax assessments for all years up to and including the tax year ended December 31, 2015.
  F.

Income before income taxes and income taxes expense (benefit) included in the consolidated statements of operations

 

 
 
Year ended December 31
 
 
 
2019
 
 
2020
 
 
2021
 
 
 
US$ thousands
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes:
 
 
 
 
 
 
 
 
 
Israel
 
 
9,339
 
 
 
5,565
 
 
 
7,486
 
Foreign jurisdictions
 
 
2,520
 
 
 
1,717
 
 
 
5,419
 
 
 
 
11,859
 
 
 
7,282
 
 
 
12,905
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current taxes:
 
 
 
 
 
 
 
 
 
 
 
 
Israel
 
 
1,732
 
 
 
1,260
 
 
 
1,281
 
Foreign jurisdictions
 
 
611
 
 
 
506
 
 
 
1,192
 
 
 
 
2,343
 
 
 
1,766
 
 
 
2,473
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current tax (benefits) expenses relating to prior years:
 
 
 
 
 
 
 
 
 
 
 
 
Israel
 
 
(17
)
 
 
50
 
 
 
(10
)
Foreign jurisdictions
 
 
(4
)
 
 
(198
)
 
 
(147
)
 
 
 
(21
)
 
 
(148
)
 
 
(157
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred taxes:
 
 
 
 
 
 
 
 
 
 
 
 
Israel
 
 
(904
)
 
 
8
 
 
 
174
 
Foreign jurisdictions
 
 
205
 
 
 
(69
)
 
 
(126
)
 
 
 
(699
)
 
 
(61
)
 
 
48
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 
1,623
 
 
 
1,557
 
 
 
2,364
 
  G.

Deferred tax assets and liabilities
The tax effects of significant items comprising the Company’s deferred tax assets and liabilities are as follows:
 
 
December 31
 
 
December 31
 
 
 
2020
 
 
2021
 
 
 
US$ thousands
 
 
US$ thousands
 
 
 
 
 
 
 
 
Deferred tax assets:
 
 
 
 
 
 
Accrued employee benefits
 
 
368
 
 
 
420
 
Research and development costs
 
 
1,859
 
 
 
2,000
 
Operating loss carryforwards
 
 
66
 
 
 
-
 
Share based compensation
 
 
365
 
 
 
427
 
Intangible assets
 
 
287
 
 
 
228
 
Operating lease liabilities
 
 
1,121
 
 
 
1,048
 
Other
 
 
1
 
 
 
-
 
Total deferred tax assets
 
 
4,067
 
 
 
4,123
 
 
 
 
 
 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
 
 
 
 
Intangible assets
 
 
(203
)
 
 
(169
)
Goodwill
 
 
(1,089
)
 
 
(1,300
)
Operating leases right-of-use, net
 
 
(1,100
)
 
 
(1,000
 )
Other
 
 
(21
)
 
 
(48
 )
Total deferred tax liabilities
 
 
(2,413
)
 
 
(2,517
)
 
 
 
 
 
 
 
 
 
Net deferred tax assets
 
 
1,654
 
 
 
1,606
 
 
 
 
 
 
 
 
 
 
In Israel
 
 
1,790
 
 
 
1,616
 
Foreign jurisdictions
 
 
(136
)
 
 
(10
)
Net deferred tax assets
 
 
1,654
 
 
 
1,606
 
 
 
 
 
 
 
 
 
 
Non-current deferred tax assets
 
 
1,790
 
 
 
1,616
 
Non-current deferred tax liabilities
 
 
(136
)
 
 
(10
)
  H.

Reconciliation of the statutory tax expense to actual tax expense
 
 
 
Year ended December 31
 
 
 
2019
 
 
2020
 
 
2021
 
 
 
US$ thousands
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 
11,859
 
 
 
7,282
 
 
 
12,905
 
Statutory tax rate in Israel
 
 
23.0
%
 
 
23.0
%
 
 
23.0
%
 
 
 
2,728
 
 
 
1,675
 
 
 
2,968
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase (decrease) in taxes resulting from:
 
 
 
 
 
 
 
 
 
 
 
 
Non-deductible operating expenses
 
 
417
 
 
 
508
 
 
 
395
 
Prior years adjustments
 
 
(21
)
 
 
(148
)
 
 
(157
)
Tax effect due to
 
 
 
 
 
 
 
 
 
 
 
 
"Preferred Enterprise" status*
 
 
(1,099
)
 
 
(714
)
 
 
(800
)
Statutory rate differential
 
 
18
 
 
 
105
 
 
 
(86
)
Changes in tax rate
 
 
7
 
 
 
181
 
 
 
223
 
Creation of deferred taxes for tax losses and
benefits from previous years for which deferred
taxes were not created in the past
 
 
(476
)
 
 
-
  
 
 
-
 
Other
 
 
49
 
 
 
(50
)
 
 
(179
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 
1,623
 
 
 
1,557
 
 
 
2,364
 
 
 
 *
The effect of the benefit resulting from the "Preferred Enterprise" status on net earnings per ordinary share is as follows:
 
 
 
Year ended December 31
 
 
 
2019
 
 
2020
 
 
2021
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
0.15
 
 
 
0.10
 
 
 
0.12
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted
 
 
0.15
 
 
 
0.10
 
 
 
0.11
 
  I.

Accounting for uncertainty in income taxes

The accounting literature clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.
 
During 2019, 2020 and 2021 the Company and its subsidiaries did not have any significant unrecognized tax benefits and thus, no related interest and penalties were accrued.
 
In addition, the Company and its subsidiaries do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.