Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities

9 Months Ended

Jun. 30, 2016

Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities [Text Block]

15. Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities

(a) Income taxes in the condensed consolidated statements of comprehensive loss (income)

The Company’s provision for income taxes (credit) expenses consisted of:

		Three months ended June 30,						Nine months ended June 30,
		2015			2016			2015		2016
PRC income tax:
Current	$	-		$	-		$	-	$	-
Deferred		(32,851	)		(51	)		5,770,683		14,775
	$	(32,851	)	$	(51	)	$	5,770,683	$	14,775

United States Tax
China BAK is subject to a statutory tax rate of 35% under United States of America tax law. No provision for income taxes in the United States or elsewhere has been made as China BAK had no taxable income for the three and nine months ended June 30, 2015 and 2016.

Hong Kong Tax
BAK Asia is subject to Hong Kong profits tax rate of 16.5% and did not have any assessable profits arising in or derived from Hong Kong for the three and nine months ended June 30, 2015 and 2016 and accordingly no provision for Hong Kong profits tax was made in these periods.

PRC Tax
The Company’s subsidiaries in China are subject to Enterprise Income Tax at 25% for the three and nine months ended June 30, 2015 and 2016.

A reconciliation of the provision for income taxes determined at the statutory income tax rate to the Company's income taxes is as follows:

		Three months ended June 30,						Nine months ended June 30,
		2015			2016			2015			2016
(Loss) profit before income taxes	$	(1,301,852	)	$	(2,668,692	)	$	21,436,051		$	(6,689,697	)
United States federal corporate income tax rate		35%			35%			35%			35%
Income tax (credit) expenses computed at United States statutory corporate income tax rate		(455,648	)		(934,042	)		7,502,618			(2,341,393	)
Reconciling items:
Valuation allowance on deferred tax assets		238,141			489,723			285,153			1,326,230
Rate differential for PRC earnings		97,818			219,389			(2,194,794	)		529,619
Non-deductible expenses		19,488			39,032			110,660			120,313
Share based payments		67,350			131,860			67,350			375,047
Others		-			53,987			(304	)		4,959
Income tax (credit) expenses	$	(32,851	)	$	(51	)	$	5,770,683		$	14,775

(b) Deferred tax assets and deferred tax liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of September 30, 2015 and June 30, 2016 are presented below:

		September 30,			June 30,
		2015			2016
Deferred tax assets
Trade accounts receivable	$	32,979		$	185,973
Inventories		54,127			86,704
Property, plant and equipment		5,976			301
Valuation allowance		(49,907	)		(272,677	)
Deferred tax assets, current portion	$	43,175		$	301
Net operating loss carried forward		12,470,938			13,571,948
Valuation allowance		(12,470,938	)		(13,571,948	)
Deferred tax assets, non-current	$	-		$	-
Deferred tax liabilities, non-current
Property, plant and equipment	$	142,650		$	81,827

As of September 30, 2015 and June 30, 2016, the Company’s U.S. entity had net operating loss carry forwards of $35,318,443, of which $102,293 was available to reduce future taxable income which will expire in various years through 2035 and $35,216,150 was available to offset capital gains recognized through 2020 and the Company’s PRC subsidiaries had net operating loss carry forwards of $437,933 and $4,841,972, respectively, which will expire in various years through 2021. Management believes it is more likely than not that the Company will not realize these potential tax benefits as these operations will not generate any operating profits in the foreseeable future. As a result, a valuation allowance was provided against the full amount of the potential tax benefits.

The Company did not provide for deferred income taxes and foreign withholding taxes on the cumulative undistributed earnings of foreign subsidiaries as of September 30, 2015 and June 30, 2016 of approximately of $14.2 million and $8.9 million, respectively. The cumulative undistributed earnings of foreign subsidiaries were included in accumulated deficit and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes or applicable withholding taxes, related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if management concluded that such earnings will be remitted in the future.

As of September 30, 2015 and June 30, 2016, the Company had no material unrecognized tax benefits which would favorably affect the effective income tax rates in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the three and nine months ended June 30, 2015 and 2016, and no provision for interest and penalties is deemed necessary as of September 30, 2015 and June 30, 2016.

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 its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion.