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Taxation | 12 Months Ended
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Dec. 31, 2020
Taxation |
Taxation |
10. | Taxation
Composition of income tax The following table presents the composition of income tax expenses for the years ended December 31, 2018, 2019 and 2020:
|  | For the Year Ended December 31, |
|  | 2018 |  |  | 2019 |  |  | 2020 |
|  | RMB in thousands |
Current income tax expenses |  |  | 14,909 |  |  |  | 29,452 |  |  |  | 48,081 |
Withholding income tax expenses |  |  | 11,079 |  |  |  | 16,894 |  |  |  | 18,754 |
Deferred tax benefits |  |  | — |  |  |  | (10,479 | ) |  |  | (13,466 | )
Total |  |  | 25,988 |  |  |  | 35,867 |  |  |  | 53,369 |
a) | Income taxes
Cayman Islands Under the current laws of the Cayman Islands, the Company and its intermediate holding companies in the Cayman Islands are not subject to tax on income or capital gain. Additionally, upon payments of dividends by the Company or its subsidiaries in the Cayman Islands to their shareholders, no withholding tax will be imposed. British Virgin Islands (“BVI”) Subsidiaries in the BVI are exempted from income tax on their foreign-derived income in the BVI. There are no withholding taxes in the BVI. Hong Kong Subsidiaries in Hong Kong are subject to 16.5% income tax on their taxable income generated from operations in Hong Kong. The payments of dividends by these companies to their shareholders are not subject to any withholding tax in Hong Kong. Commencing from the year of assessment of 2018, 2019 and 2020, the first HK$2 million of profits earned by the Company’s subsidiaries incorporated in Hong Kong will be taxed at half the current tax rate (i.e. 8.25%) while the remaining profits will continue to be taxed at the existing 16.5% tax rate. China On March 16, 2007, the National People’s Congress of the PRC enacted the Enterprise Income Tax (“EIT”) Law, under which FIEs and domestic companies would be subject to EIT at a uniform rate of 25%. Preferential tax treatments will continue to be granted to FIEs or domestic companies which conduct businesses in certain encouraged sectors and to entities otherwise classified as “Software Enterprises”, “Key Software Enterprises”, “Encouraged Enterprises” and/or “High and New Technology Enterprises” (“HNTEs”). The EIT Law became effective on January 1, 2008. The aforementioned preferential tax rates are subject to annual review by the relevant tax authorities in China. Certain subsidiaries were qualified as HNTEs or Encouraged Enterprises and enjoyed a preferential income tax rate at 15% for the corresponding years from the year they are qualified, respectively, provided that they continue to qualify as HNTEs or Encouraged Enterprises during such periods. The following table presents a reconciliation of the differences between the statutory income tax rate and the Group’s effective income tax rate for the years ended December 31, 2018, 2019 and 2020:
|  | For the Year Ended December 31, |
|  | 2018 |  |  | 2019 |  |  | 2020 |
|  | % |  |  | % |  |  | % |
Statutory income tax rate |  |  | 25.00 |  |  |  | 25.00 |  |  |  | 25.00 |
Permanent differences |  |  | (3.76 | ) |  |  | (0.83 | ) |  |  | 0.60 |
Tax rate difference from statutory rate in other jurisdictions* |  |  | (0.92 | ) |  |  | (0.39 | ) |  |  | (3.90 | )
Tax effect of preferential tax treatments |  |  | (3.15 | ) |  |  | (8.48 | ) |  |  | (8.29 | )
Withholding tax |  |  | (2.05 | ) |  |  | (1.33 | ) |  |  | (0.63 | )
Change in valuation allowance |  |  | (19.94 | ) |  |  | (16.80 | ) |  |  | (14.56 | )
Effective income tax rate |  |  | (4.82 | ) |  |  | (2.83 | ) |  |  | (1.78 | )
* | It is primarily due to the tax effect of the Company as a tax-exempt entity incorporated in the Cayman Islands.
