8. Income tax
United States
The Company is subject to the United States Federal and state income tax at a statutory rate of 34%. No provision for the U.S. Federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting periods.
No provision for U.S. federal and state incomes taxes has been made in our consolidated financial statements for those non-U.S. subsidiaries whose earnings are considered to be reinvested. The amount of undistributed earnings considered to be “reinvested” which may be subject to tax upon distribution was approximately $32.4 million and $29.5 million at December 31, 2016 and 2015, respectively. A distribution of these non-U.S. earnings in the form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to the various non-U.S. countries. Determination of the amount of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.
BVI
Megaway was incorporated in the BVI and, under the current laws of the BVI, is not subject to income taxes.
HK
Star Wealth was incorporated in Hong Kong and is subject to Hong Kong profits tax at a tax rate of 16.5% . No provision for Hong Kong profits tax has been made as Star Wealth had no taxable income during the reporting periods.
PRC
SipingJuyuan and Beijing Juyuan are subject to PRC enterprise income tax (“EIT”) at the statutory rate of 25%. As SipingJuyuan was qualified as a “High-tech Enterprise”, it was entitled to a preferential EIT rate of 15% during the reporting periods. Beijing Juyuan ceased to be a sino joint venture after SipingJuyuan acquired 25% equity interest in Beijing Juyuan from Hanyang, the minority foreign business partner, in May 2013. As a result, Beijing Juyuan was subject to EIT at the standard rate of 25% during the years ended December 31, 2016 and 2015.
The components of the provision for income taxes are:
| Year ended December 31, | ||||||
| 2016 | 2015 | |||||
| Current taxes | $ | 514,649 | $ | - | ||
| Deferred taxes | - | - | ||||
| $ | 514,649 | $ | - | |||
Reconciliations between the statutory tax rate and the Company’s effective tax rate are as follows:
| Year Ended December 31, | ||||||
| 2016 | 2015 | |||||
| U.S. statutory rate | 34.00% | 34.00% | ||||
| Foreign income not recognized in the U.S. | ( 34.00)% | ( 34.00)% | ||||
| PRC enterprise income tax rate | 25.00% | 25.00% | ||||
| Effect of tax exemptions and relief granted to the subsidiary | ( 9.12)% | 0.00% | ||||
| Effect of additional deduction on R&D expenses | ( 9.62)% | ( 32.55)% | ||||
| Effect of expenses not deductible for tax purposes | 7.24% | 4.30% | ||||
| Effect of Income tax difference under different tax jurisdictions | 0.06% | 2.80% | ||||
| Effect of valuation allowance on deferred income tax assets | 0.12% | 0.45% | ||||
| Effective tax rate | 13.68% | 0.00% | ||||
ASC 740 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s tax positions and considered that no provision for uncertainty in income taxes was necessary as of December 31, 2016 and 2015.
Deferred tax assets as of December 31, 2016 and 2015 are composed of the following:
| As of December 31, | ||||||
| 2016 | 2015 | |||||
| Short-term | ||||||
| Allowance for doubtful accounts | $ | 1,322,955 | $ | 1,260,570 | ||
| Allowance for obsolete inventories | 2,636 | 2,820 | ||||
| Valuation allowance | (1,176,066 | ) | (1,103,430 | ) | ||
| 149,525 | 159,960 | |||||
| Long-term | ||||||
| Net operating loss carried forward | 297,785 | 313,660 | ||||
| Valuation allowance | (297,785 | ) | (313,660 | ) | ||
| Total deferred tax assets | $ | 149,524 | $ | 159,960 | ||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or are utilized.