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Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities

12 Months Ended

Sep. 30, 2016

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

16.

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 expenses (credit) consisted of:

			2015			2016
	PRC income tax:
	Current	$	5,218,898		$	769,373
	Deferred		101,617			(96,793	)
		$	5,320,515		$	(672,580	)

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, 2015 and 2016.

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 years ended September 30, 2015 and 2016 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, 2015 and 2016.

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

			2015			2016
	Profit (loss) before income taxes	$	19,363,204		$	(11,979,614	)
	United States federal corporate income tax rate		35%			35%
	Income tax expense (credit) computed at United States statutory corporate income tax rate		6,777,121			(4,192,865	)
	Reconciling items:
	Over provision of deferred taxation in prior year		-			(96,793	)
	Rate differential for PRC earnings		(2,100,342	)		1,015,843
	Non-deductible expenses		310,514			125,998
	Share based payments		262,558			511,769
	ASC 740-10 uncertain tax position		-			769,373
	Valuation allowance on deferred tax assets		70,664			2,539,255
	Income tax expenses	$	5,320,515		$	672,580

(b) Deferred tax assets and deferred tax liabilities

During November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The Company early adopted this guidance to the current fiscal year ending September 30, 2016 on a prospective basis. Adoption of this guidance resulted in a reclassification of the net current deferred tax asset to the net non-current deferred tax asset in the consolidated balance sheet as of September 30, 2016. No prior periods were retrospectively adjusted.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of September 30, 2015 and 2016 are presented below:

			2015			2016
	Deferred tax assets
	Trade accounts receivable	$	32,979		$	-
	Inventories		54,127			-
	Property, plant and equipment		5,976			-
	Valuation allowance		(49,907	)		-
	Deferred tax assets, current	$	43,175		$	-

	Trade accounts receivable	$	-		$	711,944
	Inventories		-			160,222
	Property, plant and equipment		-			156,628
	Valuation allowance		-			(1,028,794	)
	Deferred tax assets, non-current	$	-		$	-

	Net operating loss carried forward	$	36,362,743		$	37,923,110
	Valuation allowance		(36,362,743	)		(37,923,110	)
	Deferred tax assets, non-current	$	-			-

	Deferred tax liabilities, non-current
	Property, plant and equipment	$	142,650		$	-

As of September 30, 2015 and 2016, the Company’s U.S. entity had net operating loss carry forwards of $103,580,741, respectively, of which $102,293 available to reduce future taxable income which will expire in various years through 2035 and $103,478,448 available to offset capital gains recognized in the succeeding 5 tax years and the Company’s PRC subsidiaries had net operating loss carry forwards of $437,933 and $6,679,401, respectively, which will expire in various years through 2021. 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, 2015 and 2016 of approximately of $14.2 million and $3.4 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.

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.