| 25. | INCOME TAXES AND TAX RECEIVABLE |
Effective January 1, 2008, the New Taxation Law of PRC stipulates that domestically owned enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform tax rate of 25%. While the New Tax Law equalizes the tax rates for FIEs and domestically owned enterprises, preferential tax treatment may continue to be given to companies in certain encouraged sectors and to entities classified as high-technology companies, regardless of whether these are domestically-owned enterprises or FIEs. In November 2009, the Jiangsu Province Government issued Su Zheng Ban Fa [2009] No. 132 which stipulates that micro-credit companies in Jiangsu Province is subject to preferential tax rate of 12.5%. As a result, the Company is subject to the preferential tax rate of 12.5% for its loan business for the periods presented. The taxation practice implemented by the tax authority governing the Company is that the Company pays enterprise income taxes at rate of 25% on a quarterly basis, and upon annual tax settlement done by the Company and the tax authority in five (5) months after December 31 the tax authority will refund the Company the excess enterprise income taxes it paid beyond the rate of 12.5%. However since 2015, the excess enterprise income taxes paid will not be refunded but can be used to offset the future income tax payable arising from taxable income.
The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the years ended December 31, 2016 and 2015, the Company had no unrecognized tax benefits. For the years ended December 31, 2016, the Company made net tax operating profit from its PRC subsidiaries and its consolidated VIE of US$479,493. As of December 31, 2016, the Company has carry-forward tax operating losses from its PRC subsidiaries and its consolidated VIE of US$61,426,881, which will expire from the year ending December 31, 2019 to 2020. The Company recognized deferred income tax assets of US$11,217,707 as of December 31, 2016. However, the Company estimates there will be no sufficient net income before income tax from years ending December 31, 2016 to 2021 to realize the deferred income tax assets. The Company provided valuation allowance for deferred income tax assets of US$11,217,707 as of December 31, 2016.
The Company does not anticipate any significant increase to its liability for unrecognized tax benefit within the next 12 months. The Company will classify interest and penalties related to income tax matters, if any, in income tax expense.
Income tax payable is comprised of:
| December 31, 2016 | December 31, 2015 | |||||||
| Income tax payable | $ | 169,226 | $ | 126,485 | ||||
Income tax expense for years ended December 31, 2016 and 2015 is comprised of:
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Current income tax expense | $ | - | $ | 1,764,058 | ||||
| Deferred income tax expense | - | 731,090 | ||||||
| Total provision for income taxes | $ | - | $ | 2,495,148 | ||||
The effective tax rates for the years ended December 31, 2016 and 2015 are 0% and -4.25%, respectively.
The reconciliation between the effective income tax rate and the PRC statutory income tax rate of 25% is as follows:
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| PRC statutory tax rate | $ | 25 | % | $ | 25 | % | ||
| Effect of preferential income tax rate on loan business | 3.88 | % | -8.65 | % | ||||
| Effect of income tax rate difference in other jurisdiction | -38.18 | % | -0.22 | % | ||||
| Effect of non-deductible expenses | -12.95 | % | 0.00 | % | ||||
| Effect of valuation allowances | 22.25 | % | -17.43 | % | ||||
| Effect of allowances on income tax receivable | 0.00 | % | -2.9 | % | ||||
| Effect of others | 0.00 | % | 0.73 | % | ||||
| Total provision for income taxes | $ | 0.00 | % | $ | -4.25 | % | ||
Deferred tax liability arises from government incentive for the purpose of covering the Company’s actual loan losses and ruled that the income tax will be imposed on the subsidy if the purpose is not fulfilled within 5 years after the Company receives the subsidy. As of December 31, 2016 and 2015, subsidy of US$1,353,810 and US$1,011,877 did not fulfill the purpose within due date and the related deferred tax liability was transferred to income tax payable. As of December 31, 2016 and 2015, the deferred tax liability amounted to US$139,947 and US$204,266, respectively.
As of December 31, 2016 and 2015, the Company intends to permanently reinvest the undistributed earnings from its foreign subsidiaries to fund future operations. The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries is not determined because such a determination is not practicable.