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Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities

9 Months Ended

Jun. 30, 2015

Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities [Text Block]

13.

Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities

(a)

Income taxes in the condensed consolidated statements of comprehensive loss (income)

The Company’s provision for income taxes consisted of:

		Three months ended June 30,					Nine months ended June 30,
		2014		2015			2014		2015
PRC income tax:
Current	$	-	$	-		$	16,474	$	-
Deferred		-		(32,851	)		-		5,770,683
	$	-	$	(32,851	)	$	16,474	$	5,770,683

United States Tax
China BAK is subject to a statutory tax rate of 35% under United States of America tax law. No provision for income taxes in the United States or elsewhere has been made as China BAK had no taxable income for the three and nine months ended June 30, 2014 and 2015.

Hong Kong Tax
BAK Asia and BAK International are subject to Hong Kong profits tax rate of 16.5% and did not have any assessable profits arising in or derived from Hong Kong for the three and nine months ended June 30, 2014 and 2015 and accordingly no provision for Hong Kong profits tax was made in these periods.

PRC Tax
The Company’s subsidiaries in China are subject to enterprise income tax at 25% for the three and nine months ended June 30, 2014 and 2015.

Canada States Tax
BAK Canada was subject to statutory tax rate of 38% under Canada tax law. No provision for income taxes in Canada has been made as BAK Canada had no taxable income for the three and nine months ended June 30, 2014.

German States Tax
BAK Europe was subject to a 25% statutory tax rate under Germany tax law. No provision for income taxes in Germany has been made as BAK Europe had no taxable income for the three and nine months ended June 30, 2014.

India Tax
BAK India was subject to a 30% statutory tax rate under India tax law. No provision for income taxes in India has been made as BAK India had no taxable income for the three and nine months ended June 30, 2014.

A reconciliation of the provision for income taxes determined at the statutory income tax rate to the Company's income taxes is as follows:

		Three months ended June 30,						Nine months ended June 30,
		2014			2015			2014			2015
(Loss) earnings before income taxes - continuing operations	$	(9,829,430	)	$	(1,301,852	)	$	(26,351,675	)	$	21,436,051
United States federal corporate income tax rate		35%			35%			35%			35%
Income tax credit computed at United States statutory corporate income tax rate		(3,440,301	)		(455,648	)		(9,223,086	)		7,502,618
Reconciling items:
Valuation allowance on deferred tax assets		2,939,065			238,141			6,147,546			285,153
Rate differential for PRC earnings		455,721			97,818			2,555,291			(2,194,794	)
Non-deductible expenses		40,430			19,488			506,060			110,660
Share based payments		5,085			67,350			30,663			67,350
Others		-			-			-			(304	)
Income tax (credit) expenses	$	-		$	(32,851	)	$	16,474		$	5,770,683

(b)

Deferred tax assets and deferred tax liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of September 30, 2014 and June 30, 2015 are presented below:

		September 30,			June 30,
		2014			2015
Deferred tax assets
Net operating loss carried forward	$	12,534,160		$	12,824,257
Valuation allowance		(12,534,160	)		(12,824,257	)
Long-term deferred tax assets	$	-		$	-

Deferred tax liabilities
Government grants	$	-		$	5,767,518
Less: current portion		-			(267,524	)
Non-current portion	$	-		$	5,499,994

As of September 30, 2014 and June 30, 2015, the Company’s U.S. entity had net operating loss carry forwards of $35,581,443, available to reduce future taxable income which will expire in various years through 2034 and the Company’s PRC subsidiaries had net operating loss carry forwards of $690,821 and $1,851,208, respectively, which will expire in various years through 2020. Management believes it is more likely than not that the Company will not realize these potential tax benefits as these operations will not generate any operating profits in the foreseeable future. As a result, a valuation allowance was provided against the full amount of the potential tax benefits.

The Company did not provide for deferred income taxes and foreign withholding taxes on the cumulative undistributed earnings of foreign subsidiaries as of September 30, 2014 and June 30, 2015 of approximately of nil and $16.1 million, respectively. The cumulative distributed earnings of foreign subsidiaries were included in accumulated deficit and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes or applicable withholding taxes, related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if management concluded that such earnings will be remitted in the future.

As of September 30, 2014 and June 30, 2015, the Company had no material unrecognized tax benefits which would favorably affect the effective income tax rates in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the three and nine months ended June 30, 2014 and 2015, and no provision for interest and penalties is deemed necessary as of June 30, 2015 and September 30, 2014.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion.