Tianci International, Inc. (formerly Steampunk Wizards Inc.), was formed in June 2012 under the name Freedom Petroleum, Inc. Prior to the Share Exchange in August 21, 2015, the Company only had operations in the United States. In August 2015, the Company became the parent of Malta Co., a wholly owned Malta subsidiary, which files tax returns in Malta.
The Malta and U.S. components of (loss) income before income taxes were as follows:
| For the Years Ended | ||||||||
| July 31, | ||||||||
| 2017 | 2016 | |||||||
| United States | $ | (430,888 | ) | $ | (315,576 | ) | ||
| Malta | (498 | ) | (367,925 | ) | ||||
| Loss before income taxes | $ | (431,386 | ) | $ | (683,501 | ) | ||
The income tax provision (benefit) for the years ended July 31, 2017 and 2016 consists of the following:
| For the Years Ended | ||||||||
| July 31, | ||||||||
| 2017 | 2016 | |||||||
| Income tax expense(benefit) at statutory rate: | ||||||||
| United States | $ | (146,502 | ) | $ | (107,296 | ) | ||
| Malta | – | (128,774 | ) | |||||
| Total | (146,502 | ) | (236,070 | ) | ||||
| Change in valuation allowance | 146,502 | 236,070 | ||||||
| Income tax expense (benefit) | $ | – | $ | – | ||||
Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recorded for tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
| July 31, | ||||||||
| 2017 | 2016 | |||||||
| NOL Carryover: | ||||||||
| United States | $ | 688,138 | $ | 541,636 | ||||
| Malta | – | 294,687 | ||||||
| Total | 688,138 | 836,323 | ||||||
| Valuation allowance | (688,138 | ) | (836,323 | ) | ||||
| Net deferred tax asset | $ | – | $ | – | ||||
The reconciliation of the effective income tax rate to the U.S. federal statutory rate as of July 31, 2017 and 2016:
| Federal income tax rate | 34.0% | |||
| Increase in valuation allowance | (34.0% | ) | ||
| Effective income tax rate | 0.0% |
The reconciliation of the effective income tax rate to Malta statutory rate as of July 31, 2016:
| Income tax rate | 35.0% | |||
| Increase in valuation allowance | (35.0% | ) | ||
| Effective income tax rate | 0.0% |
At July 31, 2017 and 2016, the Company had $2,023,935 and $1,593,047, respectively of the U.S. net operating losses (the “U.S. NOLs”), which are available to offset future taxable income until 2036.
At July 31, 2017 and 2016, the Company had $0 and $841,962, respectively of foreign net operating losses (the “Malta NOLs”) that may be available to offset future taxable income until 2036. Due to the Spin-Off Agreement dated on October 13, 2016, the Malta NOLs are no longer available to the Company.
The Company assesses the likelihood that deferred tax assets will be realized. ASC 740, “Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation allowance as of July 31, 2017 and 2016.
The Company has not completed its evaluation of NOL utilization limitation under IRC Section 382, change of ownership rules, but believes that it had a change of ownership that would limit the amount of U.S. NOLs that could be utilized each year based on the “Internal Revenue Code, as Amended “
The Company’s tax returns are subject to examination by tax authorities beginning with the year ended July 31, 2013.