12. INCOME TAXES

Cayman Islands and BVI

Under the current laws of the Cayman Islands and BVI, the Company is not subject to tax on income or capital gains. Additionally, upon payments of dividends by the Company to its shareholders, neither Cayman Islands nor BVI withholding tax will be imposed.

Hong Kong

Under the Hong Kong tax laws, subsidiaries in Hong Kong are subject to the Hong Kong profits tax rate at 16.5% and they may be exempted from income tax on their foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

Japan

Under the Japan tax laws, a company with paid-in capital in excess of JPY100 million was subject to a national corporate income tax rate of 25.5% up to March 31, 2015 and from April 1, 2015 the income tax rate has been reduced to 23.9%. A company with paid-in capital equals JPY100 million or less will be taxed at a tax rate of 15% on first JPY8 million and at 23.9% on the portion over JPY8 million from April 1, 2015. Local income taxes, which are local inhabitant tax and enterprise tax, are also imposed on corporate income. The resulting effective corporate income tax rates of the Company’s Japanese subsidiaries range from approximately 34% to 37%.

China

Effective from January 1, 2008, the PRC’s statutory, Enterprise Income Tax (“EIT”) rate is 25%. Preferential EIT rates at 15% and 10% are available for qualified “High and New Technology Enterprises” (“HNTEs”) and “Key Software Enterprise” (“KSE”). The HNTE certificate is effective for a period of 3 years and the KSE certificate is effective for a period of 2 years.

Baidu Online enjoyed a reduced tax rate of 10% as a qualified KSE until the end of 2014 and a reduced tax rate of 15% as a qualified HNTE starting from 2015. Certain other PRC subsidiaries and VIEs, including Baidu Netcom, are qualified HNTEs and enjoy a reduced tax rate of 15% for the years presented, which will expire in 2016, 2017 or 2018. An entity could re-apply for the HNTE or KSE certificate when the prior certificate expires. Historically, all of the Company’s subsidiaries and VIEs successfully re-applied for the certificates when the prior ones expired.

A certificate for the current year might be obtained in the following year as a result of the stringent inspection and approval process by the governmental authorities. The Company would record an income tax reversal in the year when the certificate is obtained for the over-paid or over-accrued provisional tax in connection with the grant of a more favorable tax rate for the prior year.

Under the current EIT Law, dividends for earnings derived from January 1, 2008 and onwards paid by PRC entities to any of their foreign non-resident enterprise investors are subject to a 10% withholding tax. A lower tax rate will be applied if tax treaty or arrangement benefits are available. Under the tax arrangement between the PRC and Hong Kong, the reduced withholding tax rate for dividends paid by PRC entities is 5% provided the Hong Kong investors meet the requirements as stipulated by relevant PRC tax regulations, such as the beneficiary owner test. Capital gains derived from PRC are also subject to a 10% PRC withholding tax.

Moreover, the current EIT Law treats enterprises established outside of China with “effective management and control” located in China as PRC resident enterprises for tax purposes. The term “effective management and control” is generally defined as exercising overall management and control over the business, personnel, accounting, properties, etc. of an enterprise. The Company, if considered a PRC resident enterprise for tax purposes, would be subject to the PRC Enterprise Income Tax at the rate of 25% on its worldwide income for the period after January 1, 2008. As of December 31, 2015, the Company has not accrued for PRC tax on such basis. The Company will continue to monitor its tax status.

The Company had minimal operations in jurisdictions other than the PRC. Income (loss) before income taxes consists of:


	For the years ended December 31,
	2013			2014			2015		2015
	RMB			RMB			RMB		US$
	(In thousands)
PRC		13,815,469			17,783,174			16,877,599		2,605,452
Non-PRC		(1,598,762	)		(3,298,768	)		21,029,024		3,246,322

		12,216,707			14,484,406			37,906,623		5,851,774

Except for the investment related gain as mentioned in Note 4, the pre-tax losses from non-PRC operations consist primarily of operating costs, administration expenses, interest expenses and share-based compensation expenses.

