INCOME TAX

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

INCOME TAX

12. INCOME TAX

The Company’s Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate tax adjustments.  Under the Chinese tax law, the tax treatment of finance and sales-type leases is similar to US GAAP.  However, the local tax bureau continues to treat CREG sales-type leases as operating leases.  Accordingly, the Company recorded deferred income taxes.

The Company’s subsidiaries generate all of their net income from their PRC operations. Shanghai TCH’s effective income tax rates for 2012 and 2011 are 25% and 24%, respectively. Xi’an TCH’s effective income tax rate for 2012 and 2011 is 15% as a result of its high tech enterprise status that was approved by the taxing authority. The 2012 rate expired in August 2012 and after its expiration the effective rate is 25%. Xingtai Huaxin’s effective income tax rate for 2012 and 2011 is 25% (deregistered in October 2012).  Huahong and Erdos TCH’s effective income tax rate for 2012 and 2011 is 25%.  Pingshan Shengda’s effective income tax rate for 2012 and 2011 is 25% (deregistered in September 2012). Shanghai TCH, Xi’an TCH, Xingtai Huaxin, Huahong, Pingshan Shengda and Erdos TCH file separate income tax returns. If Xi’an TCH had not been granted high tech enterprise status, income tax expense for the year ended December 31, 2012, would have been increased by $465,983, and EPS would have been reduced by $0.01.

There is no income tax for companies domiciled in the Cayman Islands. Accordingly, the Company’s consolidated financial statements do not present any income tax provisions related to Cayman Islands tax jurisdiction where Sifang Holding is domiciled.

The parent company, China Recycling Energy Corporation, is taxed in the U.S. and, as of December 31, 2012, had net operating loss (“NOL”) carry forwards for income taxes of $10.26 million, which may be available to reduce future years’ taxable income as NOLs can be carried forward up to 20 years from the year the loss is incurred. Our management believes the realization of benefits from these losses may be uncertain due to the Company’s limited operating history and continuing operating losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

Consolidated foreign pretax earnings approximated $9.1 million and $23.6 million for the years ended December 31, 2012 and 2011, respectively. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. As of December 31, 2012, $68.8 million of accumulated undistributed earnings of non-U.S. subsidiaries were indefinitely invested. At the existing U.S. federal income tax rate, additional taxes of approximately $13.4 million would have to be provided if such earnings were remitted currently.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for years ended December 31, 2012 and 2011, respectively:

	2012			2011
U.S. statutory rates		34.0	%		34.0	%
Tax rate difference – current provision		(13.4	)%		(8.0	)%
Effective tax holiday		(8.3	)%		(6.5	)%
Non tax-deductible expense		5.6	%		(10.0	)%
Valuation allowance on PRC NOL		18.7	%		-	%
Valuation allowance on US NOL		10.9	%		6.3	%
Tax per financial statements		47.6	%		15.8	%

Non-tax deductible expenses represented permanent non-tax deductible interest expense resulting from an amortization of a beneficial conversion feature for a convertible note and changes in FV of conversion feature liability.

The provision for income taxes for the years ended December 31, 2012 and 2011 consisted of the following:

	2012		2011
Income tax expense - current	$	1,921,842	$	4,226,593
Income tax expense - deferred		1,000,411		6,352
Total income tax expenses	$	2,922,253	$	4,232,945