NOTE 14 – INCOME TAXES

The Company accounts for income taxes pursuant to ASC 740 “Accounting for Income Taxes” that requires the recognition of deferred tax assets and liabilities for the differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income and timing of reversals of future taxable differences along with any other positive and negative evidence during the periods in which those temporary differences become deductible or are utilized.

The Company is governed by the Income Tax Laws of the PRC, Inland Revenue Ordinance of Hong Kong, and the U.S. Internal Revenue Code of 1986, as amended. Under the Income Tax Laws of PRC and Inland Revenue Ordinance of Hong Kong, Chinese companies are generally subject to an income tax at an effective rate of 25% and 16.5%, respectively, on income reported in the statutory financial statements after appropriate tax adjustments. The Company’s subsidiary, Green Power, and VIEs (Dyeing and Heavy Industries) are subject to PRC statutory rates and certain subsidiaries domiciled in Hong Kong are subject to the Hong Kong statutory rate. The Company’s wholly-owned subsidiary, Fulland Limited was incorporated in the Cayman Islands and certain subsidiaries were incorporated in the British Virgin Islands. Under the current laws of the Cayman Islands and British Virgin Islands, these entities are not subject to income taxes.

Sharing Economy International Inc. was incorporated in the United States and has incurred an aggregate net operating loss of approximately $8,402,000 for income taxes purposes through December 31, 2017 and Foreign Tax Credits related to the Income Tax Laws of the PRC of approximately $982,409, subject to the Internal Revenue Code (“IRC”) Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. The Company has not calculated its IRC Section 382 change of ownership to date, but there seems to have been a change of ownership within the meaning of IRC Section 382, which has not limited the use of net operating losses, nor foreign tax credits as of December 31, 2017, based upon Managements review. The net operating loss carries forward and foreign tax credit carry forward for United States income taxes may be available to reduce future years’ taxable income. These net operating loss carry forwards will expire, if not utilized, through 2037 and the remaining foreign tax credits expire, if not utilized, through 2026. As of December 31, 2017, the Company had net operating loss carryforwards of approximately $4,462,000 for PRC income tax purposes, such losses are set to expire in 2022 for PRC income tax purposes. As of December 31, 2017, the Company had net operating loss carryforwards of approximately $827,000 for Hong Kong income tax purposes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a United States corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017 and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company believes it is subject to the one-time transition tax on the mandatory deemed repatriation of foreign earnings. Such deemed repatriation tax was estimated to be approximately $5,256,000, which has been reduced to zero by the use of Foreign Tax Credit carryforward utilization at December 31, 2017 related to the Income Tax Laws of the PRC. Management is in the process of reviewing its IRC Section 382 change of ownership, relating to such amount.

The Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.

As a result of the reduction of the United States federal corporate income tax rate, the Company reduced the value of its net deferred tax asset by $1,092,239 which was recorded as a corresponding reduction to the valuation allowance during the fourth quarter of 2017.

Management believes that it appears more likely than not that the Company will not realize these tax benefits due to the Company’s continuing losses for United States income taxes purposes, and losses in PRC and Hong Kong. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit related to its U.S. and foreign net operating loss carry forwards to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as necessary.

The Company has cumulative undistributed earnings from its China subsidiary and VIEs of approximately $40.2 million and $45.2 million as of December 31, 2017 and 2016, respectively, which is included in the consolidated retained earnings and will continue to be indefinitely reinvested in the Company’s PRC operations. Accordingly, a provision has been made for deferred taxes related to the mandatory deemed repatriation of foreign earnings. Such deemed repatriation tax was estimated to be approximately $5,256,000, which has been reduced to zero by the use of Foreign Tax Credit carryforward utilization at December 31, 2017 related to the Income Tax Laws of the PRC. Management is in the process of reviewing its IRC Section 382 change of ownership, relating to such amount.

The table below summarizes the differences between the U.S. statutory federal rate and the Company’s effective tax rate for the years ended December 31, 2017 and 2016:

	2017			2016
U.S. statutory rates		34.0	%		34.0	%
U.S. effective rate in excess of China tax rate		(3.3	)%		(4.2	)%
Bad debt allowance		(17.9	)%		(8.8	)%
Effect of change in U.S statutory rate from 34% to 21%		(2.1	)%		-
China valuation allowance		(7.2	)%		(11.6	)%
U.S. valuation allowance		(3.5	)%		(9.4	)%
Total current provision for income taxes		0.0	%		0.0	%

For the years ended December 31, 2017 and 2016, current and deferred income taxes expense was related to our operations in the PRC and amounted to $408,287 and $0, respectively.

The tax effects of temporary differences under ASC 740 “Accounting for Income Taxes” that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows:

	December 31, 2017			December 31, 2016
Deferred tax assets:
Net U.S. operating loss carry forward	$	1,764,385		$	2,694,569
Net PRC and Hong Kong operating loss carry forward		1,252,015			754,143
Foreign tax credit		206,306			-
Allowance for doubtful accounts and reserve for obsolete inventories		-			454,663
Total gross deferred tax assets		3,222,706			3,903,375
Less: valuation allowance		(3,222,706	)		(3,516,994	)
Net deferred tax assets	$	-		$	386,381

At December 31, 2017 and 2016, the valuation allowance were $3,222,706 and $3,448,712 related to the U.S. and foreign net operating loss carry forwards, and $0 and $68,282 related to allowance for doubtful accounts and reserve for obsolete inventories, respectively. During the year ended December 31, 2017, the valuation allowance increased by approximately $797,951.

The Company had incurred a significant loss from discontinued operations of $10,285,932 for the year ended December 31, 2016. Such loss is attributable to the Company’s China operations from the forged rolled rings and related component segment and the petroleum and chemical equipment segment. Management believes there will be no tax benefit from such loss and accordingly, no deferred tax asset and corresponding valuation reserve has been provided for at December 31, 2017 and 2016.