NOTE 15 – 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 years ended December 31, 2011, 2010 and 2009, and management believes that its earnings are permanently invested in the PRC.

(b) BVI

Upper Class Group Limited 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 years ended 31 December 31, 2011, 2010 and 2009.

Hong Kong Jiaxing Industrial 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 years. The applicable statutory tax rates for the years ended December 31, 2011, 2010 and 2009 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 December 31, 2011 and 2010, the accumulated distributable earnings under the Generally Accepted Accounting Principles (“GAAP”) of PRC are $180,939,187 and $129,201,268, 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 December 31, 2011 and 2010, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of December 31, 2011 and 2010, the unrecognized WHT are $7,965,999 and $5,431,616, respectively.

The components of the provision for income taxes from continuing operations are:

	Years ended December 31,
	2011			2010			2009

Current taxes – PRC	$	15,972,518		$	18,066,297		$	11,266,564
Deferred tax – PRC		(2,569,647	)		(11,448	)		(82,166	)
	$	13,402,871		$	18,054,849		$	11,184,398

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

	Years ended December 31,
	2011			2010			2009

Statutory income tax rate		25	%		25	%		25	%
Non-taxable items		(1	)%		0	%		0	%
Non-deductible items		3	%		0	%		0	%
US federal net operating loss		3	%		1	%		2	%
Effective tax rate		30	%		26	%		27	%

As of December 31, 2011 and 2010, the Company had US federal net operating loss (“NOL”) of approximately $30 million and $25 million available to offset against future federal income tax liabilities, respectively. NOL can be carried forward up to 15 years from the year the loss is incurred. NOL of approximately $12 million will expire at the beginning of 2014. The Company believes the realization of benefits from these losses remains uncertain due to the Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance has been provided.

Differences between the application of accounting principles and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2011 and 2010 are as follows:

	As of December 31,
	2011			2010
Deferred tax liabilities	$	-		$	-

Deferred tax assets:
Allowance for obsolete and slow-moving inventories	$	3,718		$	1,674
Impairment on property, plant and equipment		639,031			-
Exploration costs		1,797,391			-
Repair and maintenance costs		224,984			-
Property, plant and equipment		81,060			98,020
Property, plant and equipment under capital leases		(8,001	)		-
US federal net operating loss		10,111,821			7,698,225
Total deferred tax assets		12,850,004			7,797,919
Valuation allowance		(10,111,821	)		(7,698,225	)
Net deferred tax asset	$	2,738,183		$	99,694

Current deferred tax asset	$	228,702		$	99,694
Long-term deferred tax asset	$	2,509,481		$	-

The increase in valuation allowance for each of the years ended December 31, 2011, 2010 and 2009 is $2,413,596, $1,005,799 and $1,101,800, respectively.

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

Tax returns filed regarding tax years from 2005 through 2011 are subject to review by the respective tax authorities.