22. INCOME TAXES

12 Months Ended

Jun. 30, 2018

Notes to Financial Statements

INCOME TAXES

The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining the provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. The statute of limitations, in general, is open for years 2014 to 2017 for tax authorities in those jurisdictions to audit or examine income tax returns. The Company is under annual review by the tax authorities of the respective jurisdiction to which the subsidiaries belong.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and permanently reduces the U.S. federal corporate tax rate from 35% to 21%, eliminated corporate Alternative Minimum Tax, modified rules for expensing capital investment, and limits the deduction of interest expense for certain companies. The Act is a fundamental change to the taxation of multinational companies, including a shift from a system of worldwide taxation with some deferral elements to a territorial system, current taxation of certain foreign income, a minimum tax on low tax foreign earnings, and new measures to curtail base erosion and promote U.S. production.

As the Company has a June 30 fiscal year end, the lower corporate income tax rate will be phased in, resulting in a lower U.S. statutory federal rate. In accordance with Section 15 of the Internal Revenue Code, the Company applied a blended U.S. statutory federal income tax rate of 27.55% for the year ended June 30, 2018. Accounting Standard Codification (“ASC”) 740 requires filers to record the effect of tax law changes in the period enacted. The Company recognized income tax expenses of $900 related to the one-time deemed repatriation. No expenses have been recognized related to the deferred tax re-measurement and minimum tax on low tax foreign earnings. However, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), that permits filers who may not have the necessary information available, prepared, or analyzed (including computations) for certain income tax effects of the Act in order to determine a reasonable estimate to be recorded as provisional amounts during a measurement period ending no later than one year from the date of enactment. Accordingly, the Company has recorded an estimate $900 and will finalize the accounting for the tax impact of the Tax Act no later than the end of the permitted measurement period under the SAB 118.

Discussion of the certain material provisions affecting the Company is provided below.

One-Time Mandatory Repatriation

One of the effects of the Tax Act is to transition from a world-wide to a territorial tax system. The Tax Act requires a mandatory one-time repatriation of certain post-1986 earnings and profits that were deferred from U.S. taxation by the Company’s foreign subsidiaries. The Company recognized an income tax expense and payable of $900 for the twelve months ended June 30, 2018. The basis of the tax is on cash held and specified assets which are taxed at 15.5% and 8%, respectively. The Company may elect to pay the Repatriation Tax over an 8-year period.

The computation of the post-1986 earning and profits used estimates and are preliminary amounts which will be finalized during the measurement period.

Minimum Tax on Low Tax Foreign Earnings

The Tax Act implemented the inclusion in gross income for the Global Intangible Low-Tax Income (GILTI) for any taxable year beginning on or after January 1, 2018. This provision significantly expands current taxation of foreign subsidiary corporate earnings. The Company must generally include in current income all earnings of the foreign subsidiaries in excess of the assumed deemed return on tangible assets of the foreign subsidiaries. Given the complexity of GILTI provision, the company is still assessing the effects of the provisions to determine whether to elect to either provide for the minimum tax as future income tax expense as a period expense or as a deferred tax on the related investment in foreign subsidiaries.

Deferred Tax Re-Measurement

The re-measurement is based on the expected reversals of the deferred taxes at the estimated U.S. federal tax rates of 28% for the current fiscal year and 21% for future fiscal years. As the Company established a full valuation allowance on the U.S. deferred tax assets, the Company has not recognized any income tax effects for the deferred tax re-measurement under the Tax Act.

However, the Company is still considering any future impacts on any additional U.S. federal or U.S. state and local deferred tax assets and liabilities.

Effective Tax Rate Effects

	For the Year Ended June 30,
	2018			2017
Income before Income Taxes		2,290			1,801
Income Taxes Expenses		987			341
Effective Tax Rate		43.1	%		18.9	%

The Act impacted the Company’s effective tax rate which recorded at 43.1% for fiscal 2018 compared to 18.9% for fiscal 2017. This effects of this tax were primarily due to estimated charge of $900 recorded as a component of provision for income taxes from continuing operations.

