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15. INCOME TAXES
 12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
15. INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.

 

(a)           United States

 

Gulf Resources, Inc. is subject to the United States of America Tax law at tax rate of 35%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the years ended December 31, 2013 and 2012, and management believes that its earnings are permanently invested in the PRC.

 

(b)           BVI

 

Upper Class Group Limited was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the years ended 31 December 31, 2013 and 2012.

 

(c)           Hong Kong

 

Hong Kong Jiaxing Industrial Limited was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong.  No provision for profits tax has been made as the Company has no assessable income for the years.  The applicable statutory tax rates for the years ended December 31, 2013 and 2012 are 16.5%.

 

(d)           PRC

 

Enterprise income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the assessable profits.

 

The operating subsidiaries SCHC and SYCI are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise Income Tax Law.

 

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.

 

As of December 31, 2013 and 2012, the accumulated distributable earnings under the Generally Accepted Accounting Principles (“GAAP”) of PRC are $225,003,631 and $197,042,047, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of December 31, 2013 and 2012, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of December 31, 2013 and 2012, the unrecognized WHT are $10,133,056 and $8,768,486, respectively.

  

 

The Company’s tax returns are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the Company’s tax returns filed in the United States for three years from the date of filing. The Company’s US tax returns since 2010 are currently subject to examination. Inland Revenue Department of Hong Kong may examine the Company’s tax returns filed in Hong Kong for seven years from date of filing. The Company’s Hong Kong tax returns since incorporation are currently subject to examination. The tax authorities of the PRC may examine the Company’s PRC tax returns for three years from the date of filing. The Company’s PRC tax returns since 2010 are currently subject to examination.

 

The components of the provision for income taxes from continuing operations are:

 

    Years ended December 31,  
    2013     2012      
                 
Current taxes – PRC   $ 7,607,050     $ 5,102,119      
Deferred tax – PRC     633       489,334      
    $ 7,607,683     $ 5,591,453      
                       

 

The effective income tax expenses differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:-

 

    Years ended December 31,
    2013    2012    
                 
Statutory income tax rate 　 25%     25%      
Non-deductible items   1%     -      
Change in valuation allowance   1%     2%      
Effective tax rate 　  27%      27%      

 

As of December 31, 2013 and 2012, the Company had US federal net operating loss (“NOL”) of approximately $26.5 million and $25.9 million available to offset against future federal income tax liabilities, respectively.  NOL can be carried forward up to 15 years from the year the loss is incurred. NOL of approximately $12.0 million will expire at the beginning of 2014. The Company believes the realization of benefits from these losses remains uncertain due to the Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance has been provided.

 

Differences between the application of accounting principles and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities. Significant components of the Company’s deferred tax assets and liabilities at December31, 2013 and 2012 are as follows:

 

    As of December 31,  
    2013     2012  
Deferred tax liabilities   $ -     $ -  
                 
Deferred tax assets:                
Allowance for obsolete and slow-moving inventories   $ 1,657     $ 6,973  
Impairment on property, plant and equipment     479,151       464,778  
Exploration costs     1,837,025       1,781,921  
Repair and maintenance costs     -       -  
Property, plant and equipment     -       -  
Property, plant and equipment under capital leases     -       -  
Compensation costs of unexercised stock options     2,053,310       1,809,378  
US federal net operating loss     9,272,734       8,809,935  
Total deferred tax assets     13,643,877       12,872,985  
Valuation allowance     (11,326,044 )     (10,619,313 )
Net deferred tax asset   $ 2,317,833     $ 2,253,672  
                 
Current deferred tax asset   $ 1,657     $ 6,973  
Long-term deferred tax asset   $ 2,316,176     $ 2,246,699  

 

The increases in valuation allowance for each of the years ended December 31, 2013 and 2012 were $706,731 and $507,492 respectively.

 

There were no unrecognized tax benefits and accrual for uncertain tax positions as of December 31, 2013 and 2012.