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Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities

9 Months Ended

Sep. 30, 2017

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 condensed consolidated statements of comprehensive loss (income)

The Company’s provision for income taxes credit consisted of:

			Three months ended September 30,						Nine months ended September 30,
			2016			2017			2016			2017
	PRC income tax:
	Current	$	769,373		$	-		$	769,373		$	-
	Deferred		(111,568	)		-			(168,860	)		-
		$	657,805		$	-		$	600,513		$	-

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 September 30, 2016 and 2017.

Hong Kong Tax
BAK Asia is 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 September 30, 2016 and 2017 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 September 30, 2016 and 2017.

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 September30,						Nine months ended September30,
			2016			2017			2016			2017
	Loss before income taxes	$	(5,289,917	)	$	(4,202,753	)	$	(9,919,008	)	$	(10,024,349	)
	United States federal corporate income tax rate		35%			35%			35%			35%
	Income tax credit computed at United States statutory corporate income tax rate		(1,851,472	)		(1,470,963	)		(3,471,653	)		(3,508,522	)
	Reconciling items:
	Rate differential for PRC earnings		486,224			391,875			852,047			897,639
	Non-deductible expenses		5,685			48,901			111,212			144,669
	Share based payments		136,722			50,500			381,057			222,436
	ASC 740-10 uncertain tax position		769,373			-			769,373			-
	Valuation allowance on deferred tax assets		1,213,025			979,687			2,039,655			2,243,778
	Over provision of deferred taxation in prior year		(96,793	)		-			(96,793	)		-
	Others		(4,959	)		-			15,615			-
	Income tax expenses	$	657,805		$	-		$	600,513		$	-

(a)

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 December 31, 2016 and September 30, 2017 are presented below:

			December 31,			September 30,
			2016			2017
	Deferred tax assets
	Trade accounts receivable	$	748,949		$	978,942
	Inventories		254,852			613,512
	Property, plant and equipment		373,287			389,542
	Provision for product warranty		51,351			334,909
	Net operating loss carried forward		38,055,264			39,303,013
	Valuation allowance		(39,483,703	)		(41,619,918	)
	Deferred tax assets, non-current	$	-		$	-
	Deferred tax liabilities, non-current	$	-		$	-

As of December 31, 2016 and September 30, 2017, the Company’s U.S. entity had net operating loss carry forwards of $103,580,741, 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 $7,213,329 and $12,199,014, 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 December 31, 2016 and September 30, 2017 of approximately of $2.0 million and $0 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.

The impact of an uncertain income tax positions on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.

The significant uncertain tax position arose from the subsidies granted by the local government for the Company’s PRC subsidiary, which may be modified or challenged by the central government or the tax authority. A reconciliation of January 1, 2017 through September 30, 2017 amount of unrecognized tax benefits excluding interest and penalties ("Gross UTB") is as follows:

			Gross UTB			Surcharge			Net UTB
	Balance as of January 1, 2017	$	7,061,140		$	-		$	7,061,140
	Decrease in unrecognized tax benefits taken
	in current period		(321,598	)		-			(321,598	)
	Balance as of September 30, 2017	$	6,739,542		$	-		$	6,739,542

As of December 31, 2016 and September 30, 2017, the Company had not accrued any interest and penalties related to unrecognized tax benefits.