Taxes on income included in the consolidated statements of operations represent current taxes due to taxable income of the Company and its Subsidiary.
Corporate taxation in the U.S.
The applicable corporate tax rate for the Company is 34%.
No provision for income tax was made for the period from September 15, 2004 (Inception) to August 31, 2017 as the Company had cumulative operating losses. For the years ended August 31, 2017 and 2016, the Company incurred net losses for tax purposes of $1,114,659 and $516,588, respectively. Under U.S. tax laws, subject to certain limitations, carry forward tax losses expire 20 years after the year in which incurred. In the case of the Company, subject to potential limitations in accordance with the relevant law, the net loss carry forward will expire in the years 2032 through 2036.
Corporate taxation in Israel:
The Subsidiary is taxed in accordance with Israeli tax laws. The corporate tax rate applicable to 2016 and 2017 is 25%.
In January 2016, the Law for the Amendment of the Income Tax Ordinance (No. 216) was published, enacting a reduction of corporate tax rate beginning in 2016 and thereafter, from 26.5% to 25%. There is no impact on the financial statements of the Company as a result of the changes in the Israeli corporate tax rate as the Subsidiary is in a loss position for tax purposes.
As of August 31, 2017, the Subsidiary has an accumulated tax loss carry forward of approximately $935,000 (as of August 31, 2016, approximately $274,000). Under the Israeli tax laws, carry forward tax losses have no expiration date.
The income tax expense (benefit) differs from the amount computed by applying the United States Statutory corporate income tax rate as follows:
| For the Year Ended August 31, | ||||||||
| 2017 | 2016 | |||||||
| United States statutory corporate income tax rate | 34.0% | 34.0% | ||||||
| Change in valuation allowance on deferred tax assets | -34.0% | -34.0% | ||||||
| Provision for income tax | –% | –% | ||||||
Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The components of the net deferred income tax assets are approximately as follows:
| August 31, | ||||||||
| 2017 | 2016 | |||||||
| US Deferred income tax assets: | ||||||||
| Net operating loss carry forwards benefit | $ | 878,994 | $ | 446,024 | ||||
| Valuation allowance | (878,994 | ) | (446,024 | ) | ||||
| Net deferred income tax assets | $ | – | $ | – | ||||
| Outside US Deferred income tax assets: | ||||||||
| Net operating loss carry forwards benefit | $ | 235,664 | $ | 70,564 | ||||
| Valuation allowance | (235,664 | ) | (70,564 | ) | ||||
| $ | – | $ | – | |||||
| August 31, | ||||||||
| 2017 | 2016 | |||||||
| Consolidated Deferred income tax assets: | ||||||||
| Net operating loss carry forwards benefit | $ | 1,114,659 | $ | 516,588 | ||||
| Valuation allowance | (1,114,659 | ) | (516,588 | ) | ||||
| Net deferred income tax assets | $ | – | $ | – | ||||
The amount taken into income as deferred income tax assets must reflect that portion of the income tax loss carry forwards that is more likely than not to be realized from future operations. The Company has established a full valuation allowance on its net deferred tax assets because of a lack of sufficient positive evidence to support its realization. The valuation allowance increased by $598,070 and $91,399 for the years ended August 31, 2017 and 2016, respectively.
No provision for income taxes has been provided in these financial statements due to the net loss for the years ended August 31, 2017 and 2016. At August 31, 2017, the Company has net operating loss carry forwards of approximately $3,520,160 which expire commencing 2032. The potential tax benefit of these losses may be limited due to certain change in ownership provisions under Section 382 of the Internal Revenue Code (“IRS”) and similar state provisions.
IRS Section 382 places limitations (the “Section 382 Limitation”) on the amount of taxable income which can be offset by net operating loss carry forwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. Generally, after a change in control, a loss corporation cannot deduct operating loss carry forwards in excess of the Section 382 Limitation. Due to these “change in ownership” provisions, utilization of the net operating loss and tax credit carry forwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. The Company has not concluded its analysis of Section 382 through August 31, 2017, but believes the provisions will not limit the availability of losses to offset future income.
The Company is subject to income taxes in the U.S. federal jurisdiction and is subject to examination for a period of three years for current filings and indefinitely for any delinquent filings. The tax regulations within each jurisdiction are subject to interpretation of related tax laws and regulations and require significant judgment to apply. The Company estimates that the amount of penalties, if any, will not have a material effect on the results of operations, cash flows or financial position. No provisions have been made in the financial statements for such penalties, if any.