NOTE 13 - 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 a 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 three-month and nine-month periods ended September 30, 2012 and 2011, 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 three-month and nine-month periods ended September 30, 2012 and 2011.

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 three-month and nine-month periods ended September 30, 2012 and 2011. The applicable statutory tax rates for the three-month and nine-month periods ended September 30, 2012 and 2011 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, 2012 and December 31, 2011, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP") of PRC are $193,475,905 and $180,939,187, 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, 2012 and December 31, 2011, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of September 30, 2012 and December 31, 2011, the unrecognized WHT are $8,599,714 and $7,965,999, respectively.

The Company's tax returns are subject to the various tax authorities' examination. The federal, state and local authorities of the United States may examine the Company's tax returns filed in the United States for three years from the date of filing. The Company's US tax returns since 2009 are currently subject to examination. Inland Revenue Department of Hong Kong may examine the Company's tax returns filed in Hong Kong for seven years from date of filing. The Company's Hong Kong tax returns since incorporation are currently subject to examination. The tax authorities of the PRC may examine the Company's PRC tax returns for three years from the date of filing. The Company's PRC tax returns since 2009 are currently subject to examination.

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

	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,
	2012		2011		2012		2011
Current taxes - PRC	$	1,418,892	$	3,075,375	$	4,567,725	$	14,286,566
Deferred taxes - PRC		110,434		104,171		271,260		(1,821,553	)
	$	1,529,326	$	3,179,546	$	4,838,985	$	12,465,013

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 Ended September 30,						Nine-Month Period Ended September 30,
Reconciliations	2012			2011			2012			2011
Statutory income tax rate		25	%		25	%		25	%		25	%
Non-deductible expenses		0	%		10	%		0	%		2	%
Change in valuation allowance - US federal net operating loss		2	%		1	%		2	%		2	%
Effective tax rate		27	%		36	%		27	%		29	%

Significant components of the Company's deferred tax assets and liabilities at September 30, 2012 and December 30, 2011 are as follows:

	September 30, 2012			December 31, 2011
Deferred tax liabilities	$	-		$	-

Deferred tax assets:
Allowance for obsolete and slow-moving inventories	$	3,694		$	3,718
Impairment on property, plant and equipment		634,964			639,031
Exploration costs		1,771,168			1,797,391
Repair and maintenance costs		40,646			224,984
Property, plant and equipment		-			73,059
Compensation costs of unexercised stock options		1,806,930			1,635,809
US federal net operating loss		8,762,745			8,476,012
Total deferred tax assets		13,020,147			12,850,004
Valuation allowance		(10,569,675	)		(10,111,821	)
Net deferred tax asset	$	2,450,472		$	2,738,183

Current deferred tax asset	$	44,340		$	228,702
Long-term deferred tax asset	$	2,406,132		$	2,509,481

The increase in valuation allowance for each of the three-month periods ended September 30, 2012 and 2011 is $127,541 and $1,578,170, respectively, and nine-month periods ended September 30, 2012 and 2011 is $457,854 and $2,775,153, respectively.

There was no unrecognized tax benefits and accrual for uncertain tax positions as of September 30, 2012 and December 31, 2011.