(10)   INCOME TAXES

 

Cayman Islands and British Virgin Islands

 

Under the current laws of the Cayman Islands and the British Virgin Islands, the Group is not subject to any income tax in these jurisdictions.

 

Hong Kong

 

Xing Wei did not derive any income that is subject to Hong Kong profits tax for the taxable year ended March 31, 2014. Accordingly, no provision for Hong Kong profit tax was required. The payment of dividends by Hong Kong companies is not subject to any Hong Kong withholding tax.

 

People’s Republic of China

 

The Company’s consolidated PRC entities file separate income tax returns.

 

On March 16, 2007, the National People’s Congress passed the Enterprise Income Tax Law (“EIT Law”) which statutory income tax rate is 25% effective from January 1, 2008. According to the EIT Law, entities that qualify as “high-and-new technology enterprises eligible for key support from the State” (“HNTE”) are entitled to a preferential income tax rate of 15%.

 

The Company’s PRC entities are subject to income tax at 25%, unless otherwise specified.

 

In December 2008, ATA Testing received approval from the tax authority that it qualified as an HNTE. The certificate entitled ATA Testing to the preferential income tax rate of 15% effective retroactively from January 1, 2008 to December 31, 2010. In October 2011, ATA Testing received approval from the tax authority on its renewal as an HNTE which entitled it to the preferential income tax rate of 15% effective retroactively from January 1, 2011 to December 31, 2013. As of March 31, 2014, ATA Testing’s applicable income tax rate from January 1, 2014 onwards was 25%.

 

In December 2009, ATA Learning, ATA Online and Beijing JDX received approvals from the tax authorities that they qualified as HNTEs. The certificates entitled them to the preferential income tax rate of 15% effectively retroactively from January 1, 2009 to December 31, 2011. In May and July 2012, ATA Learning, ATA Online and Beijing JDX received approvals from the tax authorities on its renewals as HNTEs which entitled them to the preferential income tax rate of 15% effective retroactively from January 1, 2012 to December 31, 2014. ATA Learning, ATA Online and Beijing JDX’s applicable income tax rate from January 1, 2015 onwards is 25%.

 

Zhi Xing, a PRC subsidiary of Xing Wei, is subject to an income tax rate of 25%.

 

The EIT Law and its relevant regulations impose a withholding tax at 10%, unless reduced by a tax treaty or agreement, for dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC for earnings generated beginning on January 1, 2008. Undistributed earnings generated prior to January 1, 2008 are exempt from withholding tax. As of March 31, 2013, the Company intended to indefinitely reinvest the undistributed earnings of its PRC consolidated entities and had not provided for income taxes on earnings of RMB 142,455,116 generated by its PRC consolidated entities since January 1, 2008. The unrecognized deferred income tax liability related to these earnings was RMB 14,245,512. During the year ended March 31, 2014 and as a result of management’s reassessment of the Company’s operating funding needs and future development initiatives, the Company revised the amount of undistributed earnings to be indefinitely reinvested in its PRC consolidated entities to RMB 89,611,563 as of March 31, 2014. A RMB 113,000,000 dividend distribution was made during the year ended March 31, 2014 to the holding company, for which dividend withholding tax of RMB 11,300,000 was recognized and paid during the year ended March 31, 2014. The unrecognized deferred income tax liabilities as of March 31, 2014 related to the undistributed earnings of the Company’s PRC consolidated entities was RMB 8,961,156.

 

The earnings before income taxes were generated in the following jurisdictions:

 

		Year Ended March 31,
		2012		2013		2014
		RMB		RMB		RMB
Cayman Islands and British Virgin Islands		(15,598,329	)	(19,373,510	)	(18,615,565	)
PRC		85,778,881		49,586,482		65,782,659
Hong Kong		—		—		4,803
Earnings before income taxes		70,180,552		30,212,972		47,171,897

 

Income tax expense (benefit) recognized in the consolidated statements of comprehensive income consists of the following:

 

		Year Ended March 31,
		2012		2013		2014
		RMB		RMB		RMB
PRC
Current expense		13,189,414		10,226,537		9,312,545
Deferred expense (benefit)		1,149,668		(3,221,555	)	(717,083	)
Dividend withholding tax		—		—		11,300,000
Total income tax expense		14,339,082		7,004,982		19,895,462

 

