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INCOME TAXES
 6 Months Ended
Jun. 30, 2021
Income Tax Disclosure [Abstract]  
INCOME TAXES

NOTE 13 – 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 (“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 six-month periods ended June 30, 2021 and 2020, and management believes that its earnings are permanently invested in the PRC.

 

(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 six-month periods ended June 30, 2021 and 2020.

 

(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 six-month periods ended June 30, 2021 and 2020.  The applicable statutory tax rates for the three-month and six-month periods ended June 30, 2021 and 2020 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 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 June 30, 2021 and December 31, 2020, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $125,637,125 and $126,643,733, 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 June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020, the unrecognized WHT are $5,227,527 and $5,288,346, 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 2016 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 2019, 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 have been examined, and there is no Hong Kong Profits Tax was charged.

 

The components of the income tax benefit from continuing operations are:

                                 
   Three-Month Period Ended June 30,  Six-Month Period Ended June 30,
   2021  2020  2021  2020
Current taxes – PRC  $—   $—   $—   $— 
Deferred taxes   (356,408)   612,354    387,229    1,739,929 
Change in valuation allowance   —    60,279    —    189,147 
Tax Expense Benefit  $(356,408)  $672,633   $387,229   $1,929,076 

        

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

                         
   Three-Month Period Ended June 30,  Six-Month Period Ended June 30,
Reconciliations  2021  2020  2021  2020
Statutory income tax rate   25%   25%   25%   25%
Non-taxable & Non-deductible items   (6%)   (2%)   (3%)   — 
Change in valuation allowance   (34%)   —    (15%)   — 
Effective tax rate   (15%)   23%   7%   25%

 

Significant components of the Company’s deferred tax assets and liabilities at June 30, 2021 and December 31, 2020 are as follows:

 

   June 30,  December 31,
   2021  2020
Deferred tax liabilities  $—   $— 
           
Deferred tax assets:          
Impairment on property, plant and equipment   2,731,415    2,907,548 
Impairment on prepaid land lease   880,714    883,884 
Exploration costs   1,927,260    1,908,087 
Compensation costs of unexercised stock options   1,614    74,883 
PRC tax losses   22,396,953    21,643,028 
US federal net operating loss   1,247,000    1,045,503 
Total deferred tax assets   29,184,956    28,462,933 
Valuation allowance   (9,930,632)   (9,872,706)
Net deferred tax asset  $19,254,534   $18,590,227 

 

The increase in valuation allowance for the three-month period ended June 30, 2021 is $144,890.

 

The decrease in valuation allowance for the three-month period ended June 30, 2020 is $60,279.

 

The increase in valuation allowance for the six-month period ended June 30, 2021 is $57,926.

 

The decrease in valuation allowance for the six-month period ended June 30, 2020 is $189,147.

 

There were no unrecognized tax benefits and accrual for uncertain tax positions as of June 30, 2021 and December 31, 2020 and no amounts accrued for penalties and interest for the three and six months ended June 30, 2021 and 2020.