INCOME TAXES

12 Months Ended

Dec. 31, 2023

INCOME TAXES [Abstract]

INCOME TAXES

NOTE 14 - INCOME TAXES

Australia

CEGL is subject to a tax rate of 25%.

United States

U.S. subsidiaries are subject to a federal tax rate of 21% and respective state tax rate.

Europe

Subsidiaries in Germany, Spain, Italy, Netherlands and Turkey are subject to a tax rate of 15.8%, 25%, 24%, 19% and 25%, respectively.

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 5% in 2023.

(1) Income taxes

Income tax expenses for the years ended December 31, 2023 and 2022 are $8,988 and nil.

The components of the income tax provision are as follows:

	For the Years Ended December 31,
	2023			2022
Current	$	24,919		$	-
Deferred		(15,931	)		-
Total	$	8,988		$	-

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

	For the Years Ended December 31,
	2023			2022
PRC	$	(8,291,573	)	$	(7,386,251	)
US		(14,349,845	)		(17,254,945	)
Europe		(10,839,504	)		(20,130,854	)
Australia		(19,225,749	)		(67,392,512	)
Others		(1,645,096	)		19,300
Total	$	(54,351,767	)	$	(112,145,263	)

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 statements of operations and comprehensive loss for years ended December 31, 2023 and 2022 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,
	2023			2022
Loss before provision for income tax	$	(54,351,767	)	$	(112,145,263	)
PRC statutory income tax rate		25	%		25	%
Income tax expense at the PRC statutory rate		(13,587,942	)		(28,036,316	)
Effect of preferential tax rate		1,535,761			161,592
Effect of international tax rates		123,766			(2,255,963	)
Effect of non-deductible expenses		569,327			1,069,009
Effect of research and development deduction		(1,261,231	)		(568,446	)
Fair value change of warrant liability		60,799			3,912,074
Impairment loss of goodwill		-			2,777,972
Effect of valuation allowance		12,584,439			22,940,078
Total income tax expense - current		24,919			-
Effective income tax rate		0	%		0	%

(2) Deferred taxes assets/(liabilities)

The tax effects of temporary differences that give rise to the net deferred tax liabilities balances as of December 31, 2023 and 2022 are as follows:

	December 31, 2023			December 31, 2022
Deferred tax assets:
Impairment loss	$	3,561,625		$	3,532,162
Change in fair value of financial instrument		(3,885,519	)		912,340
Capitalization of research and experimental costs		943,938			369,687
Net operating loss carry forwards		42,229,598			28,818,841
Total deferred income tax assets		42,849,642			33,633,030
Valuation allowance		(42,849,642	)		(33,633,030	)
Deferred tax assets, net	$	-		$	-
Deferred income tax liabilities:
Intangible assets arising from acquisition		(228,086	)		-
Total deferred tax liabilities		(228,086	)		-
Net deferred tax liabilities		(228,086	)		-

The changes related to valuation allowance are as follows:

	For the Years Ended December 31,
	2023			2022
Balance at the beginning of the year	$	33,633,030		$	14,659,415
Additions during the year		12,584,439			22,940,078
Expire of NOL		(3,165,660	)		(1,318,979	)
Change in tax rate		96,387			(91,423	)
Exchange rate effect		(298,554	)		(2,556,061	)
Balance at the end of the year	$	42,849,642		$	33,633,030

The valuation allowances as of December 31, 2023 and 2022 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 $1,173,034 can be carried forward indefinitely.

For entities incorporated in the U.S., federal net operating losses of $38,730,970 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, $744,848, and $1,512,798 will expire if unused by 2035, 2036, 2037 and 2038, respectively.

For entities incorporated in the PRC, net losses can be carried forward for five years.  PRC net losses of $37,266,136 were available to offset future taxable income.  Net losses of $5,413,592, $2,210,756, $5,989,640, $10,479,727 and $13,172,422 will expire, if unused, by 2024, 2025, 2026, 2027 and 2028 respectively.

For entities incorporated in German, net losses of $26,565,271 can be carried forward indefinitely.

For entities incorporated in Australia, net losses of $61,911,565 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, 2023 and 2022, 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.