The actual income tax expense reported in the consolidated statements of comprehensive income differs from the respective amount computed by applying the PRC statutory income tax rate of 25% for each of the years ended March 31, 2012, 2013 and 2014 to earnings before income taxes due to the following:

 

		Year Ended March 31,
		2012		2013		2014
		RMB		RMB		RMB
Computed “expected” income tax expense		17,545,138		7,553,243		11,792,976
Increase (decrease) in valuation allowance		(2,035,788	)	(735,773	)	737,572
Preferential income tax rate		(8,301,350	)	(7,069,673	)	(6,208,364	)
Entities not subject to income tax		833,483		1,624,864		2,018,962
Non-deductible expenses
Entertainment		1,344,639		1,213,569		972,624
Share-based compensation		3,066,099		3,218,514		2,633,728
Bad debt loss		47,296		1,058,750		462,751
Impairment of ETS TOEIC license		—		—		3,002,364
Changes in tax rates		2,032,901		429,667		—
Tax rate differential		(53,254	)	1,977,043		(4,213,407	)
Dividend withholding tax		—		—		11,300,000
Additional deduction of research and development costs		(371,754	)	(2,309,671	)	(2,805,937	)
Other		231,672		44,449		202,193
Actual income tax expense		14,339,082		7,004,982		19,895,462

 

The applicable PRC statutory tax rate is used since the Group’s taxable income is generated in the PRC.

 

The tax effects of the Group’s temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are as follows.

 

		March 31,
		2013		2014
		RMB		RMB
Deferred income tax assets:
Tax loss carryforwards		2,876,488		4,644,352
Property and equipment, net		1,709,276		1,494,298
Allowance for doubtful accounts		1,592,868		1,172,108
Write-down of inventories		317,163		24,237
Accrued expenses and other payables		3,796,164		5,572,175
Total gross deferred income tax assets		10,291,959		12,907,170
Less: valuation allowance		(921,751	)	(2,575,187	)
Net deferred income tax assets		9,370,208		10,331,983
Deferred income tax liabilities:
Customer relationships		195,452		179,202
Training platform		—		96,869
Contract in progress		—		164,073
Total gross deferred income tax liabilities		195,452		440,144
Net deferred income tax assets		9,174,756		9,891,839

 

		March 31,
		2013		2014
		RMB		RMB
Current deferred income tax assets, included in prepaid expenses and other current assets		7,524,161		8,429,138
Non-current deferred income tax assets, included in other assets		1,709,276		1,462,701
Non-current deferred income tax liabilities		(58,681	)	—
Net deferred income tax assets		9,174,756		9,891,839

 

The movements of the valuation allowance are as follows:

 

		Year Ended March 31,
		2012		2013		2014
		RMB		RMB		RMB
Balance at the beginning of the year		3,693,312		1,657,524		921,751
Additions from Xing Wei Group acquisition		—		—		915,864
Additions of valuation allowance excluding acquisition		—		—		737,572
Reduction of valuation allowance		(2,035,788	)	(735,773	)	—
Balance at the end of the year		1,657,524		921,751		2,575,187

 

As of March 31, 2014, the valuation allowance of RMB2,575,187 was mainly related to the deferred income tax assets of PRC entities at cumulative losses. As of March 31, 2014, management believes it is more likely than not that the Group will realize the deferred income tax assets, net of the valuation allowance. The amount of the deferred income tax assets, however, considered realizable as of March 31, 2014 could be reduced in the near term if estimates of future taxable income are reduced.

 

As of March 31, 2014, the Group had tax loss carry forwards for PRC income tax purpose of RMB 18,577,405, of which RMB nil, RMB 2,237,578, RMB nil, RMB 508,730, RMB 5,921,488 and RMB 9,909,609 will expire if unused by December 31, 2014, 2015, 2016, 2017, 2018 and 2019, respectively.

 

For the years ended March 31, 2012, 2013 and 2014, the Group had no unrecognized tax benefits, and thus no related interest and penalties were recorded. Also, the Group does not expect that the amount of unrecognized tax benefits will significantly increase within the next twelve months.

 

According to the PRC Tax Administration and Collection Law, the statute of limitation is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitation is extended to five years under special circumstances where the underpayment of taxes is more than RMB 100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. The income tax return of each of the Company’s PRC consolidated entities is subject to examination by the relevant tax authorities for the calendar tax years beginning in 2009.