Annual report pursuant to Section 13 and 15(d)

AMAK ZAKAT AND INCOME TAX

AMAK ZAKAT AND INCOME TAX

12 Months Ended

Dec. 31, 2019

INCOME TAXES



The provision for income taxes from continuing operations consisted of the following:
	Year ended December 31,
	2019			2018			2017
	(thousands of dollars)
Current federal benefit	$	—		$	(74	)	$	(1,202	)
Current state expense	91			31			282

Deferred federal benefit	(3,564		)	(813		)	(5,389		)
Deferred state expense (benefit)	(93		)	210			81

Income tax benefit	$	(3,566	)	$	(646	)	$	(6,228	)

The difference between the effective tax rate in income tax expense and the Federal statutory rate of 21% for the years ended December 31, 2019 and 2018, and 35% for the year ended December 31, 2017, is as follows:



	2019			2018			2017
	(thousands of dollars)
Income taxes at U.S. statutory rate	$	(3,455	)	$	(661	)	$	4,816
State taxes, net of federal benefit	256			234			235
Net operating loss carryback	—			—			(961		)
Research and development credits	(203		)	(263		)	—
Permanent and other items	(164		)	44			(11		)
Deferred tax impact of US tax reform	—			—			(10,307		)
Total tax benefit	$	(3,566	)	$	(646	)	$	(6,228	)

Permanent differences are primarily due to the Federal manufacturer's deduction, in applicable year 2017, research and development credit, and stock-based compensation.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("TCJA") was signed into law making significant changes to the Internal Revenue Code. The changes as a result of the TCJA, which had the most significant impact on the Company's federal income taxes are as follows:

Reduction of the U.S. Corporate Income Tax Rate - The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the TCJA, the Company revalued its ending net deferred tax liabilities at December 31, 2017.

Acceleration of Depreciation - The Company recognized a provisional reduction to net deferred tax assets attributable to the accelerated depreciation for certain assets placed into service after September 27, 2017. The provisional estimate was finalized including consideration of TCJA on long term construction projects.

The Company elected to recognize the income tax effects of the TCJA in its financial statements in accordance with Staff Accounting Bulletin 118 (SAB 118), which provides guidance for the application of ASC Topic 740 Income Taxes, in the reporting period in which the TCJA was signed into law. During the fourth quarter of 2018, we completed our accounting for the Tax Act based on the current regulatory guidance available at the end of the SAB 118 measurement period and recorded no material net adjustments to our provisional estimate.

Tax effects of temporary differences that give rise to significant portions of federal and state deferred tax assets and deferred tax liabilities were as follows:



	December 31,
	2019			2018
	(thousands of dollars)
Deferred tax liabilities:
Plant, pipeline and equipment	$	(29,227	)	$	(25,169	)
Intangible assets	—			(1,075		)
Other assets	(32		)	(40		)
Operating lease asset	(2,838		)	—
Investment in AMAK	(302		)	(671		)
Total deferred tax liabilities	$	(32,399	)	$	(26,955	)

Deferred tax assets:
Net operating loss carryforward	11,685			9,073
Intangible assets	3,699			—
Operating lease liability	2,838			—
Stock-based compensation	1,093			954
Foreign tax credit	891			802
Accounts receivable	240			238
Mineral interests	226			226
Interest expense carryforward	211			—
General business credit	140			—
Inventory	111			133
Post-retirement benefits	71			79
Charitable contributions	45			—
Gross deferred tax assets	21,250			11,505
Valuation allowance	(226		)	(226		)
Total net deferred tax assets	$	21,024		$	11,279
Net deferred tax liabilities	$	(11,375	)	$	(15,676	)

In connection with the proceeds received from AMAK in connection with its share repurchase program (See Note 6), the Company accrued a deferred tax asset (foreign tax credit) and the corresponding liability for the Saudi Arabian tax which was settled during 2019.

We provided a valuation allowance in 2019 and 2018 against certain deferred tax assets because of uncertainties regarding their realization. As of December 31, 2019 and 2018, we have federal income tax net operating losses ("NOLs") carryforwards of $56.6 million and $43.2 million, respectively. The NOLs were created after the enactment of TCJA and therefore do not expire but may offset only 80% of taxable income in an annual period.

We file an income tax return in the U.S. federal jurisdiction and a margin tax return in Texas. We received notification from the Internal Revenue Service ("IRS") in February 2020 on the selection of our December 31, 2017 tax return for audit. In prior years, we received notification that Texas selected our R&D credit calculations for 2014 and 2015 for audit. The state of Texas had suspended their examination while they comprehensively reviewed their audit procedures for consistency. During the fourth quarter of 2019, we received notice that Texas had completed their review of their procedures and initiated additional requests for information. We do not expect any changes related to the Federal or Texas audits. Our federal and Texas tax returns remain open for examination for the years 2016 through 2019.

We recognized no adjustment for uncertain tax positions. As of December 31, 2019, and 2018, no interest or penalties related to uncertain tax positions had been accrued.

AMAK

Income Tax Contingency [Line Items]

ZAKAT AND INCOME TAX

Zakat and Income Tax

We have submitted our Zakat and income tax return for the year ended December 31, 2018 and have obtained our 2018 Zakat certificate. We are in the process of preparing and submitting our Zakat and income tax return for the year 2019.

The Zakat base for the Saudi shareholders was positive in 2019, 2018 and 2017 and the corresponding Zakat expense and liability has been recorded. In 2019 and 2018, there was a taxable profit attributable to our non-Saudi (foreign) shareholders and the current income tax expense and liability has also been recorded, also included in the liability is withholding on non-Saudi shareholders in connection with the share repurchase as discussed in Note 1. There was no taxable profit attributable to our non-Saudi (foreign) shareholders for 2017, therefore, no current income tax liability is due in that year.



The components of Zakat and income tax expense (benefit) are as follows:
	Years ended December 31,
	2019		2018		2017
Deferred income tax benefit	1,737,276		(12,961,569	)	(8,617,706	)
Change in valuation allowance	(1,312,403	)	5,736,640		9,035,670
Current Zakat and income tax expense	6,326,283		5,400,000		3,209,229
Zakat and income tax expense (benefit)	6,751,156		(1,824,929	)	3,627,193

The difference between the effective income tax rate and the statutory rate for non-Saudi shareholders of 20% for the years ended December 31, 2019, 2018, and 2017, relates primarily to changes in the valuation allowance and adjustments to estimates in depreciation.



Tax effects of temporary differences that give rise to significant portions of non-Saudi owners deferred tax assets and deferred tax liabilities were as follows:
	December 31,
	2019		2018
Deferred tax assets:
Loss carryforward	41,293,547		42,193,939
Other	799,526		656,819
	42,093,073		42,850,758
Deferred tax liabilities:
Property and Equipment	(8,785,642	)	(7,806,051	)
Net deferred tax asset	33,307,431		35,044,707
Valuation allowance	(37,525,089	)	(38,837,492	)
Net deferred tax liability	(4,217,658	)	(3,792,785	)

At December 31, 2019 and 2018, we had tax loss carryforwards totaling approximately SR206,468,000 and SR210,970,000 . Tax losses may be carried forward indefinitely subject to certain annual limitations for non-Saudi shareholders. We have provided a valuation allowance in 2019 and 2018 against a portion of our gross deferred tax assets because of uncertainties regarding their realization.