Income taxes consist of:


	For the years ended December 31,
	2013			2014			2015		2015
	RMB			RMB			RMB		US$
	(In thousands)
Current income tax		2,006,980			2,942,173			3,213,638		496,100
Income tax refund due to reduced tax rate		(508,686	)		(17,553	)		—		—
Adjustments of deferred tax assets due to reduced tax rates		21,573			28,146			79,947		12,342
Deferred income tax (benefit) expense		309,063			(721,594	)		2,180,792		336,656

		1,828,930			2,231,172			5,474,377		845,098

The reconciliation of the actual income taxes to the amount of tax computed by applying the aforementioned statutory income tax rate to pre-tax income is as follows:


	For the years ended December 31,
	2013			2014			2015			2015
	RMB			RMB			RMB			US$
	(In thousands, except for per share data)
Expected taxation at PRC statutory tax rate		3,046,254			3,587,693			9,476,656			1,462,944
Effect of differing tax rates in different jurisdictions		312,938			676,663			(5,253,700	)		(811,032	)
Non-taxable income		(69,673	)		(12,504	)		(65,411	)		(10,098	)
Non-deductible expenses		168,735			123,245			165,264			25,512
Research and development super-deduction		(318,652	)		(538,305	)		(767,858	)		(118,537	)
Effect of PRC preferential tax rates and tax holiday		(2,152,806	)		(1,897,184	)		(1,547,392	)		(238,876	)
Effect of tax rate changes on deferred taxes		21,573			28,146			79,947			12,342
Over-accrued EIT for previous years		(32,982	)		(153,121	)		(248,673	)		(38,388	)
PRC withholding tax		560,243			—			2,470,733			381,415
Addition to valuation allowance		293,300			416,539			1,164,811			179,816

Taxation for the year		1,828,930			2,231,172			5,474,377			845,098

Effective tax rate		15.01%			15.41%			14.44%			14.44%
Effect of preferential tax rates inside the PRC on basic earnings per Class A and Class B ordinary share		61.53			53.61			44.31			6.84

The tax effects of temporary differences that gave rise to the deferred tax balances at December 31, 2014 and 2015 are as follows:


	As of December 31,
	2014			2015			2015
	RMB			RMB			US$
	(In thousands)
Deferred tax assets:
Provision for doubtful receivables		23,179			120,612			18,619
Accrued expenses, payroll and others		1,084,113			1,745,810			269,506
Fixed assets depreciation		38,157			19,659			3,035
Net operating loss carry-forward		930,456			1,320,496			203,850
Less: valuation allowance		(1,131,826	)		(2,198,403	)		(339,375	)

Deferred tax assets, net		944,079			1,008,174			155,635


	As of December 31,
	2014		2015		2015
	RMB		RMB		US$
	(In thousands)
Long-lived assets arising from acquisitions		549,485		359,531		55,502
Withholding tax on PRC subsidiaries’ undistributed earnings		594,336		592,719		91,500
Withholding tax on capital gains derived from PRC		—		2,489,040		384,243

Deferred tax liabilities		1,143,821		3,441,290		531,245

As of December 31, 2015 the Company had net losses of approximately RMB8.05 billion (US$1.24 billion) deriving from entities in the PRC, Hong Kong and Japan. The net loss in the PRC and Japan can be carried forward for five years and nine years, respectively, to offset future net profit for income tax purposes. The net loss of entities in the PRC and Japan will begin to expire in 2018, if not utilized. The net loss in Hong Kong can be carried forward without an expiration date.

The Company evaluated its income tax uncertainty under ASC 740. ASC 740 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. The Company elects to classify interest and penalties related to an uncertain tax position, if and when required, as part of income tax expense in the consolidated statements of comprehensive income. As of and for the years ended December 31, 2014 and 2015, there was no significant impacts from tax uncertainty on the Company’s financial position and result of operations. The Company does not expect the amount of unrecognized tax benefits would increase significantly in the next 12 months. In general, the PRC tax authorities have up to five years to conduct examinations of the tax filings of the Company’s PRC subsidiaries. Accordingly, the PRC subsidiaries’ tax years of 2011 through 2015 remain open to examination by the respective tax authorities. The Company may also be subject to the examinations of the tax filings in other jurisdictions, which are not material to the consolidated financial statements.

The Company accrued withholding tax of RMB580.72 million for the potential remittance of earnings from the PRC subsidiaries to their offshore parent companies in the form of dividend distribution as of December 31, 2013, because the Company believes that the underlying dividends will be distributed in the future considering future merger and acquisition activities. The Company did not provide for additional deferred income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries in 2014 and 2015 on the basis of its intent to permanently reinvest foreign subsidiaries’ earnings. As of December 31 2015, the total amount of undistributed earnings from the PRC subsidiaries for which no withholding tax has been accrued was RMB70.13 billion (US$10.83 billion). Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. In the case of its VIEs in the PRC, undistributed earnings were insignificant as of each of the balance sheet dates.