13. 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 rate for 2013 and 2012 is 25%. Xi’an TCH’s effective income tax rate in 2012 until August was 15% as a result of its high tech enterprise status that was approved by the taxing authority. The 15% rate expired in August 2012, and Xi’an TCH’s effective income tax rate became 25%. Huahong and Erdos TCH’s effective income tax rate for 2013 and 2012 was 25%. Shanghai TCH, Xi’an TCH, Huahong, and Erdos TCH file separate income tax returns.

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 Company is taxed in the U.S. and, as of September 30, 2013, had net operating loss (“NOL”) carry forwards for income taxes of $11.5 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.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for nine and three months ended September 30, 2013 and 2012, respectively:

	Nine Months						Three Months
	2013			2012			2013			2012
U.S. statutory tax (benefit) rate		34.0	%		34.0	%		34.0	%		(34.0)	%
Tax rate difference		(9.7)	%		(14.6)	%		(9.2)	%		(7.1)	%
Effective tax holiday		-			(17.3)	%		-			(45.3)	%
Non tax-deductible expense		-			5.5	%		-			35.6	%
Effect of tax rate change on deferred tax items		4.2	%		-			0.4	%		-
Valuation allowance on PRC NOL		0.5	%		39.3	%		1.3	%		273.1	%
Valuation allowance on US NOL		2.5	%		15.6	%		0.7	%		43.7	%
Tax per financial statements		31.5	%		62.5	%		27.2	%		266.0	%

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 expense for the nine and three months ended September 30, 2013 and 2012 consisted of the following:

	Nine Months				Three Months
	2013		2012		2013		2012
Income tax expense - current	$	2,859,443	$	851,577	$	552,388	$	476,567
Income tax expense - deferred		2,503,693		1,574,393		1,083,878		1,007,322
Total income tax expense	$	5,363,136	$	2,425,970	$	1,636,266	$	1,483,889