NOTE 16

INCOME TAXES

The Company is subject to income tax on an entity basis on income arising from the tax jurisdiction in which they operate.

The Company’s two operating subsidiaries, Lihua Electron and Lihua Copper, are generally subject to PRC enterprise income tax (“EIT”). Before January 1, 2008, Lihua Electron was subject to an EIT rate of 24% on its taxable income because it is located in an economic development zone. Furthermore, Lihua Electron is a production-based foreign investment enterprise and was granted an EIT holiday for the two years ended December 31, 2006 and 2005 and a 50% reduction on the EIT rate for the three years ended December 31, 2007, 2008 and 2009.

On March 16, 2007, the PRC government promulgated a new tax law, China’s Unified Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1, 2008. Under the New EIT Law, foreign-owned enterprises as well as domestic companies are subject to a uniform tax rate of 25%. The New EIT Law provides for a grandfathering and five-year transition period from its effective date for those enterprises which were established before the promulgation date of the New EIT Law and which were entitled to a preferential EIT treatment. Accordingly, Lihua Electron’s exemption period on its EIT expired at December 31, 2009 and it has been subject to an EIT rate of 25% for the years ending December 31, 2011 and 2010 under the New EIT Law.

Lihua Copper also has been subject to an EIT rate of 25% for the years ending December 31, 2011 and 2010 under the New EIT Law.

The New EIT Law also imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China for distribution of earnings generated after January 1, 2008. Under the New EIT Law, the distribution of earnings generated prior to January 1, 2008 is exempt from the withholding tax. As management does not anticipate that the subsidiaries in the PRC will distribute their earnings to the Company for the year ending December 31, 2011, and no dividends were distributed in the years ended December 31, 2010 and 2009, no deferred tax liability has been recognized for the undistributed earnings of these PRC subsidiaries through September 30, 2011. Total undistributed earnings of these PRC subsidiaries at September 30, 2011 was RMB858,265,203 ($135,055,658).

No provision for other overseas taxes is made as neither Lihua, Ally Profit or Lihua Holdings has any taxable income in the U.S., British Virgin Islands or Hong Kong, respectively.

The Company’s provision for income taxes consisted of:

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2011		2010			2011		2010
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
PRC income tax:
Current – PRC	$	4,363,916	$	3,564,137		$	12,907,872	$	9,598,823
Deferred		54,896		(752	)		25,541		58,268

	$	4,418,812	$	3,563,385		$	12,933,413	$	9,657,091

A reconciliation of the provision for income taxes determined at the United States income tax rate to the Company’s effective income tax rate is as follows:

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Pre-tax income	$	17,946,895		$	13,419,090		$	53,339,558		$	38,267,646

United States federal corporate income tax rate		34	%		34	%		34	%		34	%
Income tax computed at United States statutory corporate income tax rate		6,101,943			4,562,491			18,135,450			13,011,000
Reconciling items:
Loss not recognized as deferred tax assets		140,242			234,338			566,151			701,773
Change in fair value of warrants		(189,455	)		43,858			(1,087,568	)		(762,009	)
Rate differential for PRC earnings		(1,593,293	)		(1,276,936	)		(4,649,092	)		(3,416,781	)
Other		(40,625	)		(366	)		(31,528	)		123,108

	$	4,418,812		$	3,563,385		$	12,933,413		$	9,657,091

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred income tax assets are as follows:

	September 30,			December 31,
Deferred income tax assets:	2011			2010
Net operating loss carry forward	$	3,450,609		$	2,860,053
Unrealized intercompany profit in inventory		51,383			74,363
Excess of accounting depreciation over tax depreciation		-			52,954
Less: Valuation allowance		(3,450,609	)		(2,860,053	)
	$	51,383		$	127,317

As of September 30, 2011 and December 31, 2010, our U.S. entity, i.e. Lihua International, Inc., had net operating loss carry forwards of $10,148,849 and $8,411,921, respectively, available to reduce future taxable income which will expire in various years through 2030. Management believes it is more likely than not that the Company will not realize these potential tax benefits as the Company’s U.S. operations will not generate any operating profits in the foreseeable future. As a result, the full amount of the valuation allowance was provided against the potential tax benefits.

As of September 30, 2011 and December 31, 2010, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the nine months ended September 30, 2011 and 2010, and no provision for interest and penalties is deemed necessary as of September 30, 2011 and December 31, 2010.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion.