INCOME TAXES

12 Months Ended

Dec. 31, 2022

INCOME TAXES [Abstract]

INCOME TAXES

NOTE 13 - INCOME TAXES

Australia

CEGL is subject to a tax rate of 30%.

United States

U.S. subsidiaries CEG, Cennatic Power Inc. and CAC are subject to a federal tax rate of 21%.

Germany

CAE and Cenntro Electric is subject to a tax rate of 30%.

Hong Kong

In accordance with the relevant tax laws and regulations of Hong Kong, a company registered in Hong Kong is subject to income taxes within Hong Kong at the applicable tax rate on taxable income. Effective from April 1, 2018, a two-tier corporate income tax system was officially implemented in Hong Kong, which is 8.25% for the first HK$2.0 million profits, and 16.5%  for the subsequent profits, it is exempted from the Hong Kong income tax on its foreign-derived income. CEG’s subsidiaries, CAG HK and Sinomachinery HK, are registered in Hong Kong as intermediate holding companies, subject to an income tax rate of 16.5% for taxable income earned in Hong Kong. Payments of dividends from Hong Kong subsidiaries to CEG are not subject to any Hong Kong withholding tax.

PRC

Pursuant to the tax laws and regulations of the PRC, the Company’s applicable enterprise income tax (“EIT”) rate is 25%. Zhejiang Tooniu Tech Co., Ltd, Hangzhou Hengzhong Tech Co., Ltd and. Zhejiang Xbean Tech Co., Ltd qualify as Small and micro enterprises in the PRC, and are entitled to pay a reduced income tax rate of 2.5%, 2.5% and 5% in 2022.

(1) Income taxes

Income tax expenses for the years ended December 31, 2022 and 2021 are nil.

The components of losses before income taxes are summarized as follows:

	For the Years Ended December 31,
	2022			2021
PRC	$	(7,386,251	)	$	(5,477,857	)
US		(17,254,945	)		(9,234,455	)
Europe		(20,130,854	)		-
Australia		(67,392,512	)		(1,128,325	)
Others		19,300			(581,170	)
Total	$	(112,145,263	)	$	(16,421,807	)

As the main business operations were concentrated in China, and other losses except for PRC losses are caused by non-operating activities, PRC statutory income tax rate was applied. The actual income tax expense reported in the consolidated and combined statements of operations and comprehensive loss for years ended December 31, 2022 and 2021 differs from the amount computed by applying the PRC statutory income tax rate to income before income taxes due to the following:

	For the Years Ended December 31,
	2022			2021
Loss before provision for income tax	$	(112,145,263	)	$	(16,421,807	)
PRC statutory income tax rate		25	%		25	%
Income tax expense at the PRC statutory rate		(28,036,316	)		(4,105,452	)
Effect of preferential tax rate		161,592			279,886
Effect of international tax rates		(2,255,963	)		420,450
Effect of non-deductible expenses		1,069,009			396,826
Effect of research and development deduction		(568,446	)		(204,807	)
Fair value change of warrant liability		3,912,074			-
Impairment loss of goodwill		2,777,972			-
Effect of valuation allowance		22,940,078			3,213,097
Total income tax expense		-			-
Effective income tax rate		0	%		0	%

(2) Deferred taxes assets, net

The tax effects of temporary differences that give rise to the deferred income tax assets balances as of December 31, 2022 and 2021 are as follows:

	December 31, 2022			December 31, 2021
Deferred income tax assets:
Impairment loss	$	3,532,162		$	2,013,232
Change in fair value of financial instrument		912,340			-
Capitalization of research and experimental costs		369,687			-
Net operating loss carry forwards		28,818,841			12,646,183
Total deferred income tax assets		33,633,030			14,659,415
Valuation allowance		(33,633,030	)		(14,659,415	)
Deferred income tax assets, net	$	-		$	-

The changes related to valuation allowance are as follows:

	For the Years Ended December 31,
	2022			2021
Balance at the beginning of the year	$	14,659,415		$	19,072,736
Additions during the year		22,940,078			3,213,097
Expire of NOL		(1,318,979	)		(1,243,653	)
Write-off of employee stock ownership plans deferred tax asset		-			(4,981,854	)
Change in tax rate		(91,423	)		(959,106	)
Company deregistration		-			(708,266	)
Exchange rate effect		(2,556,061	)		266,461
Balance at the end of the year	$	33,633,030		$	14,659,415

The valuation allowances as of December 31, 2022 and 2021 were provided for the deferred income tax assets of certain subsidiaries, which were at cumulative loss positions. In assessing the realization of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or utilizable.

For entities incorporated in Hong Kong, net losses of $978,187 can be carried forward indefinitely.

For entities incorporated in the U.S., federal net operating losses of $27,588,978 can be carried forward indefinitely subject to a limitation in utilization against 80% of annual taxable income. Federal net operating losses of $3,740,668, $1,430,246 and $744,848 will expire if unused by 2035, 2036 and 2037, respectively.

For entities incorporated in the PRC, net losses can be carried forward for five years.  PRC net losses of $39,109,412 were available to offset future taxable income.  Net losses of $13,755,682, $5,696,704, $2,326,371, $6,302,877 and $11,027,780 will expire, if unused, by 2023, 2024, 2025, 2026, and 2027, respectively.

For entities incorporated in German, net losses of $14,748,048 can be carried forward indefinitely.

For entities incorporated in Australia, net losses of $28,967,850 can be carried forward indefinitely.

Internal Revenue Code of 1986, as amended (“IRC”), Section 382 provides that, after an ownership change, the amount of a loss corporation’s taxable income for any post-change year that may be offset by pre-change losses shall not exceed the IRC Section 382 limitation for that year. The IRC Section 382 limitation generally equals the fair market value of the old loss corporation multiplied by the long-term tax-exempt rate. A loss corporation is any corporation that has a net operating loss, a net operating loss carryforward, or a net unrealized built-in loss for the taxable year in which the ownership change occurs. An ownership change is a greater than 50-percentage point increase in ownership by five-percent shareholders.

The Company has not yet performed an IRC Section 382 analysis to determine whether an ownership change has occurred and whether any tax attributes are limited. The Company has recorded a full valuation allowance against its deferred tax assets and does not expect to utilize its tax attributes. Once the Company utilizes its tax attributes, a complete IRC Section 382 analysis will be performed.

Uncertain tax positions

The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. CAE GmbH was not yet subject to a tax audit, but a tax audit for 2019 has been recently announced. As of December 31, 2022 and 2021, the Company did not have any significant unrecognized uncertain tax positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefits. The Company does not believe that its uncertain tax benefits position will materially change over the next twelve months.