Note 14 - INCOME TAXES

The Company was incorporated in the United States and has operations in five tax jurisdictions - the United States, the Hong Kong Special Administrative Region (“HK SAR”), mainland China, Taiwan, and the BVI.

The Company generated substantially all of its net income from its BVI operations for the six months ended September 30, 2014. According to BVI tax law, this income is not subject to any taxes. The Company’s HK SAR subsidiaries are subject to a 16.5% profit tax based on its taxable net profit. EFT (HK) Ltd provides management service to a BVI subsidiary, and the BVI subsidiary reimburses EFT HK Ltd for its total operating expenses plus 5% mark up, and the income is subject to 16.5% profit tax. The deferred tax assets for the Company’s US operations were immaterial for the six months ended September 30, 2014.

The Company’s Taiwanese subsidiaries, Excalibur and EFT Investment, and its factory in mainland China are subject to a 17% and 25% standard enterprise income tax, respectively, based on their taxable net profit. These operations have incurred net accumulated operating losses for income tax purposes and management believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, it has provided full valuation allowance for the deferred tax assets arising from the losses as of September 30, 2014 and 2013.

The income tax expenses consist of the following:

	Six Months Ended
	September 30,
	2014		2013
Current:
Domestic	$	-	$	57
Foreign		-		-
Under/(over) provision for prior years		1,872		(8,790)
Income tax expenses	$	1,872	$	(8,733)

A reconciliation of income taxes, with the amounts computed by applying the statutory federal income tax rate, 37% for the six months ended September 30, 2014 and 2013, to income before income taxes for the six months ended September 30, 2014 and 2013, is as follows:

	Six Months Ended
	September 30,
	2014		2013
Income tax provision at U.S. statutory rate	$	(85,525)	(946,396)
State tax			57
Deferred tax valuation allowance		83,225	941,303
Nondeductible expenses		2,300	5,093
Under/(over) provision for prior years		1,872	(8,790)
Income tax expenses	$	1,872	(8,733)

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.

The Company has not provided deferred taxes on unremitted earnings attributable to international companies that have been considered to be reinvested indefinitely. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the income tax liability that would be payable if such earnings were not indefinitely reinvested. In accordance with ASC Topic 740, interest associated with unrecognized tax benefits is classified as income tax and penalties are classified in selling, general and administrative expenses in the statements of operations.

In December 2013, the IRS concluded its audit of the Company’s returns for the years 2007 through 2010 and issued an examination report that proposed adjustments of $12.3 million of additional tax liabilities for the years 2008 through 2010. After receiving further information from the Company subsequent to the issuance of its original report, the IRS has revised its audit report of the Company’s returns for the years 2008 through 2010 and has reduced its proposed adjustments from $12.3 million to $3.6 million of additional tax liabilities for the years 2008 through 2010. The Company plans to continue to challenge most of the remaining proposed adjustments as set forth in the revised report and is in the process of appealing the proposed adjustments with the IRS. Based on the IRS report, the Company has recorded federal and California state tax liabilities of $3.6 million and $0.8 million, respectively, for the years 2008 through 2010.

The extent of the Company’s operations involves dealing with uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state and international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due.