| F. INCOME TAXES | On December 22, 2017, Public Law 115-97, commonly
known as the Tax Cuts and Jobs Act of 2017 (the “Tax Reform”), was enacted. The Tax Reform is applicable to the Company
commencing with its fiscal year 2018, including the Transition Tax provisions which establishes measurement dates for various computations,
November 2, 2017, December 31, 2017 and October 31, 2018. The Tax Reform imposed a mandatory one-time transition tax (the “Transition
Tax”) over foreign subsidiaries undistributed earnings and profits (“E&Ps”) earned prior to a date set by
the statute. Based on the Company’s E&Ps, the Transition Tax is estimated to be approximately $2.7 million. The Transition
Tax liability may be paid over a period of eight years starting on February 28, 2019. In the past, most of these E&Ps’
were not repatriated since such E&Ps’ were considered to be reinvested indefinitely in the foreign location, therefore
no US tax liability was incurred unless the E&Ps were repatriated as a dividend. After December 31, 2017, the Tax Reform has
established a 100% tax exemption on the foreign-source portion of dividends received attributable to E&Ps, with certain limitations. In June 2011, Pharma-Bio, Pharma-PR and Pharma-Serv
obtained a Grant of Industrial Tax Exemption pursuant to the terms and conditions set forth in Act No. 73 of May 28, 2008 (“the
Grant”) issued by the Puerto Rico Industrial Development Company (“PRIDCO”). The Grant was effective as of November
1, 2009 and covers a fifteen-year period. The Grant provides relief on various Puerto Rico taxes, including income tax, with certain
limitations, for most of the activities carried on within Puerto Rico, including those that are for services to parties located
outside of Puerto Rico. Industrial Development Income (“IDI”) covered under the Grant are subject to a fixed income
tax rate of 4%. In addition, IDI earnings distributions accumulated since November 1, 2009 are totally exempt from Puerto Rico
earnings distribution tax. For the year ended October 31, 2018, the favorable
consolidated net income aggregate dollar effect of the Grant was approximately $652,000, or $0.028 per basic weighted average share.
For the year ended October 31, 2017, subsidiaries under the Grant were on a net loss position, therefore no income tax benefit
was derived from the Grant. Puerto Rico operations not covered in the exempt
activities of the Grant are subject to Puerto Rico income tax at a maximum tax rate of 39% as provided by the 1994 Puerto Rico
Internal Revenue Code, as amended. The operations carried out in the United States by the Company’s subsidiary was taxed
in the United States at a maximum regular federal income tax rate of 35%. Among the Tax Reform provisions, effective with the Company’s
fiscal year ending on October 31, 2018, is a provision whereby the regular federal income tax rate is reduced to a 23.5% blended
rate and 21% thereafter. The reconciliation
between the United States federal statutory rate and our effective tax rate applicable to continuing operations for the years ended
October 31, 2018, and 2017 is as follows:
October 31,
2018 2017
United States federal statutory rate 23.5 % 35.0 %
US Tax Reform Transition Tax Expense 177.2 % -
Puerto Rico, including foreign loss positionsfor which the resulting deferred asset has been allowed, net (16.5 )% (26.2 )%
Other, including US loss positions for which the resulting deferred tax asset has been allowed, net (1.4 )% (9.1 )%
Effective tax rate 182.8 % (0.3 )% At October 31, 2018, Pharma-Spain, Pharma-IR,
Pharma-Bio/Pharma-US, and Pharma-Serv have unused operating losses of approximately $1,270,000, $121,000, $2,695,000, and $22,000,
respectively. These net operating losses are available to offset future taxable income until October 31, 2028, 2029, 2030, 2031,
2032 and 2033 for the aggregate amounts of $178,000, $332,000, $266,000, $181,000, $40,000 and $273,000, respectively for Pharma-Spain;
indefinitely for Pharma-IR; until October 31, 2035, 2036, 2037, and 2038 for the aggregate amounts of $292,000, $834,000, $345,000
and $1,224,000, respectively for Pharma-Bio/Pharma-US; and until October 31, 2027 in the amount of $22,000 for Pharma-Serv. After
considering various timing differences for income tax purposes, these unused operating losses result in a potential deferred tax
asset for Pharma-Spain, Pharma-IR, Pharma-Bio, and Pharma-Serv of approximately $254,000, $15,000, $566,000 and $1,000, respectively.
However, an allowance has been provided covering the total amount of such balance since it is uncertain whether the net operating
losses can be used to offset future taxable income. Realization of future tax benefits related to a deferred tax asset is dependent
on many factors, including the Company’s ability to generate taxable income. Accordingly, the income tax benefit will be
recognized when realization is determined to be more probable than not. The Company files income tax returns in the
United States (federal and various states jurisdictions), Puerto Rico, Ireland, Spain and Brazil. The 2014 (2013 for Puerto Rico)
through 2017 tax years are open and may be subject to potential examination in one or more jurisdictions. Currently, the Company
is currently not subject to a federal, state, Puerto Rico or foreign income tax examination. |
