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.

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 three years ended December 31, 2013. 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”). Both Lihua Electron and Lihua Copper are subject to an EIT rate of 25% for the three years ended December 31, 2013 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 our subsidiaries in the PRC will not be distributing earnings to the Company for the years ended December 31, 2013, 2012 and 2011, no deferred tax liability has been recognized for the undistributed earnings of these PRC subsidiaries at December 31, 2013 and 2012. Total undistributed earnings of these PRC subsidiaries at December 31, 2013 were RMB 1,638,688,844 ($268,174,105).

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,
	2013		2012		2011
PRC income tax:
Current	$	19,843,738	$	20,555,465	$	17,388,836
Deferred		(118,821)		175,379		(65,136)
	$	19,724,917	$	20,730,844	$	17,323,700

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,
	2013			2012			2011

Pre-tax income	$	75,884,367		$	78,672,847		$	70,457,233
United States federal corporate income tax rate		34	%		34	%		34	%
Income tax computed at United States statutory corporate income tax rate		25,800,685			26,748,768			23,955,459
Reconciling items:
Loss not recognized as deferred tax assets		962,173			1,155,378			771,079
Non-deductible expenses		14,492			197,375			175,696
Change in fair value of warrants		39,068			17,241			(1,071,460)
Rate differential for PRC earnings		(7,091,501)			(7,399,559)			(6,260,780)
Other		-			11,641			(246,294)
Effective tax expense	$	19,724,917		$	20,730,844		$	17,323,700

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,
	2013		2012
Deferred income tax assets:
Net operating loss carryforward	$	5,744,674	$	4,786,510
Unrealized intercompany profit in inventory		25,178		24,948
Accrued R&D expenses		121,240		-
Less: Valuation allowance		(5,744,674)		(4,786,510)
	$	146,418	$	24,948

As of December 31, 2013 and 2012, the Company’s U.S. entity, Lihua International, Inc., had net operating loss carryforwards of $16,896,101 and $14,077,971, respectively, available to reduce future taxable income which will expire in various years through 2033. 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 December 31, 2013 and 2012, 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, 2013, 2012 and 2011, and no provision for interest and penalties is deemed necessary as of December 31, 2013 and 2012.

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.