As of December 31, 2020, certain entities of the Group had net operating tax loss carry forwards as follows:
|  | RMB in thousands |
Loss expiring in 2021 |  |  | 43,751 |
Loss expiring in 2022 |  |  | 44,711 |
Loss expiring in 2023 |  |  | 83,876 |
Loss expiring in 2024 |  |  | 208,366 |
Loss expiring in 2025 and thereafter |  |  | 3,201,799 |
Total |  |  | 3,582,503 |
b) | Sales tax
The Group’s subsidiaries and VIEs incorporated in China are subject to value added tax (“VAT”) for services rendered at a rate of 6% and for goods sold at a rate varying from 0% to 17% depending on their categories in different periods. All Entities in China are also subject to surcharges on value-added tax payments in accordance with PRC law. In addition, the Group’s advertising and marketing revenues are also subject to culture business construction fee at a rate of 3% in 2018, which was reduced to 1.5% since July 1, 2019, valid until December 31, 2024.
c) | Deferred tax assets and liabilities
The following table presents the tax impact of significant temporary differences that give rise to the deferred tax assets and liabilities as of December 31, 2018, 2019 and 2020:
|  | December 31, 2018 |  |  | December 31, 2019 |  |  | December 31, 2020 |
|  | RMB in thousands |
Deferred tax assets: |  |  |  |  |  |  |  |  |  |  |  |
Deferred revenue |  |  | 90,311 |  |  |  | 95,806 |  |  |  | 163,620 |
Accrued expenses and other payables |  |  | 25,984 |  |  |  | 82,351 |  |  |  | 128,886 |
Advertising expenses in excess of deduction limit |  |  | 312 |  |  |  | 7,507 |  |  |  | 65,674 |
Net operating tax loss carry forwards |  |  | 176,439 |  |  |  | 360,975 |  |  |  | 621,035 |
Others |  |  | 909 |  |  |  | 1,199 |  |  |  | 19,036 |
Total deferred tax assets |  |  | 293,955 |  |  |  | 547,838 |  |  |  | 998,251 |
Less: valuation allowance |  |  | (293,955 | ) |  |  | (537,359 | ) |  |  | (977,333 | )
Net deferred tax assets |  |  | — |  |  |  | 10,479 |  |  |  | 20,918 |
Deferred tax liabilities |  |  |  |  |  |  |  |  |  |  |  |
Acquired intangible assets (Note 24) |  |  | — |  |  |  | — |  |  |  | (46,112 | )
Total deferred tax liabilities |  |  | — |  |  |  | — |  |  |  | (46,112 | )
Realization of the net deferred tax assets is dependent on factors including future reversals of existing taxable temporary differences and adequate future taxable income, exclusive of reversing deductible temporary differences and tax loss or credit carry forwards. The Group evaluates the potential realization of deferred tax assets on an entity-by-entity basis. As of December 31, 2018, 2019 and 2020, valuation allowances were provided against deferred tax assets in entities where it was determined it was more-likely-than-not that the benefits of the deferred tax assets will not be realized. The following table sets forth the movement of the aggregate valuation allowances for deferred tax assets for the periods presented:
|  | Balance at January 1 |  |  | Re-measurement due to applicable preferential tax rate |  |  | Addition |  |  | Expiration of loss carry forward and impact of disposal of subsidiaries |  |  | Balance at December 31 |
|  | RMB in thousands |
2018 |  |  | (157,264 | ) |  |  | 22,502 |  |  |  | (159,690 | ) |  |  | 497 |  |  |  | (293,955 | )
2019 |  |  | (293,955 | ) |  |  | — |  |  |  | (248,896 | ) |  |  | 5,492 |  |  |  | (537,359 | )
2020 |  |  | (537,359 | ) |  |  | 105 |  |  |  | (484,445 | ) |  |  | 44,366 |  |  |  | (977,333 | )
d) | Withholding income tax on dividends
The EIT Law also imposes a withholding income tax of 10% on dividends distributed by a FIE to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands, where the Company was incorporated, does not have such tax treaty with China. According to the arrangement between mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by a FIE in China to its immediate holding company in Hong Kong will be subject to withholding tax at a rate that may be lowered to 5% (if the foreign investor owns directly at least 25% of the shares of the FIE). The State Administration of Taxation further promulgated Circular 601 on October 27, 2009, which provides that tax treaty benefits will be denied to “conduit” or shell companies without business substance and that a beneficial ownership analysis will be used based on a “substance-over-form” principle to determine whether or not to grant the tax treaty benefits. To the extent that subsidiaries and VIEs of the Group have undistributed earnings, the Group will accrue appropriate expected withholding tax associated with repatriation of such undistributed earnings. As of December 31, 2018, 2019 and 2020, the Group did not record any withholding tax on the retained earnings of its subsidiaries and VIEs in the PRC as they were still in accumulated deficit position.

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