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Note 18 - Taxation
 6 Months Ended
Jun. 30, 2018
Notes to Financial Statements  
Income Tax Disclosure [Text Block]
18.
Taxation
 
1
)
Income tax
 
The entities within the Company file separate tax returns in the respective tax jurisdictions in which they operate.
 
i). a. On
December 22, 2017,
the U.S. enacted the Tax Cuts and Jobs Act (“TCJA” or the “Act”) (which is commonly referred to as “U.S. tax reform”). The Act significantly changes U.S. corporate income tax laws including but
not
limited to reducing the U.S. corporate income tax rate from
35%
to
21%
beginning in
2018,
imposing a
one
-time transition tax on previously deferred foreign earnings and imposing a new tax on global intangible low-taxed income (“GILTI”) effective for tax years of non-U.S. corporations beginning after
December 31, 2017.
 
i). b. The Company is incorporated in the state of Nevada. Under the current law of Nevada, the Company is
not
subject to state corporate income tax. Following the Share Exchange, the Company became a holding company and does
not
conduct any substantial operations of its own.
No
provision for federal corporate income tax has been made in the financial statements as the Company has
no
assessable profits for the
six
and
three
ended
June 30, 2018,
or any prior periods. Before enactment of the Act, the Company did
not
provide for U.S. taxes or foreign withholding taxes on undistributed earnings from its non-U.S. subsidiaries because such earnings are intended to be reinvested indefinitely. If undistributed earnings were distributed, foreign tax credits could become available under current law to reduce the resulting U.S. income tax liability. Please see additional discussion regarding the assessment of the income tax effect of the Act in item i). d. below.
 
i). c. On
December 22, 2017,
the Securities and Exchange Commission staff issued Staff Accounting Bulletin
No.
118
(“SAB
118”
), which provides guidance on accounting for the tax effects of the Act. SAB
118
provides a measurement period that should
not
extend beyond
one
year from the Act enactment date for companies to complete the accounting under ASC
740
“Income Taxes”. In accordance with SAB
118,
a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC
740
is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
 
i). d. As disclosed in Note
17
to the audited financial statements in the Company’s
2017
Form
10
-K, based on a preliminary assessment, the Company concluded that
no
incremental income tax expense of the
one
-time transition tax on its previously deferred foreign earnings would be charged for the year ended
December 31, 2017.
Effective
January 1, 2018,
the Company is subject to the new GILTI tax rules. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of specified foreign corporations (“SFCs”), subject to the possible use of foreign tax credits and a deduction equal to
50
 percent to offset the income tax liability, subject to some limitations. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). According to the Company’s preliminary assessment based on its SFCs’ quarterly financial results, there was
no
taxable income related to GILTI for the
six
and
three
months ended
June 30, 2018.
However, due to complexity of the new tax rules under the Act, the Company did
not
have sufficient information currently to perform a comprehensive analysis on the historical operating results of each of its PRC subsidiaries to complete its assessment of the U.S. deferred tax assets that would have been utilized and or are expected to be utilizable under the Act and has
not
elected an accounting policy for the treatment of the taxes related to GILTI. In summary, the Company has
not
completed its accounting for the tax effects of enactment of the Act and is still analyzing certain aspects of the Act and is refining its calculations, which could potentially affect the measurement of the balances or potentially give rise to new deferred tax amounts. In addition, further regulatory guidance related to the Act is expected to be issued in
2018
which
may
result in changes to the Company’s estimates. Additional analysis of the law and the impact to the Company will be performed and any impact will be finalized
no
later than the
fourth
quarter of
2018.
 
ii). China Net BVI was incorporated in the British Virgin Islands (“BVI”). Under the current law of the BVI, China Net BVI is
not
subject to tax on income or capital gains. Additionally, upon payments of dividends by China Net BVI to its shareholders,
no
BVI withholding tax will be imposed.
 
iii). China Net HK was incorporated in Hong Kong and does
not
conduct any substantial operations of its own.
No
provision for Hong Kong profits tax has been made in the financial statements as China Net HK has
no
assessable profits for the
six
and
three
months ended
June 30, 2018
or any prior periods. Additionally, upon payments of dividends by China Net HK to its shareholders,
no
Hong Kong withholding tax will be imposed.
 
iv). The Company’s PRC operating subsidiaries and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”). The EIT rate of PRC is
25%,
which applies to both domestic and foreign invested enterprises.
 
l
 In
November 2015,
Business Opportunity Online was re-approved by the related PRC governmental authorities as a High and New Technology Enterprise, which enabled the entity, as approved by the local tax authorities of Beijing, the PRC, to continue enjoying the preferential income tax rate of
15%
until
November 2018.
Therefore, for the
six
and
three
months ended
June 30, 2018
and
2017,
the applicable income tax rate of Business Opportunity Online was
15%.
 
l
 The applicable income tax rate for other PRC operating entities of the Company was
25%
for the
six
and
three
months ended
June 30, 2018
and
2017.
 
l
 The current EIT law also imposed a
10%
withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a
5%
withholding tax rate.
 
For the
six
and
three
months ended
June 30, 2018
and
2017,
the preferential income tax treatment enjoyed by the Company’s PRC VIE, Business Opportunity Online was based on the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities and local tax authorities where Business Opportunity Online operates in. The preferential income tax treatment is subject to change in accordance with the PRC government economic development policies and regulations. The preferential income tax treatment is primarily determined by the regulation and policies of the PRC government in the context of the overall economic policy and strategy. As a result, the uncertainty of the preferential income tax treatment is subject to, but
not
limited to, the PRC government policy on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic development.
 
