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14. INCOME TAXES

9 Months Ended

Sep. 30, 2019

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. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

(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 and nine-month periods ended September 30, 2019 and 2018, 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, 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, 2019 and 2018.

(c) Hong Kong

HKJI, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and 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 income tax has been made as it has no taxable income for the three-month and nine-month periods ended September 30, 2019 and 2018. The applicable statutory tax rates for the three-month and nine-month periods ended September 30, 2019 and 2018 are 16.5%. There is no dividend withholding tax in Hong Kong.

(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. The PRC tax losses may be carried forward to be utilized against future taxable profit for ten years for High-tech enterprises and small and medium-sized enterprises of science and technology and for five years for other companies. Tax losses of the operating subsidiaries of the Company may be carried forward for five years.

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued CaiShui [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, 2019 and December 31, 2018, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $215,205,425 and $240,563,868, 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, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018, the unrecognized WHT are $9,797,344 and $11,035,843, respectively.

The Company’s income 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 income tax returns filed in the United States for three years from the date of filing. The Company’s US income tax returns since 2015 are currently subject to examination.

Inland Revenue Department of Hong Kong (“IRD”) may examine the Company’s income tax returns filed in Hong Kong for seven years from date of filing. For the years 2012 through 2018, HKJI did not report any taxable income. It did not file any income tax returns during these years except for 2014 and 2018. For companies which do not have taxable income, IRD typically issues notification to companies requiring them to file income tax returns once in every four years. The tax returns for 2014 and 2018 are currently subject to examination.

The components of the provision for income tax (expense) income tax benefit from continuing operations are:

	Three-Month Period Ended September 30,								Nine-Month Period Ended September 30,
	2019				2018				2019				2018
Current taxes – PRC		$	-			$	-			$	-			$	-
Deferred taxes – PRC			1,650,132				7,205,521				3,756,199				10,338,103
Change in valuation allowance			(8,379,571)				(24,000)				(8,724,517)				(79,595)
		$	(6,729,439)			$	7,181,521			$	(4,968,318)			$	10,258,508

The effective income tax benefit (expense) rate differs 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	2019				2018				2019				2018
Statutory income tax rate		25	%			25	%			25	%			25	%
Non-taxable income		1	%			2	%			2	%			-
Change in valuation allowance		(133	%)			-				(63	%)			-
Effective income tax benefit (expense) rate		(107	%)			27	%			(36	%)			25	%

Significant components of the Company’s deferred tax assets and liabilities at September 30, 2019 and December 31, 2018 are as follows:

		September 30,				December 31,
		2019				2018
Deferred tax liabilities		$	-			$	-

Deferred tax assets:
Allowance for obsolete and slow-moving inventories		$	-			$	16,292
Impairment on property, plant and equipment			3,197,763				3,696,332
Impairment on prepaid land lease			815,370				840,284
Exploration costs			1,760,181				1,813,965
Compensation costs of unexercised stock options			171,672				194,016
PRC tax losses			16,043,972				12,663,985
US federal net operating loss and foreign tax credit			508,102				119,000
Total deferred tax assets			22,497,060				19,343,874
Valuation allowance			(9,037,533)				(313,016	)
Net deferred tax asset		$	13,459,527			$	19,030,858

The increase in valuation allowance for the three-month period ended September 30, 2019 is $8,379,571.

The increase in valuation allowance for the three-month period ended September 30, 2018 is $24,000.

The increase in valuation allowance for the nine-month period ended September 30, 2019 is $8,724,517.

The increase in valuation allowance for the nine-month period ended September 30, 2018 is $79,595.

The increase in valuation allowance in the three and nine months ended September 30, 2019 is mainly attributable to valuation allowance recorded for the deferred tax assets related to a portion of the PRC tax losses that more likely than not will expire before it could be utilized and the exploration costs which more likely than not will not be realized.

There were no unrecognized tax benefits and accrual for uncertain tax positions as of September 30, 2019 and December 31, 2018.

There were no amounts accrued for penalties and interest for the three and nine months ended September 30, 2019 and 2018. There were no change in unrecognized tax benefits during the three and nine months ended September 30, 2019 and 2018.