| INCOME TAXES | NOTE
11 - INCOME TAXES Deferred
income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax laws or rates is recognized in income in the period that includes the enactment date. Liabilities
are established for uncertain tax positions expected to be taken in income tax return when such positions are judged to meet the
“more-likely-than-not” threshold based on the technical merits of the positions. Estimated interest and penalties
related to uncertain tax positions are included as a component of other expenses. Through December 31, 2017, the Company has not
identified any uncertain tax positions that it has taken. U.S. income tax returns for the years ended December 31, 2014 through
December 31, 2017 and the Chinese income tax return for the year ended December 31, 2017 are open for possible examination. On
March 16, 2007, the National People’s Congress of China passed the Enterprise Income Tax Law (EIT Law) and on December 6,
2007, the State Council of China issued the Implementation Regulations for the EIT Law which took effect on January 1, 2008.
The EIT Law and Implementation Regulations Rules impose a unified EIT of 25% on all domestic-invested enterprises and Foreign
Invested Entities, or FIEs, unless they qualify under certain limited exceptions. The
Company is located in a special region, which had a 15% corporate income tax rate before the new EIT Law. The new EIT Law abolished
the preferential corporate income tax rate in the special region. The Company transitioned to the new 25% tax rate over a five
year period which began on January 1, 2008. During 2010, the Company applied for and received a favorable tax rate of 15% for
fiscal 2011 through 2013 due to its status in the PRC as a high technology enterprise. In 2013, the Company again applied for
and received the same favorable tax rate for 2014 to 2016. The recent net losses have put the Company in an unfavorable
position for the potential renewal of “National High-Tech Enterprise” status in 2017. After evaluating the feasibility
of the renewal, the Company has decided not to renew this status. Under the current tax law in the PRC, the Company is and
will be subject to the following enterprise income tax rates:
Year Enterprise Income Tax Rate
2016 15%
2017 25%
2018 25%
Thereafter 25% The
provision for income taxes consisted of the following:
Year Ended December 31,
2017 2016
Current $ - $ -
Deferred 122,631 308,175
Total income tax expense $ 122,631 $ 308,175 Following
is a reconciliation of income taxes calculated at the federal statutory rates to the provision for income taxes:
Years Ended December 31,
2017 2016
(Benefit) tax at statutory rate of 25% $ (4,788,734 ) $ (2,218,612 )
Effect of tax holiday - 837,089
Effect of change in tax rate from 15% to 25% - (8,094,456 )
Other, primarily the difference in U.S. tax rates 8,077 7,903
Change in valuation allowance 4,903,288 9,776,251
Income tax expense $ 122,631 $ 308,175 The
effect of the tax holiday in 2016 amounted to a change in the tax expense of $837,089, which was equivalent to basic and diluted
earnings per share of ($0.01) per share for the year ended December 31, 2016. The temporary differences which give rise to the
deferred income tax assets and liability are as follows:
December 31,
2017 2016
Deferred income tax assets:
Allowance for doubtful trade receivables $ 4,552,432 $ 3,916,124
Allowance for doubtful other receivables 10,002 17,959
Inventory obsolescence reserve 1,595,671 1,535,660
Expenses not deductible in current year 1,076,126 1,008,350
Advances for intangible assets impairment 4,387,237 793,624
PRC net operating loss carry forward 14,572,439 12,660,410
U.S. net operating loss carry forward 1,076,830 1,520,675
Total deferred income tax assets 27,270,737 21,452,802
Valuation allowance (27,270,737 ) (21,452,802 )
Net deferred income tax asset $ - $ -
Deferred income tax liability:
Intangible assets $ 738,175 $ 572,349 As
of December 31, 2017, the Company had net operating loss carryforwards for PRC tax purposes of approximately $58.3 million which
are available to offset any future taxable income through 2022. The Company also has net operating losses for United States federal
income tax purposes of approximately $5.1 million which are available to offset future taxable income, if any, through 2037. Recent
U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed
into law on December 22, 2017. The U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other
things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31,
2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition
tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain
limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes
on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years, or in a single lump-sum payment.
The decrease in the United States federal corporate income tax rate from 34% to 21% for 2018 decreased the valuation allowance
related to the U.S. net operating losses by approximately $667,000 at December 31, 2017. There was no liability at December 31,
2017 for the mandatory deemed repatriation tax. In
assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those differences become deductible or tax loss carry
forwards are utilized. Management considers projected future taxable income and tax planning strategies in making this
assessment. Based upon an assessment of the level of historical taxable income and projections for future taxable income
over the periods on which the deferred tax assets are deductible or can be utilized, Management believes it is not likely for
the Company to realize all benefits of the deferred tax assets as of December 31, 2017 and 2016. Therefore, the Company
provided for a valuation allowance against its deferred tax assets of $27,270,737 and $21,452,802 as of December 31, 2017 and
2016, respectively. The
Company is also subject to various other taxes, comprised primarily of business taxes, value-added taxes, urban construction taxes,
education surcharges and others. Any unpaid amounts are reflected on the balance sheets as accrued taxes payable. |
