NOTE 14 – INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.

(a) United States

Gulf Resources, Inc. is subject to the United States of America Tax law at tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the periods ended September 30, 2011 and 2010, and management believes that its earnings are permanently invested in the PRC.

(b) BVI

Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the periods ended September 30, 2011 and 2010.

Hong Kong Jiaxing Industrial Limited, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. No provision for profits tax has been made as the Company has no assessable income for the period. The applicable statutory tax rates for the periods ended September 30, 2011 and 2010 are 16.5%.

(d) PRC

Enterprise income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the assessable profits.

The operating subsidiaries SCHC and SYCI are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise Income Tax Law.

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.

As of September 30, 2011 and December 31, 2010, the accumulated undistributed PRC earnings are $190,521,758 and $141,781,942, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of September 30, 2011, the Company has not recorded any WHT on the cumulative amount of undistributed retained earnings of its foreign invested enterprises in China. As of September 30, 2011 and December 31, 2010, the unrecognized WHT are $8,178,272 and $5,795,755, respectively.

The effective income tax expenses differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:

	Three-Month Period					Nine-Month Period
	Ended September 30,					Ended September 30
Reconciliations		2011		2010			2011		2010

Statutory income tax rate		25	%	25	%		25	%	25	%
Non-taxable items		(1	)%	0	%		(1	)%	0	%
US federal net operating loss		12	%	1	%		5	%	1	%
Effective tax rate		36	%	26	%		29	%	26	%

Significant components of the Company’s deferred tax assets and liabilities at September 30, 2011 and December 30, 2010 are as follows:

	September 30,			December 31,
	2011			2010
Deferred tax liabilities	$	-		$	-

Deferred tax assets:
Allowance for obsolete and slow-moving inventories	$	1,744		$	1,674
Impairment on property, plant and equipment		633,596			-
Exploration costs		1,253,372			-
Property, plant and equipment		92,289			98,020
Property, plant and equipment under capital leases		(12,497	)		-
US federal net operating loss		10,473,378			7,698,225

Total deferred tax assets		12,441,882			7,797,919

Valuation allowance		(10,473,378	)		(7,698,225	)

Net deferred tax asset	$	1,968,504		$	99,694

Current deferred tax asset	$	1,744		$	99,694

Long-term deferred tax asset	$	1,966,760		$	-

There was no unrecognized tax benefits and accrual for uncertain tax positions as of September 30, 2011 and December 31, 2010.