| INCOME TAXES | NOTE D - 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 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 was determined to be approximately $2.7 million. The Transition Tax liability must be paid over a period of eight years, which started with the Company’s second quarter of fiscal year 2019. Previously, 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. However, foreign subsidiaries earnings are subject to U.S. tax at a reduced rate of 10.5%. 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, ending on October 31, 2024. The Grant provided 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 exempt from Puerto Rico earnings distribution tax. Under the provisions of Puerto Rico Acts 60-2019 and 73-2008, the Company has requested PRIDCO the renegotiation of the Grant for an additional term of fifteen years. 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 37.5% as provided by the 1994 Puerto Rico Internal Revenue Code, as amended. The operations carried out in the United States by the Company’s subsidiaries, is taxed in the United States at a maximum regular federal income tax rate of 21%. The Spanish subsidiary operations in Spain are taxed at a regular income tax rate of 25%. On October 31, 2024, Pharma-Bio, Pharma-Spain and Pharma-Serv have unused operating losses of approximately $631,000, $256,000 and $546,000, respectively. These net operating of losses for Pharma-Bio and Pharma-Spain are available to offset indefinitely for future taxable income, while for Pharma-Serv is available to offset future taxable income until October 31, 2034. After considering various timing differences for income tax purposes, these unused operating losses result in a potential deferred tax asset for Pharma-Bio, Pharma-Spain and Pharma-Serv of approximately $132,600, $64,200, and $21,800, 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 reconciliation between the United States federal statutory rate and our effective tax rate applicable to continuing operations for the years ended October 31, 2024, and 2023 is as follows: October 31, 2024 2023 United States federal statutory rate (21.0 )% 21.0 % Allowance of resulting deferred tax asset 18.4 % - % Tax holiday (PRIDCO Grant), including GILTI, if any (3.3 )% (2.1 )% Other foreign jurisdictions earnings 8.8 % 2.8 % Other - % 0.6 % Effective tax rate 2.9 % 22.3 % The effective tax rates, for the years ended October 31, 2024 and 2023, differ from the federal statutory rate mainly due to the impact of the jurisdictional mix of income and expenses. The variance in our effective tax rate is mainly attributable to (i) foreign earnings results from the Company’s operations conducted in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes and is subject to tax incentive grants, (ii) other foreign earnings other than from Puerto Rico, and (iii) the allowance of resulting deferred tax asset for net operating losses carry forward. As previously disclosed, foreign earnings (including Puerto Rico) are also subject to U.S. tax at a reduced rate of 10.5%. The Company had no income tax expense related to US federal and state taxes for the year ended October 31, 2024, while for the year ended October 31, 2023, the Company incurred approximately $132,900 in federal and state taxes. For the years ended October 31, 2024 and 2023, foreign income taxes included on income tax expense were $22,200 and $244,400, respectively. The Company files income tax returns in the United States (federal and various states jurisdictions), Puerto Rico, Spain and Brazil. The 2020 (2019 for Puerto Rico) through 2023 tax years are open and may be subject to potential examination in one or more jurisdictions. Currently, the Company is not subject to a federal, state, Puerto Rico or foreign income tax examination. |
