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Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities

12 Months Ended

Sep. 30, 2015

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

15.

Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities

(a)

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

The Company’s provision for income taxes consisted of:

			2014			2015
	PRC income tax:
	Current	$	16,475		$	5,218,898
	Deferred		-			101,617
		$	16,475		$	5,320,515

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 years ended September 30, 2014 and 2015.

Hong Kong Tax

BAK Asia and BAK International are subject to Hong Kong profits tax rate of 16.5% . The two companies did not incur any assessable profits arising in or derived from Hong Kong for the years ended September 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 years ended September 30, 2014 and 2015. The Enterprise Income Tax Law in China grants preferential tax treatment to High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs can enjoy an income tax rate of 15% for three years, but need to re-apply after the end of the three-year period. Dalian BAK Power is in the process of applying to be recognized as an HNTE.

Canada States Tax

BAK Canada was subject to a 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 year ended September 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 year ended September 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 year ended September 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:

			2014			2015
	(Loss) profit before income tax - continuing operations	$	(26,705,308	)	$	19,363,204
	United States federal corporate income tax rate		35%			35%
	Income tax credit computed at United States statutory corporate income tax rate		(9,346,763	)		6,777,121
	Reconciling items:
	Valuation allowance on deferred tax assets		6,227,021			70,664
	Rate differential for PRC earnings		2,574,746			(2,100,342	)
	Non-deductible expenses		530,410			310,514
	Share based payments		31,061			262,558
	Income tax expenses	$	16,475		$	5,320,515

(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 2015 are presented below:

			2014			2015
	Deferred tax assets
	Trade accounts receivable	$	-		$	32,979
	Inventories		-			54,127
	Property, plant and equipments		-			5,976
	Valuation allowance		-			(49,907	)
	Deferred tax assets, current portion	$	-		$	43,175

	Net operating loss carried forward	$	12,534,160		$	12,470,938
	Valuation allowance		(12,534,160	)		(12,470,938	)
	Deferred tax assets, non-current	$	-		$	-
	Deferred tax liabilities, non-current
	Property, plant and equipment	$	-		$	142,650

As of September 30, 2014 and 2015, the Company’s U.S. entity had net operating loss carry forwards of $35,318,443, of which $102,293 was available to reduce future taxable income which will expire in various years through 2035 and $35,216,150 was available to offset capital gains recognized through 2020 and the Company’s PRC subsidiaries had net operating loss carry forwards of $690,821 and $437,933, 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 2015 of approximately of nil and $14.2 million, respectively. The cumulative undistributed 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 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 years ended September 30, 2014 and 2015, and no provision for interest and penalties is deemed necessary as of September 30, 2014 and 2015.

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.