MicroCloud Hologram Inc. Income Taxes Disclosure

Note 16 — Income taxes

 

Cayman Islands

 

MC was incorporated in the Cayman Islands and is not subject to tax on income or capital gains under the laws of Cayman Islands. Additionally, the Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.

 

Seychelles

 

Mcloudvr Software is incorporated in Seychelles and is not subject to tax on income generated outside of Seychelles under the current law. In addition, upon payments of dividends by these entities to their shareholders, no withholding tax will be imposed.

 

Hong Kong

 

Mengyun HK, Broadvision HK, Ocean HK and Mcloudvr HK are incorporated in Hong Kong and is subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. Under Hong Kong tax law, Mengyun HK is exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

 

PRC

 

The subsidiaries incorporated in the PRC are governed by the income tax laws of the PRC and the income tax provision for operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), domestic enterprises and Foreign Investment Enterprises (the “FIE”) are subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemptions may be granted on a case-by-case basis. EIT grants preferential tax treatment to certain High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for HNTE status every three years. Shanghai Mengyun obtained the “high-tech enterprise” tax status in October 2017 and further renewed in December 2020, which reduced its statutory income tax rate to 15% from January 2017 to December 2023. Shenzhen Mengyun obtained the “high-tech enterprise” tax status in November 2018 and further renewed in December 2021, which reduced its statutory income tax rate to 15% from January 2018 to December 2024. Shenzhen Bowei obtained the “high-tech enterprise” tax status in December 2021, which reduced its statutory income tax rate to 15% from December 2021 to December 2024.

 

Horgos Weiyi, Horgos Youshi, Horgos Bowei and Horgos Tianyuemeng were formed and registered in Horgos in Xinjiang Province, China from 2016 to 2020, and Kashgar Youshi was formed and registered in Kashgar in Xinjiang Provence, China in 2016. These companies are not subject to income tax for 5 years and can obtain another two years of tax exemption status and three years at reduced income tax rate of 12.5% after the 5 years due to the local tax policies to attract companies in various industries.

 

The Ministry of Finance (“MOF”) and State Administration of Taxation (“SAT”) on January 17, 2019 jointly issued Cai Shui 2019 No. 13. This clarified that from January 1, 2019 to December 31, 2021, eligible small enterprises whose RMB 1,000,000 of annual taxable income is eligible for a 75% reduction on a rate of 20% (i.e., effective rate is 5%) and the income between RMB 1,000,000 and RMB 3,000,000 is eligible for 50% reduction on a rate of 20% (i.e., effective rate is 10%). On April 2, 2021, MOF and SAT further jointly issued Cai Shui 2021 No. 12, which clarified that from January 1, 2022 to December 31, 2022, eligible small enterprises whose RMB 1,000,000 of annual taxable income is eligible for an extra 50% reduction base on Cai Shui 2019 No. 13 (i.e., effective rate is 2.5%). On March 14, 2022, MOF and SAT further jointly issued Cai Shui 2022 No. 13, which clarified that from January 1, 2022 to December 31, 2022, eligible small enterprises whose income between RMB 1,000,000 and RMB 3,000,000 is eligible for an extra 50% reduction base on Cai Shui 2019 No. 13 (i.e., effective rate is 5%). For the years ended December 30, 2021 and 2022, Shenzhen Tianyuemeng and Shenzhen Yunao were eligible to employ this policy.

 

Tax savings for those entities in Xinjiang province including Horgos Weiyi, Horgos Youshi, Horgos Bowei, Kashgar Youshi and Horgos Tianyuemeng and for those entities eligible for small enterprises including Shenzhen Tianyuemeng and Shenzhen Yunao and HNTEs including Shanghai Mengyun, Shenzhen Mengyun and Shenzhen Bowei for the years ended December 31, 2022 and 2021 amounted to $186,403 and $431,109, respectively. The preferential tax rate reduction increased earnings per share by $0.004 and $0.008 for the years ended December 31, 2022 and 2021, respectively.