2
)
Turnover taxes and the relevant surcharges
 
Service revenues provided by the Company’s PRC operating subsidiaries and VIEs were subject to Value Added Tax (“VAT”). VAT rate for provision of modern services (other than lease of corporeal movables) is
6%
and for small scale taxpayer,
3%.
Therefore, for the
six
and
three
months ended
June 30, 2018
and
2017,
the Company’s service revenues are subject to VAT at a rate of
6%,
after deducting the VAT paid for the services purchased from suppliers, or at a rate of
3%
without any deduction of VAT paid for the services purchased from suppliers. The surcharges of the VAT is
12%
to
14%
of the VAT, depending on which tax jurisdiction the Company’s PRC operating subsidiaries and VIE operate in.
 
As of
June 30, 2018
and
December 31, 2017,
taxes payable consists of:
 
    June 30,
2018		   December 31,
2017
    US$(’000)   US$(’000)
    (Unaudited)    
         
Turnover tax and surcharge payable    
1,205
      
1,295
  
Enterprise income tax payable    
1,849
      
1,873
  
Total taxes payable    
3,054
      
3,168
  
 
Reconciliations of the income tax benefit determined at the U.S. federal corporate income tax rate to the Company’s effective income tax expense for each of the period presented are as follows:
 
    Six Months Ended June 30,   Three Months Ended June 30,
    2018   2017   2018   2017
    US$(’000)   US$(’000)   US$(’000)   US$(’000)
    (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)
                 
Pre-tax loss    
(9,435
 )    
(1,713
 )    
(8,861
 )    
(644
 )
U.S. federal rate    
21
 %    
35
 %    
21
 %    
35
 %
Income tax benefit computed at U.S. federal rate    
1,981
      
600
      
1,861
      
225
  
Reconciling items:                                
Rate differential for PRC earnings    
398
      
(135
 )    
324
      
(42
 )
Preferential tax treatment effect    
(107
 )    
26
      
(55
 )    
42
  
Tax effect on non-taxable change in fair value of warrant liabilities    
199
      
-
      
(111
 )    
-
  
Tax effect on non-deductible impairment on goodwill    
(1,353
 )    
-
      
(1,353
 )    
-
  
Valuation allowance on deferred tax assets    
(1,167
 )    
(622
 )    
(1,311
 )    
(350
 )
Expired tax attribute carryforwards    
(556)
      
-
      
-
      
-
  
Others    
(84
 )    
18
      
(48
 )    
12
  
Effective income tax expense    
(689
 )    
(113
 )    
(693
 )    
(113
 )
 
For the
six
and
three
months ended
June 30, 2018
and
2017,
the Company’s income tax expense consisted of:
 
    Six Months Ended June 30,   Three Months Ended June 30,
    2018   2017   2018   2017
    US$(’000)   US$(’000)   US$(’000)   US$(’000)
    (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)
                 
Current-PRC    
-
      
-
      
-
      
-
  
Deferred-PRC    
(689
 )    
(113
 )    
(693
 )    
(113
 )
Income tax expense    
(689
 )    
(113
 )    
(693
 )    
(113
 )
 
The Company’s deferred tax assets at
June 30, 2018
and
December 31, 2017
were as follows:
 
    June 30,
2018		   December 31,
2017
    US$(’000)   US$(’000)
    (Unaudited)    
         
Tax effect of net operating losses carried forward    
7,882
      
7,657
  
Bad debts provision    
1,045
      
879
  
Valuation allowance    
(8,250
 )    
(7,178
 )
Total deferred tax assets, net    
677
      
1,358
  
 
The U.S. holding company has incurred aggregate net operating losses (“NOLs”) of approximately
US$13,716,660
and
US$13,275,660
at
June 30, 2018
and
December 31, 2017,
respectively. The NOLs carryforwards as of
December 31, 2017
gradually expire over time, the last of which expires in
2037.
NOLs incurred after
December 31, 2017
will
no
longer be available to carry back, but will carry forward indefinitely. Furthermore, the Act imposes an annual limit of
80%
on the amount of taxable income that can be offset by NOLs arising in tax years ending after
December 31, 2017.
The Company maintains a full valuation allowance against its net U.S. deferred tax assets, since due to uncertainties surrounding future utilization, the Company estimates there will
not
be sufficient future earnings to utilize its U.S. deferred tax assets.
 
The NOLs carried forward incurred by the Company’s PRC subsidiaries and VIEs were approximately
US$23,263,000
and
US$23,959,000
at
June 30, 2018
and
December 31, 2017,
respectively. The losses carryforwards gradually expire over time, the last of which expires in
2023.
The related deferred tax assets were calculated based on the respective net operating losses incurred by each of the PRC subsidiaries and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which the losses are expected to be utilized.
 
The Company recorded approximately
US$8,250,000
and
US$7,178,000
valuation allowance as of
June 30, 2018
and
December 31, 2017,
respectively, because it is considered more likely than
not
that this portion of the deferred tax assets will
not
be realized through sufficient future earnings of the entities to which the operating losses related.
 
For the
six
months ended
June 30, 2018
and
2017,
the Company recorded approximately
US$1,167,000
and
US$622,000
deferred tax valuation allowance, respectively. For the
three
months ended
June 30, 2018
and
2017,
the Company recorded approximately
US$1,311,000
and
US$350,000
deferred tax valuation allowance, respectively.