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14. INCOME TAXES (Restated)

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

14. INCOME TAXES (Restated)

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

(a) United States (“US”)

Gulf Resources, Inc. may be 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, 2017 and 2016, and management believes that its earnings are permanently invested in the PRC.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted in law. With the new tax law, the corporation income tax rate is reduced from 35% to 21% and there is a one-time mandatory transition tax on accumulated foreign earnings. The Company computed this one-time mandatory transition tax on accumulated foreign earnings to be approximately $5.4 million. However, as the Company has available US federal net operating loss carry forwards and foreign tax credit to fully offset the mandatory inclusion of the accumulated foreign earnings, no net tax liability arose from the inclusion of these accumulated foreign earnings.

(b) British Virgin Islands (“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, 2017 and 2016.

(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 ended December 31, 2017 and 2016. The applicable statutory tax rates for the years ended December 31, 2017 and 2016 are 16.5%.

(d) PRC

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

The operating subsidiaries SCHC, SYCI and DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC local 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, 2017 and 2016, the accumulated distributable earnings under the Generally Accepted Accounting Principles (“GAAP”) of PRC that are subject to WHT are $282,660,981 and $255,133,960, 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, 2017 and 2016, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises that are subject to WHT in China. As of December 31, 2017 and 2016, the unrecognized WHT are $14,133,049 and $12,756,698, 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 2014 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 from year 2010 are currently subject to examination.

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

		Years ended December 31,
		2017 Restated				2016

Current taxes – PRC		$	7,737,087				11,807,194
Deferred tax – PRC			(4,126,947	)			3,013
		$	3,610,140			$	11,810,207

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,
		2017 Restated				2016

Statutory income tax rate-PRC			25	%			25	%
Non-deductible (Non-taxable) items			4	%			(1	%)
Change in valuation allowance-US federal net operating loss			2	%			1	%
Effective tax rate			31	%			25	%

As of December 31, 2017 and 2016, the Company had a US federal net operating loss (“NOL”) of approximately $15.3 million and $33.1 million. The NOL can be carried forward up to 20 years from the year the loss is incurred and will begin to expire after 2019. It is however subject to limitation of the US tax regulations arising from previous changes in ownership and business of the Company. Due to these limitations, the NOL carryovers as of December 31, 2017 are no longer available for use to offset against future US federal taxable income.

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 December 31, 2017 and 2016 are as follows:

		As of December 31,
		2017 Restated				2016

Deferred tax assets:
Allowance for obsolete and slow-moving inventories		$	10,980			$	—
Impairment on property, plant and equipment			4,610,228				421,105
Exploration costs			1,905,347				1,794,667
Compensation costs of unexercised stock options			98,092				120,986
US federal tax net operating loss			—				11,575,000
Total deferred tax assets			6,624,647				13,911,758
Valuation allowance			(98,092	)			(11,695,986	)
Net deferred tax asset		$	6,526,555			$	2,215,772

The decrease in valuation allowance for the year ended December 31, 2017 was $11,597,894. This was mainly due to the change in tax rate in the amount of $4,681,528, the utilization of NOL to offset the one-time mandatory transition tax on accumulated foreign earnings in the amount of $3,721,336 and the NOL limitation adjustment in the amount of $3,220,530.

The increases in valuation allowance for the year ended December 31, 2016 was $231,824.

There were no unrecognized tax benefits and accrual for uncertain tax positions as of December 31, 2017 and 2016.