NOTE 18 – TAXES
(a) Corporation Income Tax
Pursuant to the tax laws and regulations of the PRC, the Company’s applicable corporate income tax (“CIT”) rate is 25%. However, Kandi Vehicles qualifies as a High and New Technology Enterprise (“HNTE”) company in the PRC, and is entitled to pay a reduced income tax rate of 15% for the years presented. An entity may re-apply for an HNTE certificate when the prior certificate expires. Historically, Kandi Vehicles has successfully re-applied for such certificates when the its prior certificates expired. The applicable CIT rate of each of the Company’s three other subsidiaries, Kandi New Energy, YongkangScrou and Kandi Hainan, the JV Company and its subsidiaries, and the Service Company is 25%.
After combining research and development tax credits of 25% on certain qualified research and development expenses, the Company’s final effective tax rate for December 31, 2017,2016 and 2015 was 10.32%, -11.69% and 29.47%, respectively. The effective tax rates for each of the periods mentioned above are disclosed in the summary table of income tax expenses for December 31, 2017, 2016 and 2015.
Effective January 1, 2007, the Company adopted the guidance in ASC 740 related to uncertain tax positions. The guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.
Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2017, the Company did not have any liability for unrecognized tax benefits. The Company files income tax returns with the U.S. Internal Revenue Services (“IRS”) and those states where the Company has operations. The Company is subject to U.S. federal or state income tax examinations by the IRS and relevant state tax authorities for years after 2006. During the periods open to examination, the Company has net operating loss carry forwards (“NOLs”) for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOLs may be utilized in future periods, they remain subject to examination. The Company also files certain tax returns in the PRC. As of December 31, 2017, the Company was not aware of any pending income tax examinations by U.S. or PRC tax authorities. The Company records interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2017, the Company has no accrued interest or penalties related to uncertain tax positions. The Company has not recorded a provision for U.S. federal income tax for year ended December 31, 2017, due to a net operating loss in 2016 and an accumulated net operating loss carry forward from prior years in the United States.
As of December 31, 2017 and December 31, 2016, we had unrecognized tax benefits of $12.2 million and $0, respectively, for various federal, foreign, and state income tax matters. Unrecognized tax benefits increased by $12.2 million. After considering valuation allowance, none of the unrecognized tax benefits, if recognized, would affect our effective tax as of December 31, 2017 and December 31, 2016. These unrecognized tax benefits are presented on the accompanying consolidated balance sheets net of the tax effects of net operating loss carry forwards, which are offset by valuation allowance.
Our unrecognized tax benefit activity for fiscal 2017, 2016 and 2015 was as follows:
| 2017 | 2016 | 2015 | ||||||||||
| Beginning balances | $ | - | $ | - | $ | - | ||||||
| Increases related to tax positions taken during a prior year | 11,376,521 | - | - | |||||||||
| Decreases related to tax positions taken during a prior year | - | - | - | |||||||||
| Increases related to tax positions taken during the current year | 790,289 | - | - | |||||||||
| Ending balances | $ | 12,166,810 | $ | - | $ | - | ||||||
Income tax expenses for the year ended December 31, 2017, 2016 and 2015 are summarized as follows:
| For the Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Current: | ||||||||||||
| Provision for CIT | $ | 2,184,985 | $ | 601,212 | $ | 4,656,311 | ||||||
| Provision for Federal Income Tax | - | - | - | |||||||||
| Deferred: | ||||||||||||
| Provision for CIT | (5,448,015 | ) | 80,334 | 1,470,917 | ||||||||
| Income tax (benefit) expense | $ | (3,263,030 | ) | $ | 681,546 | $ | 6,127,228 | |||||
The reconciliation of taxes at the PRC statutory rate (25% in 2017 and 2016) to our provision for income taxes for the years ended December 31, 2017 and 2016 was as follows:
| For Year Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Expected taxation at PRC statutory tax rate | $ | (7,902,626 | ) | $ | (1,457,303 | ) | ||
| Effect of differing tax rates in different jurisdictions | 242,375 | (1,403,077 | ) | |||||
| Non-taxable income | - | - | ||||||
| Non-deductible expenses (1) | 1,735,581 | 1,103,158 | ||||||
| Research and development super-deduction | (105,186 | ) | (43,826 | ) | ||||
| Under-accrued EIT for previous years | 267,574 | (2,727,454 | ) | |||||
| Effect of PRC preferential tax rates | 1,277,678 | - | ||||||
| Addition to valuation allowance | 1,271,728 | 5,301,677 | ||||||
| Other | (50,154 | ) | (91,629 | ) | ||||
| Income tax (benefit) expense | $ | (3,263,030 | ) | $ | 681,546 | |||
| Effective tax rate | 10.32 | % | -11.69 | % | ||||
| (1) | It’s mainly due to share of (loss) in JV Company and its subsidiaries. |
