13. INCOME TAXES

3 Months Ended

Mar. 31, 2021

Income Tax Disclosure [Abstract]

13. INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

(a)           United States (“US”)

Gulf Resources, Inc. may be subject to the United States of America Tax laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the three-month periods ended March 31, 2021 and 2020, and management believes that its earnings are permanently invested in the PRC.

(b)           British Virgin Islands (“BVI”)

Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month periods ended March 31, 2021 and 2020. 

(c)           Hong Kong

HKJI, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong.  No provision for income tax has been made as it has no taxable income for the three-month periods ended March 31, 2021 and 2020.  The applicable statutory tax rates for the three-month periods ended March 31, 2021 and 2020 are 16.5%. There is no dividend withholding tax in Hong Kong.

(d)           PRC

Enterprise income tax (“EIT”) for SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.

The operating subsidiaries SCHC, SYCI and DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Local Income Tax Law. The PRC tax losses may be carried forward to be utilized against future taxable profit for ten years for High-tech enterprises and small and medium-sized enterprises of science and technology and for five years for other companies. Tax losses of the operating subsidiaries of the Company may be carried forward for five years.

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.

As of March 31, 2021 and December 31, 2020, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $122,460,382 and $126,643,733, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of March 31, 2021 and December 31, 2020, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises that are subject to WHT in China. As of March 31, 2021 and December 31, 2020, the unrecognized WHT are $5,086,534 and $5,288,346, respectively.

The Company’s income tax returns are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the Company’s income tax returns filed in the United States for three years from the date of filing. The Company’s US income tax returns since 2017 are currently subject to examination.

Inland Revenue Department of Hong Kong (“IRD”) may examine the Company’s income tax returns filed in Hong Kong for seven years from date of filing. For the years 2012 through 2019, HKJI did not report any taxable income. It did not file any income tax returns during these years except for 2014 and 2018. For companies which do not have taxable income, IRD typically issues notification to companies requiring them to file income tax returns once in every four years. The tax returns for 2014 and 2018 are currently subject to examination.

The components of the provision for income tax benefit (expense) from continuing operations are:

	Three-Month Period Ended March 31,
	2021			2020
Current taxes – PRC	$	—		$	—
Deferred tax – PRC entities		743,709			1,256,443
Deferred taxes –US entity		15,957			24,053
Change in valuation allowance		(15,957	)		(24,053	)
	$	743,709		$	1,256,443

The effective income tax benefit differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:

	Three-Month Period Ended March 31,
Reconciliations	2021			2020
Statutory income tax rate		25	%		25	%
Non-taxable & Non-deductible items		(1	%)		2	%
Change in valuation allowance		(1	%)		(1	%)
Effective income tax benefit (expense) rate		23	%		26	%

Significant components of the Company’s deferred tax assets and liabilities at March 31, 2021 and December 31, 2020 are as follows:

	March 31,			December 31,
	2021			2020
Deferred tax liabilities	$	—		$	—
Deferred tax assets:
Impairment on property, plant and equipment	$	2,712,092		$	2,907,548
Impairment on prepaid land lease		877,656			883,884
Exploration costs		1,894,641			1,908,087
Compensation costs of unexercised stock options		72,699			74,883
PRC tax losses		22,296,935			21,643,028
US federal net operating loss		1,063,644			1,045,503
Total deferred tax assets		28,917,667			28,462,933
Valuation allowance		(9,785,742	)		(9,872,706	)
Net deferred tax asset	$	19,131,925		$	18,590,227

The decrease in valuation allowance for the three-month period ended March 31, 2021 is $86,964.

The increase in valuation allowance for the three-month period ended March 31, 2020 is $128,868.

There were no unrecognized tax benefits and accrual for uncertain tax positions as of March 31, 2021 and December 31, 2020 and no amounts accrued for penalties and interest for the three months ended March 31, 2021 and 2020.