 

Significant components of the income tax expense (benefit) consisted of the following:

 

Schedule of income tax expense (benefit)
		Years ended December 31,
		2022				2021
Current income tax expense		$	8,075			$	7,398
Deferred income tax benefit			(130,848	)			(132,130	)
Total		$	(122,773	)		$	(124,732	)

 

The following table reconciles China statutory rates to the Company’s effective tax rate:

 

Schedule of effective tax rate
		For the years ended December 31,
		2022				2021
China statutory income tax rate			25.00	%			25.00	%
Preferential tax rate reduction			(24.51	)%			(24.76	)%
Change in valuation allowance			(2.01	)%			0.44	%
Additional R&D deduction in China			0.83	%			(1.24	)%
Permanent difference			(0.06	)%			(0.37	)%
Tax rate difference outside China(1)			0.04	%			(0.04	)%
Effective tax rate			(0.71	)%			(0.97	)%

 

(1)

It is mainly due to the lower tax rate of the entities incorporated in Hong Kong.

 

Deferred tax assets and liabilities — China

 

Significant components of deferred tax assets and liabilities were as follows:

 

Schedule of deferred tax assets and liabilities
		Years ended December 31,
		2022				2021
Deferred tax assets:
Allowance for doubtful accounts		$	37,242			$	36,847
Depreciation and amortization			-				485
Impairment loss for investment			34,797				-
Net operating loss carry forward			494,364				240,058
Inventory reserve			3,838				6,923
Right of use			2,045				-
Less: valuation allowance			(442,832	)			(160,172	)
Deferred tax assets, net			129,454				124,141
Deferred tax liabilities:
Recognition of intangible assets arising from business acquisition			(289,884	)			(435,968	)
Deferred tax liabilities, net			(289,884	)			(435,968	)
Total deferred tax liabilities, net		$	(160,430	)		$	(311,827	)

 

The Company evaluated the recoverable amounts of deferred tax assets, and provided a valuation allowance to the extent that future taxable profits will be available against which the net operating loss and temporary differences can be utilized. Valuation allowance is provided against deferred tax assets when the Company determines that it is more likely than not that the deferred tax assets will not be utilized in the future. In making such determination, the Company considered factors including future taxable income exclusive of reversing temporary differences and tax loss carry forwards. Valuation allowance was provided for net operating loss carry forward because it was more likely than not that such deferred tax assets would not be realized based on the Company’s estimate of its future taxable income. If events occur in the future that allow the Company to realize more of its deferred income tax than the presently recorded amounts, an adjustment to the valuation allowances will result in a decrease in tax expense when those events occur. The valuation allowance was increased by $282,660 and $56,096 for the years ended December 31, 2022 and 2021, respectively.

 

The Company recognized deferred tax liabilities related to the excess of the intangible assets reporting basis over its income tax basis as a result of fair value adjustment from acquisitions in 2020. The deferred tax liabilities will reverse as the intangible assets are amortized for financial statement reporting purposes.

 

As of December 31, 2022, the Company had net operating loss carry forwards of approximately $4,714,514, which arose from Shanghai Mengyun, Shenzhen Mengyun, Qianhai Youshi, Yijia Nework and Shenzhen Bowei, the subsidiaries established in the PRC, and will expire during the period from 2023 to 2027.

 

Uncertain tax positions

 

The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated with the tax positions. As of December 31, 2022 and 2021, the Company did not have any significant unrecognized uncertain tax positions. The Company did not incur any interest and penalties related to potential underpaid income tax expenses. As of December 31, 2022 and 2022, the Company also does not anticipate any significant increases or decreases in unrecognized tax benefits in the next 12 months from December 31, 2022.

 

Value added taxes (“VAT”)

 

Revenue represents the invoiced value of service, net of VAT. The VAT are based on gross sales price. VAT rate is 6% on services and 13% on goods in China.

 

Taxes payable consisted of the following:

 

Schedule of Taxes payable
		Years ended December 31,
		2022				2021
VAT taxes payable		$	7,199			$	414,665
Income taxes payable			68,660				72,359
Other taxes payable			11,460			$	22,900
Totals		$	87,319			$	509,924