Highpower International, Inc.

12.

Taxation

Highpower and its direct and indirect wholly and majority 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 17% 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 at 17% of their revenues.

2) Income tax

United States

Highpower was incorporated in Delaware and is subject to U.S. federal income tax with a system of graduated tax rates ranging from 15% to 35%. No deferred U.S. taxes are recorded since all accumulated profits in the PRC will be permanently reinvested in the PRC.

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 2016 and 2015.

The components of the provision for income taxes expenses are:

	For the years ended
	December 31,
	2016		2015
	$		$
Current		1,471,933		809,629
Deferred		(32,756)		9,107
Total income tax expense		1,439,177		818,736

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

	For the years ended December 31,
	2016		2015
	$		$
Income before tax		7,066,954		4,279,006

Provision for income taxes at applicable income tax rate		1,866,878		988,833
Effect of preferential tax rate		(959,453)		60,060
R&D expenses eligible for super deduction		(546,088)		(546,156)
Non-deductible expenses		146,493		59,122
Change in valuation allowance		931,347		256,877
Effective enterprise income tax		1,439,177		818,736

3) Deferred tax assets

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,
	2016		2015
	$		$

Tax loss carry-forward		4,274,881		3,382,543
Allowance for doubtful receivables		121,932		47,197
Impairment for inventory		98,276		217,733
Difference for sales cut-off		14,245		33,071
Deferred income		114,224		131,992
Property, plant and equipment subsidized by government grant		468,313		490,883
Impairment for property, plant and equipment		76,248		-
Total gross deferred tax assets		5,168,119		4,303,419
Valuation allowance		(3,690,358)		(2,759,105)
Total net deferred tax assets		1,477,761		1,544,314

The following represents the amounts and expiration dates of operating loss carried forwards for tax purpose:

	$
2019		300,520
2020		1,553,667
2021 and thereafter		2,042,635
Total		3,896,822

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, 2016 and 2015.