NOTE 18

INCOME TAXES

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

Lihua is subject to taxes in the U.S.

Ally Profit being incorporated in the British Virgin Islands (“BVI”) is not subject to any income tax in the BVI.

Lihua Holdings is generally subject to Hong Kong income tax on its taxable income derived from trade or businesses carried out in Hong Kong at 16.5% for the two years ended December 31, 2011. However, as Lihua Holdings has not generated any revenue or income, no provision for Hong Kong income tax has been made.

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 continued to be entitled to the 50% reduction on its EIT rate for the two years ended December 31, 2008 and 2009 and was subject to an EIT rate of 25% for the year ended December 31, 2011 under the New EIT Law.

Lihua Copper has been subject to an EIT rate of 25% for the years ended December 31, 2011, 2010 and 2009 under the New EIT Law.

The new Tax 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 Tax Law, the distribution of earnings generated prior to January 1, 2008 is exempt from the withholding tax. As our subsidiaries in the PRC will not be distributing earnings to the Company for the years ended December 31, 2009, 2010 and 2011, no deferred tax liability has been recognized for the undistributed earnings of these PRC subsidiaries at December 31, 2011 and 2010. Total undistributed earnings of these PRC subsidiaries at December 31, 2011 were RMB937,148,032 ($148,732,408).

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:

	Year ended December 31,
	2011		2010			2009
PRC income tax:
Current	$	17,077,406	$	14,525,214		$	5,322,268
Deferred		246,294		(25,638	)		(74,621	)

	$	17,323,700	$	14,499,576		$	5,247,647

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

	Year ended December 31,
	2011			2010			2009

Pre-tax income	$	70,457,233		$	52,965,551		$	18,980,345

United States federal corporate income tax rate		34	%		34	%		34	%
Income tax computed at United States statutory corporate income tax rate		23,955,459			18,008,287			6,453,317
Reconciling items:
Impact of tax holiday of Lihua Electron		-			-			(3,011,804	)
Loss not recognized as deferred tax assets		771,079			989,985			688,443
Non-deductible expenses		175,696			82,520			49,424
Change in fair value of warrants		(1,071,460	)		429,053			4,038,161
Rate differential for PRC earnings		(6,260,780	)		(5,126,705	)		(2,948,838	)
Other		(246,294	)		116,436			(21,056	)

Effective tax expense	$	17,323,700		$	14,499,576		$	5,247,647

The effect of the tax holiday of Lihua Electron amounted to nil, nil and $3,011,804 for the years ended December 31, 2011, 2010 and 2009, respectively, equivalent to basic earnings per share of nil, nil and $0.17, respectively, and diluted earnings per share amount of nil, nil and $0.16, respectively.

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:

	As of December 31,
	2011			2010
Deferred income tax assets:
Net operating loss carry forward	$	3,631,132		$	2,860,053
Unrealized intercompany profit in inventory		13,142			74,363
Accrued R&D expenses		187,446			-
Excess of accounting depreciation over tax depreciation		-			52,954
Less: Valuation allowance		(3,631,132	)		(2,860,053	)

	$	200,588		$	127,317

As of December 31, 2011 and 2010, the Company’s U.S. entity, Lihua International, Inc., had net operating loss carryforward of $10,679,801 and $8,411,921, respectively, available to reduce future taxable income which will expire in various years through 2030. It is more-likely-than-not that the deferred tax assets cannot be utilized in the future because there will not be significant future earnings from the entity which generated the net operating loss. Therefore, the Company recorded a full valuation allowance on its deferred tax assets.

As of December 31, 2011 and 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 years ended December 31, 2011, 2010 and 2009, and no provision for interest and penalties is deemed necessary as of December 31, 2011 and 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.