| Income Taxes | Note 13 – Income Taxes China XD is subject to a tax rate of 34% before 2018 and 21% per the new tax rules beginning 2018, and files a U.S. federal income tax return. On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act has made significant changes to the U.S. Internal Revenue Code, including the taxation of U.S. corporations, by, among other things, limiting interest deductions, reducing the U.S. corporate income tax rate, disallowing certain deductions that had previously been allowed, altering the expensing of capital expenditures, adopting elements of a territorial tax system, assessing a repatriation tax or "toll-charge" on undistributed earnings and profits of U.S.-owned foreign corporations, and introducing certain anti-base erosion provisions. The Company recorded a charge of approximately $71.0 million as a provisional amount for the repatriation tax on deemed repatriation to the United States of accumulated earnings in the Company’s consolidated statement of comprehensive income for the year ended December 31, 2017. As of December 31, 2018, the Company finalized the calculations and tax positions used in the analysis of the impact of the Tax Act in consideration of proposed regulations and other guidance issued during 2018, and no adjustment was made to the provisional amount. Under the current laws of the British Virgin Island ("BVI"), Favor Sea (BVI) and Xinda Deluxe Faith Limited, subsidiaries of China XD, these two are not subject to tax on its income or capital gains. No provision for Hong Kong Profits Tax was made for Xinda Holding (HK) Co., Ltd. ("Xinda Holding (HK) "), (formerly known as Hong Kong Engineering Plastics Co., Ltd.), Xinda (HK) International Trading Co., Ltd. ("Xinda Trading", liquidated in February 2015), Xinda (HONGKONG) Macromolecule Material Limited and Xinda (HK) Trading as they did not have any assessable profits arising in or derived from Hong Kong for any of the periods presented. Under the current laws of Dubai, AL Composites Materials FZE ("Dubai Xinda"), a subsidiary of China XD, is exempted from income taxes. The Company's PRC subsidiaries file separate income tax returns in the PRC. Effective from January 1, 2008, the PRC statutory income tax rate is 25% according to the Corporate Income Tax ("CIT") Law which was passed by the National People's Congress on March 16, 2007. Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda, a subsidiary of China XD, became a qualified enterprise located in the western region of the PRC, which entitled it to a preferential income tax rate of 15% from January 1, 2013 to December 31, 2020. The CIT Law and its implementation rules impose a withholding income tax at 10%, unless reduced by a tax treaty or arrangement, on the amount of dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC that are related to earnings accumulated beginning on January 1, 2008. Dividends relating to undistributed earnings generated prior to January 1, 2008 are exempt from such withholding income tax. China XD earnings from its subsidiaries in PRC and Dubai are subject to the U.S. federal income tax at 21%, less any applicable foreign tax credits. Due to its plan to indefinitely reinvest its earnings in the PRC, the Company has not provided for deferred income tax liabilities related to PRC withholding income tax on undistributed earnings of US$732,515,443 and US$673,784,710 as of December 31, 2018 and 2017, respectively. In addition, due to its plan to indefinitely reinvest its earnings in Dubai, the Company has not provided for deferred income tax liabilities related to Dubai on undistributed earnings of US$201,787,664 and US$206,128,306 as of December 31, 2018 and 2017, respectively. The undistributed earnings as of December 31, 2017 were subject to the one-time repatriation tax under the Tax Act as a deemed repatriation of accumulated undistributed earnings from the foreign subsidiaries. However, The components of income (loss) before income taxes are as follows:
Years Ended December 31,
2018
2017
US$
US$
US
(4,499,127
)
(2,490,668
)
BVI
2,578
(394
)
Hong Kong SAR
(10,611,927
)
(12,544,625
)
Dubai
(4,340,642
)
33,354,059
PRC, excluding Hong Kong SAR
95,475,652
103,827,741
Total income before income taxes
76,026,534
122,146,113 The Company's income tax expense (benefit) recognized in the consolidated statements of comprehensive income consists of the following:
Years Ended December 31,
2018
2017
US$
US$
Current income tax expense-PRC
8,638,230
21,966,937
Current income tax expense-US
992,876
70,965,148
Deferred income tax benefit-PRC
(1,917,993
)
(2,407,706
)
Total income tax expense
7,713,113
90,524,379 The effective income tax rate based on income tax expense and income before income taxes reported in the consolidated statements of comprehensive income differs from the PRC statutory income tax rate of 25% due to the following:
Years Ended December 31,
2018
2017
US$
US$
PRC statutory income tax rate
25
%
25
%
Increase (decrease) in effective income tax rate resulting from:
Tax rate differential on HK entities not subject to PRC income tax
1.1
%
0.9
%
Tax rate differential on BVI entities not subject to PRC income tax
0.0
%
0.1
%
Tax rate differential on US entities not subject to PRC income tax
(0.2
)%
0.0
%
Tax rate differential on UAE entities not subject to PRC income tax
1.4
%
(6.9
)%
Non-deductible expenses
1.2
%
0.2
%
Preferential tax rate
(6.6
)%
(4.5
)%
Change in valuation allowance
4.0
%
3.1
%
R&D additional deduction
(15.0
)%
(3.9
)%
Reversal of unrealized tax benefits
(3.8
)%
0.0
%
Repatriation tax
0.0
%
58.1
%
Others
3.0
%
2.0
%
Effective income tax rate
10.1
%
74.1
% The principal components of the Company's deferred income tax assets and deferred income tax liabilities are as follows:
December 31,
2018
2017
US$
US$
Deferred income tax assets:
Tax loss carry forwards
10,559,911
7,818,069
Foreign currency contracts
-
270,964
Less: valuation allowance
(10,559,911
)
(7,818,069
)
Deferred income tax assets, net (included in other non-current assets)
-
270,964
Deferred income tax liabilities (included in other non-current liabilities):
Property, plant and equipment
6,716,921
