| (11) | Income Taxes |
China Auto and HKCo do not generate any income and therefore are not subject to US or Hong Kong income taxes. The Company conducts substantially all of its business through its PRC operating subsidiaries and they are subject to PRC income taxes. The Company’s subsidiaries in the PRC are subject to the standard 25% tax rate in 2016 and 2015.
The components of loss before income tax expenses from continuing operations for the years ended December 31, 2016 and 2015 follows:
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Loss before income tax expenses from continuing operations | ||||||||
| US Federal | $ | - | $ | _ | ||||
| Non US | (629,317 | ) | (9,306,284 | ) | ||||
| (629,317 | ) | (9,306,284 | ) | |||||
The Company’s income tax expense from continuing operations amounted to $113,163 and $249,988 for the years ended December 31, 2016 and 2015, respectively, (an effective rate of -18.0% and -2.7% for 2016 and 2015, respectively). A reconciliation of the provision (benefit) for income taxes from continuing operations, with amounts determined by applying the statutory US federal income tax rate to income before income taxes, is as follows:
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Computed tax benefit at US federal statutory rate of 34% | $ | (213,968 | ) | $ | (3,164,137 | ) | ||
| Permanent differences: | ||||||||
| Meals and entertainment (non-deductible portion) | 38,178 | 23,565 | ||||||
| Legal and professional fees (non-deductible portion) | 213,368 | 213,203 | ||||||
| Impairment loss on goodwill | - | 1,347,223 | ||||||
| Tax rate difference between US and PRC on foreign earnings | (9,947 | ) | 418,274 | |||||
| Write –off of deferred tax valuation allowance as a result of sale of Zhengji | - | 522,337 | ||||||
| Change in valuation allowance | 19,810 | 794,897 | ||||||
| Exchange rate change on valuation allowance | 897 | 34,928 | ||||||
| Other | 64,825 | 59,698 | ||||||
| $ | 113,163 | $ | 249,988 | |||||
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Details of income taxes from continuing operations | ||||||||
| Current | ||||||||
| US Federal | $ | - | $ | - | ||||
| PRC | 113,163 | 249,988 | ||||||
| Total current provision (benefit) | 113,163 | 249,988 | ||||||
| Deferred | ||||||||
| US Federal | - | - | ||||||
| PRC | - | - | ||||||
| Total deferral benefit | - | - | ||||||
| Total income tax provision from continuing operations | $ | 113,163 | $ | 249,988 | ||||
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Details of deferred taxes from continuing operations | ||||||||
| Deferred tax assets: | ||||||||
| Net operating losses carryforwards | $ | 39,767 | $ | 44,071 | ||||
| Allowance for doubtful account– receivable related to Financing Services | 757,889 | 770,333 | ||||||
| Allowance for doubtful account – advances to suppliers | 27,920 | 49,128 | ||||||
| 825,576 | 863,532 | |||||||
| Valuation allowance | (825,576 | ) | (863,532 | ) | ||||
| Total deferred tax asset | - | - | ||||||
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. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are tested whether they are deductible or can be utilized, management believes that the deferred tax assets amounting to $825,576 and $863,532 as of December 31, 2016 and 2015, respectively, are not more likely than not to be realized. Accordingly the Company provided a valuation allowance amounting to $825,576 and $863,532 against the deferred tax assets as of December 31, 2016 and 2015, respectively. As of December 31, 2016, the Company had unused net operating loss carryforward from its PRC subsidiaries in the amount of approximately $159,000 which may be applied against future taxable income and begins to expire after the year of 2019.
The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries as they are to be reinvested indefinitely. These earnings relate to ongoing operations and are approximately $17.3 million as of December 31, 2016. Because of the availability of US foreign tax credits, it is not practicable to determine the US income tax liability that would be payable if such earnings were not indefinitely reinvested.
The Company is subject to income taxes in the PRC. Tax regulations are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. All tax positions taken, or expected to be taken, continue to be more likely than not ultimately settled at the full amount claimed. The Company’s tax filings are subject to the US Federal tax bureau’s examination for a period up to three years and PRC tax bureau’s examination for a period up to 5 years. The Company is not currently under any examination by the PRC tax bureau.