NOTE 17 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”). Both Lihua Electron and Lihua Copper are subject to an EIT rate of 25% for 2012 and 2011 under China’s Unified Enterprise Income Tax Law (“New Tax 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 management does not anticipate that the subsidiaries in the PRC will distribute their earnings to the Company for the year ending December 31, 2012, and no dividends were distributed in the years ended December 31, 2011 and 2010, no deferred tax liability has been recognized for the undistributed earnings of these PRC subsidiaries through March 31, 2012. Total undistributed earnings of these PRC subsidiaries at March 31, 2012 was RMB1,012,910,604 ($160,925,060).

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:

	Three months ended March 31,
	2012			2011
PRC income tax:
Current	$	4,456,962		$	3,952,509
Deferred		(179,616	)		(29,355	)
	$	4,277,346		$	3,923,154

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:

	Three months ended March 31,
	2012			2011
Pre-tax income	$	15,752,358		$	16,435,140

United States federal corporate income tax rate		34	%		34	%
Income tax computed at United States statutory corporate income tax rate		5,355,802			5,587,948
Reconciling items:
Loss not recognized as deferred tax assets		342,528			229,033
Non-deductible expenses (income)		(7,230	)		57,581
Change in fair value of warrants		121,281			(488,180	)
Rate differential for PRC earnings		(1,542,865	)		(1,410,102	)
Other		7,830			(53,126	)
Effective tax expense	$	4,277,346		$	3,923,154

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:

	March 31,			December 31,
	2012			2011
Deferred income tax assets:
Net operating loss carry forward	$	3,973,660		$	3,631,132
Unrealized intercompany profit in inventory		21,002			13,142
Accrued R&D expenses		-			187,446
Less: Valuation allowance		(3,973,660	)		(3,631,132	)
	$	21,002		$	200,588

As of March 31, 2012 and December 31, 2011, the Company’s U.S. entity, Lihua International, Inc., had net operating loss carryforwards of $11,687,236 and $10,679,801, 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 March 31, 2012 and December 31, 2011, 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 three months ended March 31, 2012 and 2011, and no provision for interest and penalties is deemed necessary as of March 31, 2012 and December 31, 2011.

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.