The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of December 31, 2017 and December 31, 2016 are summarized as follows:
| December 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Expense (2) | 192,046 | 72,742 | ||||||
| Depreciation | 182,961 | 230,156 | ||||||
| Loss carried forward | 6,581,726 | 27,218,934 | ||||||
| less: valuation allowance | (1,019,373 | ) | (26,820,811 | ) | ||||
| Total deferred tax assets, net of valuation allowance | 5,937,360 | 701,021 | ||||||
| Deferred tax liabilities: | ||||||||
| Expense (3) | 1,553,935 | 1,698,303 | ||||||
| Total deferred tax liability | 1,553,935 | 1,698,303 | ||||||
| Net deferred tax assets (liabilities) | $ | 4,383,425 | $ | (997,282 | ) | |||
| (2) | It’s provision for impairment inventory, fixed assets. |
| (3) | It’s due to the difference of tax basis and GAAP basis of other long-term assets. |
As of December 31, 2017, the aggregate NOLs incurred in 2013 through 2017 of $4.85 million deriving from entities in the U.S. will expire in varying amount between 2018 and 2022. The aggregate NOLs in 2016 through 2017 of $22.75 million deriving from entities in the PRC will expire in varying amount between 2021 and 2022. As of December 31, 2016, the aggregate NOLs incurred in 2012 through 2016 of $78.88 million deriving from entities in the U.S. will expire in varying amount between 2017 and 2021. The aggregate NOLs incurred in 2016 of $2.12 million deriving from entities in the PRC will expire in 2021. The cumulative net loss in the PRC and U.S. can be carried forward for five years, to offset future net profits for income tax purposes. The cumulative net loss in Hong Kong can be carried forward without an expiration date.
Operating loss carry forward for tax purpose resulted in a deferred tax asset of $6.58million at December 31,2017. Tax benefit of operating loss available to offset future tax liabilities are $5.56 million. Tax benefit of operating loss is evaluated on an ongoing basis including a review of historical and projected future operating results, the eligible carry forward period, and available tax planning strategies.
Income (loss) before income taxes from PRC and non-PRC sources for the year ended December 31, 2017, 2016 and 2015 are summarized as follows:
| For Year Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Income(loss) before income taxes consists of: | ||||||||
| PRC | $ | (25,471,997 | ) | $ | 6,023,694 | |||
| Non-PRC | (6,138,507 | ) | (11,852,905 | ) | ||||
| Total | $ | (31,610,504 | ) | $ | (5,829,211 | ) | ||
Net change in the valuation allowance of deferred tax assets are summarized as follows:
| Net change of valuation allowance of Deferred tax assets | ||||
| Balance at December 31,2016 | 26,820,811 | |||
| Additions-change to tax expense | 1,271,728 | |||
| Deduction-expired of loss carried forward④ | 14,573,835 | |||
| Deduction-changed of UTP | 12,166,810 | |||
| Deduction-changed of tax rate | 332,521 | |||
| Balance at December 31,2017 | 1,019,373 | |||
| (4) | It’s due to the loss carried forward deduction-expired of Kandi Technologies of 2012. |
(b) Tax Holiday Effect
For the year ended December 31, 2017, 2016 and 2015, the PRC CIT rate was 25%. Certain subsidiaries of the Company are entitled to tax exemptions (tax holidays) for the year ended December 31, 2017, 2016 and 2015.
The combined effects of income tax expense exemptions and reductions available to the Company for the year ended December 31, 2017, 2016 and 2015 are as follows:
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Tax benefit (holiday) credit | $ | 105,186 | $ | 36,522 | $ | 912,548 | ||||||
| Basic net income per share effect | $ | 0.000 | $ | 0.001 | $ | 0.020 | ||||||
(C) The Tax Cuts and Job Act
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect our fiscal year ended 12/31/2017 and going-forwarding, including, but not limited to, (1) reducing the U.S. federal corporate tax rate effective January 1, 2018, (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years.
The SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
For various reasons that are discussed more fully below, we have not fully completed our accounting for the income tax effects of certain elements of the Tax Act. If we were able to make reasonable estimates of the effects of elements for which our analysis is not yet complete, we recorded provisional adjustments. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act.
Our accounting for the following elements of the Tax Act is incomplete. However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
Reduction of U.S. Federal Corporate Tax Rate: The Tax Act reduces the corporate tax rate to 21.0%, effective January 1, 2018. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of $0.3 million, respectively, with a corresponding net adjustment to valuation allowance of $0.3 million for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Due to the timing of the enactment and the complexity involved in applying the provisions of the Act, we could not made reasonable estimates of the effects and did not record provisional amounts in our financial statements as of December 31, 2017. However, we are continuing to gather information to precisely compute the amount of the Transition Tax.