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14. INCOME TAXES

9 Months Ended

Sep. 30, 2015

Income Tax Disclosure [Abstract]

14. 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 a 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 three-month and nine-month periods ended September 30, 2015 and 2014, and management believes that its earnings are permanently invested in the PRC.

(b) BVI

Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., 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 three-month and nine-month periods ended September 30, 2015 and 2014.

(c) Hong Kong

Hong Kong Jiaxing Industrial Limited, a subsidiary of Upper Class Group 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 three-month and nine-month periods ended September 30, 2015 and 2014. The applicable statutory tax rates for the three-month and nine-month periods ended September 30, 2015 and 2014 are 16.5%. There is no dividend withholding tax in Hong Kong.

(d) PRC

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

The operating subsidiaries SCHC, SYCI and SCRC 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 September 30, 2015 and December 31, 2014, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC are $259,398,916 and $242,440,917, 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 September 30, 2015 and December 31, 2014, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of September 30, 2015 and December 31, 2014, the unrecognized WHT are $11,899,270 and $11,008,938, 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 2011 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 in year 2008 are currently subject to examination.

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

	Three-Month Period Ended September 30,								Nine-Month Period Ended September 30,
	2015				2014				2015				2014
Current taxes – PRC		$	3,290,372			$	1,732,861			$	9,086,618			$	5,035,433
Deferred taxes – PRC			-				-				(81,460	)			-
		$	3,290,372			$	1,732,861			$	9,005,158			$	5,035,433

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

	Three-Month Period Ended September 30,								Nine-Month Period Ended September 30,
Reconciliations	2015				2014				2015				2014
Statutory income tax rate		25	%			25	%			25	%			25	%
Non-taxable item		(1	%)			0	%			(0.7	%)			0	%
Change in valuation allowance - US federal net operating loss		0	%			1	%			0.7	%			0	%
Effective tax rate		24	%			26	%			25	%			25	%

Significant components of the Company’s deferred tax assets and liabilities at September 30, 2015 and December 30, 2014 are as follows:

		September 30, 2015				December 31, 2014
Deferred tax liabilities		$	-			$	-

Deferred tax assets:
Allowance for obsolete and slow-moving inventories		$	831			$	864
Impairment on property, plant and equipment			459,228				477,427
Exploration costs			1,957,141				1,952,990
Compensation costs of unexercised stock options			621,707				1,427,296
US federal net operating loss			10,013,893				9,692,379
Total deferred tax assets			13,052,800				13,550,956
Valuation allowance			(10,635,600	)			(11,119,675	)
Net deferred tax asset		$	2,417,200			$	2,431,281

Current deferred tax asset		$	831			$	864
Long-term deferred tax asset		$	2,416,369			$	2,430,417

The increase in valuation allowance for each of the three-month period ended September 30, 2015 and 2014 is $70,320 and $57,219, respectively.

The decrease in valuation allowance for the nine-month period ended September 30, 2015 is $484,075.

The increase in valuation allowance for the nine-month period ended September 30, 2014 is $276,646.

There were no unrecognized tax benefits and accrual for uncertain tax positions as of September 30, 2015 and December 31, 2014.