9,267,501 The Research Institute was established with a registered capital of approximately US$0.4 million in 2007. The Research Institute provided research and development services to the Company's ultimate end customers. In December 2010, for tax purposes and because the Research Institute could not meet the Company's development needs, the Company dissolved the Research Institute and formed a new legal entity, Heilongjiang Xinda Enterprise Group Macromolecule Materials R&D Center Company Limited ("Xinda Group Material Research"). Based on applicable regulations promulgated by the local Civil Affairs Bureau, only the local government has the authority for the distribution of the assets of the Research Institute upon liquidation. Therefore, the Company dissolved the Research Institute by distributing the net assets of the Research Institute in the amount of US$84.0 million to the local government. The difference between the net assets in the amount of US$84.0 million and the amount of the initial registered capital of US$0.4 million represents undistributed accumulated profit generated by the Research Institute from its inception date to its liquidation date. Simultaneously, the local government granted the net assets back to the Research Center, the newly established subsidiary of Harbin Xinda in December 2010. The Research Center was established with a registered capital of approximately US$0.5 million funded by cash. A loss equal to the net assets of the Research Institute distributed to the local government was recognized in other expenses and a government grant for the receipts of the same assets back from the local government was recognized as other income in the consolidated statements of comprehensive income. Pursuant to the local tax regulations, the net assets granted to the Research Center are not subject to income tax to the extent the Research Center spends a total of US$84.0 million in five years from the date of grant. The expenditures of US$84.0 million will not be deductible for income tax purposes. As a result, the Company recognized a deferred income tax liability in the amount of US$21.5 million in connection with the net assets granted to the Research Center as of December 31, 2010. To the extent that the Company has spent on research and development equipment during the five years from the date of grant, deferred income tax liabilities relating to the net assets of Research Institute granted to Research Center will be reclassified to deferred income tax liabilities relating to property, plant and equipment, and recognized in profit or loss over the useful life of the asset. The Company spent a total of US$84.0 million on research and development equipment by the end of December 31, 2015, and the deferred income tax liabilities was US$6,716,921 and US$9,267,501 as of December 31, 2018 and 2017, respectively. The movements of the valuation allowance are as follows:
Years Ended December 31,
2018
2017
US$
US$
Balance at the beginning of the year
7,818,069
3,951,012
Expiration due to liquidation
(240
)
(86,139
)
Additions of valuation allowance
3,108,747
3,960,392
Reduction of valuation allowance
(366,665
)
(7,196
)
Balance at the end of the year
10,559,911
7,818,069 The valuation allowance as of December 31, 2018 and 2017 was primarily provided for the deferred income tax assets of certain entities, which were at cumulative loss positions. As of December 31, 2018, for U.S. federal income tax purposes, the Company had tax loss carry forwards of (i) US$520,617 from US Entity, of which US$520,617, nil and nil would expire by 2036, 2037 and 2038, respectively, if unused, (ii) US$20,812,578 from subsidiaries in the PRC, of which US$6,900,933, US$8,480,529 and US$5,431,116 would expire by 2021, 2022 and 2023, respectively, if unused, and (iii) US$28,603,895 from subsidiaries in HK, which could be carried forward indefinitely to be offset against future profits. In view of the cumulative losses for the entities concerned, 100% valuation allowances were provided against their deferred income tax assets as of December 31, 2018 and 2017, which in the judgment of the management, are not more likely than not to be realized. A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:
Years Ended December 31,
2018
2017
US$
US$
Balance at the beginning of the year
34,197,070
25,929,112
Increase related to current year tax positions
1,645,734
8,267,958
Decrease related to prior year tax positions
(2,794,165
)
-
Balance at the end of the year
33,048,639
34,197,070 At December 31, 2018 and 2017, there are US$26,882,183 and US$28,149,386 of unrecognized tax benefits that if recognized, would affect the annual effective tax rate. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and does not recognize penalties. During the years ended December 31, 2018 and 2017, the Company recognized approximately US$2,413,440 and US$4,092,605 interest expense. The Company had approximately US$12,172,418 and US$10,342,390 for the interest accrued related to unrecognized tax benefits amounting to US$32,981,190 and US$34,045,550 as of December 31, 2018 and 2017, respectively. US$2,794,165 previously unrecognized tax benefits accrued in year 2012 and the related accrued interest amounting to US$2,525,926 were reversed due to the expiration of five-year tax assessment period on May 31, 2018. The unrecognized tax benefits in year 2013 amounting to US$3,681,796 and related accrued interest amounting to US$2,944,256 were classified as current liabilities as the five-year tax assessment period will expire on May 31, 2019. US$67,449 of unrecognized tax benefit were presented as a reduction of the deferred income tax assets for tax loss carry forwards since the uncertain tax position would reduce the tax loss carry forwards under the tax law. The unrecognized tax benefits represent the estimated income tax expenses the Company would be required to pay, should the income tax rate used, taxable income and deductible expenses for tax purpose recognized in accordance with tax laws and regulations. The Company is currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve months. The tax returns of the U.S. Entities are subject to U.S. federal income tax examination by tax authorities for the years from 2017 to 2018. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances where the underpayment of taxes is more than US$15,000. In the case of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The tax returns of the Company's PRC subsidiaries for the years from 2016 to 2018 are open to examination by the PRC tax authorities. |
