INCOME TAX - Note 23

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

INCOME TAX - Note 23

NOTE 23 — INCOME TAX

The Company is subject to income taxes by entity on income arising in or derived from the tax jurisdiction in which each entity is domiciled.

Zoom Technologies Inc., the parent company was incorporated in the U.S. and has net operating losses ("NOL") for income tax purposes, which can be carried forward for up to 20 years from the year the loss is incurred. Zoom has NOL carry forwards for income taxes of approximately $9.0 million at March 31, 2012, which may be available to reduce future years' taxable income. Management believes the realization of benefits from these losses remains uncertain due to Zoom's limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance has been provided.

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 three months period ended March 31, 2012, 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.

Portables is governed by the Income Tax Law of United States; however, because Portables is a pass through entity for tax purposes, tax liabilities are the responsibility of its members. Therefore, Zoom Sub, which is responsible to report and make payments on its portion of income generated by Portables is subject to a statutory tax rate of 34%.

TCB Digital had pre-tax loss of $330,920 and pre-tax profit of $82,608 for the three months ended March 31, 2012 and 2011 respectively, while Jiangsu Leimone had pre-tax loss of $62,756 and $197,098 for the three months ended March 31, 2012 and 2011 respectively, while Profit Harvest had pre-tax profit of $2,220,820 and $4,608,867 for 2011 and 2010 respectively, while Nollec Wireless had pre-tax loss of $563,923 and $1,131,905 for the three months ended March 31, 2012 and 2011, while CDE had pre-tax loss of $131,407 and $37,798 for the three months ended March 31, 2012 and 2011, while Portables had pre-tax profit of $484,328 for the three months ended March 31, 2012.

The following table summarizes the temporary differences which result in deferred tax assets and liabilities as at March 31, 2012 and December 31, 2011:

	March 31, 2012		December 31, 2011
Deferred tax assets:	(Unaudited)		(Audited)
Inventory impairment reserve	$	8,413	$	8,360
R&D expenses-TVOC		19,764		-
Inventory shortage		61,072		60,688
Long-term investment impairment		17,787		17,676
		107,036		86,724
Less: Valuation allowance		-		-
Total deferred tax assets		107,036		86,724
Deferred tax liabilities:
Developed products		(30,768)		(30,575)
Deferred tax assets, net	$	76,268	$	56,149

The following table reconciles the U.S. statutory rates to the Company's effective tax rate for the three months ended March 31, 2012 and 2011:

	March 31, 2012	March 31, 2011
US statutory rates	34.0%	34.0%
Tax rate difference	-20.8%	-20.7%
US NOL for which no benefit is realized	19.9%	0.0%
Valuation allowance	6.3%	17.1%
Tax for prior year	4.4%	0.0%
Non-taxable Income of pass through entity	-14.1%	0.0%
Tax per financial statements	29.7%	30.4%

Foreign pretax earnings approximated $1.2 million for the three months ended March 31, 2012. 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 March 31, 2012, approximately $30.79 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 $6.4 million would have to be provided if such earnings were remitted currently.