INCOME TAX - Note 22

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

INCOME TAX - Note 22

NOTE 22 — INCOME TAX

TCB Digital, Jiangsu Leimone and Nollec Wireless are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

Jiangsu Leimone is exempt from income tax in PRC for two years starting from the first profitable year or the year 2008, whichever is earlier, and is subject to a 50% exemption on normal income tax rate for the following three years. 

Nollec Wireless is exempt from income tax in PRC for two years starting from 2008, and is subject to a 50% exemption on normal income tax rate for three years starting from 2010 and is subject to normal income tax rate from 2013.

Since Nollec has pre-tax loss for the nine months period ended September 30, 2011, the Company's net income and earnings per share had no effect due to its income tax exemption.

Profit Harvest and CDE are governed by the Income Tax Law of Hong Kong, which is generally subject to tax at a statutory rate of 16.5% on income reported in the statutory financial statements after appropriate tax adjustments.

TCB Digital had pre-tax loss of $360,102 and pre-tax profit of $550,883 for the nine months ended September 30, 2011 and 2010 respectively, while Jiangsu Leimone had pre-tax loss of $801,131 and $19,152 for the nine months ended September 30, 2011 and 2010 respectively, while Profit Harvest had pre-tax profit of $12,333,401 and $11,408,108 for the nine months ended September 30, 2011 and 2010 respectively, while Nollec Wireless had pre-tax loss of $1,884,866 for the nine months ended September 30, 2011, while CDE had pre-tax loss of $133,576 for the nine months ended September 30, 2011.

The following table summarizes the temporary differences which result in deferred tax assets and liabilities as at September 30, 2011 and December 31, 2010:

	September 30, 2011		December 31, 2010
Deferred tax assets:			(Audited)
Inventory impairment reserve	$	-	$	28,763
Accrued expenses	29,625		28,684
Bad debt allowance	24,597
Other expenses not deductible in this period	12,985
Expensed Technology development cost	131,799		-
Inventory shortage	98,539		95,410
Long-term investment impairment	17,573		17,014
	315,118		169,871
Less: Valuation allowance	-		-
Total deferred tax assets	315,118		169,871
Deferred tax liabilities
Developed products	(68,632)		(66,452)
Deferred tax assets, net	$	246,486	$		103,419

The following table reconciles the U.S. statutory rates to the Company's effective tax rate for the nine months ended September 30, 2011 and 2010:

	September 30, 2011	September 30, 2010
US statutory rates	34.0%	34.0%
Tax rate difference	(22.6)%	(13.4)%
Valuation allowance	16.5%	-
Tax for prior year	1.3%	3.0%
Tax per financial statements	29.4%	23.6%

The following table reconciles the U.S. statutory rates to the Company's effective tax rate for the three months ended September 30, 2011 and 2010:

	September 30, 2011	September 30, 2010
US statutory rates	34.0%	34.0%
Tax rate difference	(13.0)%	(14.8)%
Valuation allowance	(0.6%)	(1.3)%
Tax for prior year	5.0%	0.5%
Tax per financial statements	26.6%	18.4%

Foreign pretax earnings approximated $9.2 million for the nine months ended September 30, 2011. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are invested indefinitely outside of the U.S. At September 30, 2011, approximately $29 million of accumulated undistributed earnings of non-U.S. subsidiaries was invested indefinitely. At the existing U.S. federal income tax rate, additional taxes of $2.6 million would have to be provided if such earnings were remitted currently.