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13. INCOME TAXES (Restated)

3 Months Ended

Mar. 31, 2018

Income Tax Disclosure [Abstract]

13. 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 laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the three-month periods ended March 31, 2018 and 2017, 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 federal 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 carryovers 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, 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 periods ended March 31, 2018 and 2017.

(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 periods ended March 31, 2018 and 2017. The applicable statutory tax rates for the three-month periods ended March 31, 2018 and 2017 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 March 31, 2018 and December 31, 2017, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $286,732,938 and $282,660,981, 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 March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, the unrecognized WHT are $14,336,647 and $14,133,049, 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 since incorporation in year 2010 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 components of the provision for income tax expense (benefit) from continuing operations are:

		Three-Month Period Ended March 31,
		2018				2017

Current taxes – PRC		$	—			$	2,821,826
Deferred tax – PRC			(1,193,746	)			—
		$	(1,193,746	)		$	2,821,826

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 March 31,
Reconciliations		2018				2017
Statutory income tax rate			25	%			25	%
Non-deductible expense and change in valuation allowance			(7	%)			1	%
Non-taxable items			(3	%)			—
Effective tax rate			15	%			26	%

Significant components of the Company’s deferred tax assets and liabilities at March 31, 2018 and December 31, 2017 are as follows:

		March 31,				December 31,
		2018 (Restated)				2017
Deferred tax liabilities		$	—			$	—

Deferred tax assets:
Allowance for obsolete and slow-moving inventories		$	1,368			$	10,980
Impairment on property, plant and equipment			4,076,604				4,610,228
Exploration costs			1,979,924				1,905,347
Compensation costs of unexercised stock options			98,088				98,092
PRC tax losses			1,931,983				—
US federal net operating loss			27,100				—
Total deferred tax assets			8,115,067				6,624,647
Valuation allowance			(125,188	)			(98,092	)
Net deferred tax asset		$	7,989,879			$	6,526,555

The increase in valuation allowance for the three-month period ended March 31, 2018 is $27,096.

The increase in valuation allowance for the three-month period ended March 31, 2017 is $40,800.

There were no unrecognized tax benefits and accrual for uncertain tax positions as of March 31, 2018 and December 31, 2017.