(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.

 

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 new Enterprise Income Tax Law (“new EIT Law”) which statutory income tax rate is 25% effective from January 1, 2008. According to the new 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. As of March 31, 2011, ATA Testing’s applicable income tax rate from January 1, 2011 onwards was 25%. 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. ATA Testing’s applicable income tax rate from January 1, 2014 onwards is 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. As of March 31, 2012, ATA Learning, ATA Online and Beijing JDX’s applicable income tax rate from January 1, 2012 onwards was 25%. 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%.

 

The new 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 has not provided for income taxes on earnings of RMB 142,455,116 generated by its PRC consolidated entities since January 1, 2008 as the Company plans to reinvest these earnings indefinitely in the PRC. As of March 31, 2013, the unrecognized deferred income tax liability related to these earnings was RMB 14,245,512.

 

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

 

		Year Ended March 31,
		2011		2012		2013
		RMB		RMB		RMB
Cayman Islands and British Virgin Islands		(11,433,911	)	(15,598,329	)	(19,373,510	)
PRC		34,500,214		85,778,881		49,586,482
Earnings before income taxes		23,066,303		70,180,552		30,212,972

 

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

 

		Year Ended March 31,
		2011		2012		2013
		RMB		RMB		RMB
PRC
Current expense		7,203,811		13,189,414		10,226,537
Deferred (benefit) expense		(3,891,524	)	1,149,668		(3,221,555	)
Total income tax expense		3,312,287		14,339,082		7,004,982

 

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, 2011, 2012 and 2013 to earnings before income taxes due to the following:

 

		Year Ended March 31,
		2011		2012		2013
		RMB		RMB		RMB
Computed “expected” income tax expense		5,766,576		17,545,138		7,553,243
Decrease in valuation allowance		(1,379,408	)	(2,035,788	)	(735,773	)
Preferential income tax rate		(4,486,178	)	(8,301,350	)	(7,069,673)
Entities not subject to income tax		1,695,485		833,483		1,624,864
Non-deductible expenses
Entertainment		1,308,601		1,344,639		1,213,569
Share-based compensation		1,162,993		3,066,099		3,218,514
Bad debt loss		—		47,296		1,058,750
Changes in tax rates		—		2,032,901		429,667
Tax rate differential		(1,503,124	)	(53,254	)	1,977,043
Prior year tax return true up		450,139		—		—
Additional deduction of research and development costs		—		(371,754	)	(2,309,671	)
Other		297,203		231,672		44,449
Actual income tax expense		3,312,287		14,339,082		7,004,982

 

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,
		2012		2013
		RMB		RMB
Deferred income tax assets:
Tax loss carryforwards		479,411		2,876,488
Property and equipment, net		1,859,136		1,709,276
Allowance for doubtful accounts		912,399		1,592,868
Write-down of inventories		579,644		317,163
Accrued expenses and other payables		4,021,629		3,796,164
Total gross deferred income tax assets		7,852,219		10,291,959
Less: valuation allowance		(1,657,524	)	(921,751	)
Net deferred income tax assets		6,194,695		9,370,208
Deferred income tax liabilities:
Intangible assets acquired in JDX acquisition:
Customer relationships		241,494		195,452
Total gross deferred income tax liabilities		241,494		195,452
Net deferred income tax assets		5,953,201		9,174,756

 

		March 31,
		2012		2013
		RMB		RMB
Current deferred income tax assets, included in prepaid expenses and other current assets		4,233,996		7,524,161
Non-current deferred income tax assets, included in other assets		1,859,136		1,709,276
Non-current deferred income tax liabilities		(139,931	)	(58,681	)
Net deferred income tax assets		5,953,201		9,174,756

 

The decrease in the valuation allowance for the years ended March 31, 2011, 2012 and 2013 were RMB1,379,408, RMB2,035,788 and RMB735,773, respectively. As of March 31, 2013, the valuation allowance of RMB921,751 was mainly related to the deferred income tax assets of entities at cumulative losses. As of March 31, 2013, 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, 2013 could be reduced in the near term if estimates of future taxable income are reduced.

 

As of March 31, 2013, the Group had net tax loss carry forwards for PRC income tax purpose of RMB 17,623,772, if unused, will expire by December 31, 2018.

 

For the years ended March 31, 2011, 2012 and 2013, 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 2008.