Taxation

12 Months Ended

Dec. 31, 2018

15.

Taxation

Highpower and its directly and indirectly owned subsidiaries file tax returns separately.

1) VAT

Pursuant to the Provisional Regulation of the PRC on VAT and the related implementing rules, all entities and individuals ("taxpayers") that are engaged in the sale of products in the PRC are generally required to pay VAT, at a rate of which was changed from 17% to 16% on May 1, 2018 of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayers. Further, when exporting goods, the exporter is entitled to a portion of or all the refund of VAT that it has already paid or incurred. The Company’s PRC subsidiaries are subject to VAT of their revenues.

2) Income tax

United States

Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into legislation. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 34% to 21%, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax.

On December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

The one-time transition tax is based on the total post-1986 earnings and profits (“E&P”) for which the Company has previously deferred U.S. income taxes.

The Company evaluated the Global Intangible Low Taxed Income ("GILTI") inclusion on current earnings and profits of greater than 10%

owned foreign controlled corporations. The Company has evaluated whether it has additional provision amount resulted by the GILTI inclusion on current earnings and profits of its foreign controlled corporations. The law also provides that corporate taxpayers may benefit from a 50% reduction in the GILTI inclusion, which effectively reduces the 21% U.S. corporate tax rate on the foreign income to an effective rate of 10.5%. The GILTI inclusion further provides for a foreign tax credit in connection with the foreign taxes paid. In 2018, the Company recorded a GILTI inclusion of $7,222,667. However, the total tax of $1,243,075 is fully offset by the deemed paid foreign tax credit.

The Company completed quantification of the Tax Act impact. The final adjustment is not material.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid.

Hong Kong

HKHTC, which was incorporated in Hong Kong, is subject to a corporate income tax rate of 16.5%.

PRC

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on taxable income.

In China, the companies granted with National High-tech Enterprise (“NHTE”) status enjoy 15% income tax rate. This status needs to be renewed every three years. If these subsidiaries fail to renew NHTE status, they will be subject to income tax at a rate of 25% after the expiration of NHTE status. All the PRC subsidiaries received NHTE status and enjoy 15% income tax rate for calendar year 2018 and 2017.

The components of the provision (benefit) for income taxes expenses are:

	For the years ended December 31,
	2018			2017
	$			$
Current		2,538,375			3,940,699
Deferred		(156,441	)		374,626
Total income taxes expenses		2,381,934			4,315,325

The reconciliation of income taxes expenses computed at the PRC statutory tax rate to income tax expense is as follows:

	For the years ended December 31,
	2018			2017
	$			$
Income before tax		15,536,515			21,529,221

Provision for income taxes at PRC statutory income tax rate (25%)		3,884,129			5,382,305
Impact of different tax rates in other jurisdictions		144,866			(75,504	)
Effect of PRC preferential tax rate		(1,587,956	)		(2,313,343	)
R&D expenses eligible for super deduction		(776,444	)		(451,003	)
Other non-deductible expenses		139,090			754,820
Toll-charge from the Tax Act		-			5,773,436
Foreign tax credits		-			(2,063,810	)
Change in valuation allowance of deferred tax assets		578,249			(2,691,576	)
Effective enterprise income tax		2,381,934			4,315,325

3) Deferred tax assets, net

Deferred tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of temporary difference.

	December 31,			December 31,
	2018			2017
	$			$
Tax loss carry-forward		1,096,956			991,766
Allowance for doubtful receivables		9,153			136,562
Impairment for inventory		382,375			222,289
Difference for sales cut-off		15,526			17,322
Deferred government grants		69,631			46,446
Property, plant and equipment subsidized by government grant		250,563			269,344
Impairment for property, plant and equipment		138,122			58,304
Total gross deferred tax assets		1,962,326			1,742,033
Valuation allowance		(1,096,956	)		(991,766	)
Total net deferred tax assets		865,370			750,267

As of December 31, 2018, the Company had net operating loss carry-forwards in Hong Kong of $6,648,217 and all of the losses do not expire.

Valuation allowance was provided against deferred tax assets in entities where it was determined, it was more likely than not that the benefits of the deferred tax assets will not be realized. The Company had deferred tax assets which consisted of tax loss carry-forwards and others, which can be carried forward to offset future taxable income. The management determines it is more likely than not that part of deferred tax assets could not be utilized, so allowance was provided as of December 31, 2018 and 2017. The net valuation allowance increased by approximately $0.1 million and decreased by approximately $2.7 million during the years ended December 31, 2018 and 2017, respectively.