The Company had an income tax expense of $987 for the year ended June 30, 2018, as compared to income tax expense of $341 for the year ended June 30, 2017. Without the impact of $900 in one-time tax expenses, the decrease in income tax expenses was mainly due to a lower corporate tax rate enjoyed by the Tianjin, China operation in calendar year 2018 which qualified as a National Advanced Tech Corporation and a decrease in deferred tax for timing differences recorded by the Malaysia operation.

The Company accrues penalties and interest related to unrecognized tax benefits when necessary as a component of penalties and interest expenses, respectively. The Company had not accrued any penalties or interest expenses relating to unrecognized benefits at June 30, 2018.

Undistributed Foreign Earnings

The Company has asserted in prior years that all of its undistributed offshore earnings were permanently reinvested and had not recorded any deferred taxes related to any basis difference regarding the foreign subsidiaries. The estimated remaining net undistributed earnings at June 30, 2018 was $12,392. (This items is the Retained Earnings of the Non-U.S. subs less eliminations less Retained Earnings used for transition tax.) The Company has computed and recorded a preliminary estimate of the mandatory deemed repatriation tax on the such earnings. The Company, however, is currently evaluating the 2017 Tax Act on how the Tax Act will affect the Company’s current assertion of permanent reinvestment. As such, the Company has made no changes with respect to the permanent reinvestment assertion for remaining non-U.S. subsidiary basis, foreign withholding taxes, and state and local income taxes, during the measurement period.

On a consolidated basis, the Company’s net income tax provisions were as follows:

	For the Year Ended June 30,
	2018		2017
Current:
Federal	$	900	$	-
State		2		2
Foreign		79		235
	$	981	$	237
Deferred:
Federal	$	-	$	-
State		-		-
Foreign		6		104
		6		104
Total provisions	$	987	$	341

The reconciliation between the U.S. federal tax rate and the effective income tax rate was as follows:

	For the Year Ended June 30,
	2018			2017
Statutory federal tax rate		(27.55	)%		(34.00	)%
State taxes, net of federal benefit		(6.00	)		(6.00	)
Foreign tax related to profits making subsidiaries		35.93			20.23
NOL Expiration		-			(0.03	)
Other		(3.50	)		(0.86	)
Changes in valuation allowance		13.63			1.54
Tax reform related to one-time repatriation tax		(153.31	)		-
Effective rate		(140.80	)%		(19.12	)%

At June 30, 2018, the Company had net operating loss carry-forward of approximately $232 and $314 for U.S. federal and state tax purposes, respectively, expiring through 2037. The Company also had tax credit carry-forward of approximately $200 for U.S. federal income tax purposes expiring through 2020. Management of the Company is uncertain whether it is more likely than not that these future benefits will be realized. Accordingly, a full valuation allowance was established.

At June 30, 2017, the Company had net operating loss carry-forward of approximately $nil and $148 for U.S. federal and state tax purposes, respectively, expiring through 2033. The Company also had tax credit carry-forward of approximately $211 for U.S. federal income tax purposes expiring through 2020. Management of the Company is uncertain whether it is more likely than not that these future benefits will be realized. Accordingly, a full valuation allowance was established.

The components of deferred income tax assets (liabilities) were as follows:

	For the Year Ended June 30,
	2018		2017
Deferred tax assets:
Net operating losses and credits	$	633	$	710
Inventory valuation		69		99
Provision for bad debts		112		107
Accrued vacation		3		35
Accrued expenses		629		751
Investment in subsidiaries		61		60
Unrealized gain		4		23
Other		3		-
Total deferred tax assets	$	1,514	$	1,785

Deferred tax liabilities:
Unrealized loss		-			(29	)
Depreciation		(324	)		(266	)
Total deferred income tax liabilities	$	(324	)	$	(295	)
Subtotal		1,190			1,490
Valuation allowance		(1,117	)		(1,410	)
Net deferred tax assets	$	73		$	80
Presented as follows in the balance sheets:
Deferred tax assets		400			375
Deferred tax liabilities		(327	)		(295	)
Net deferred tax assets	$	73		$	80

The valuation allowance decreased by $293and $1,396 in fiscal year 2018 and 2017, respectively.