NOTE 8 - INCOME TAXES

Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income in the period that includes the enactment date.

Undistributed earnings of Helpson, the Company's foreign subsidiary, since its acquisition, amounted to approximately $102.7 million at December 31, 2011. Those earnings, as well as the investment in Helpson of approximately $23.3 million, are considered to be indefinitely reinvested and, accordingly, no U.S. federal or state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. federal and state income taxes (net of an adjustment for foreign tax credits) and withholding taxes payable to the PRC. Determination of the amount of unrecognized deferred U.S. income tax liability is not practical because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits may be available to reduce a portion of the U.S. tax liability.

On March 16, 2007, the National People's Congress of China passed the new Enterprise Income Tax Law (EIT Law) and on December 6, 2007, the State Council of China issued the Implementation Regulations for the EIT Law which took effect on January 1, 2008. The EIT Law and Implementation Regulations Rules impose a unified EIT of 25% on all domestic-invested enterprises and Foreign Invested Entities, or FIEs, unless they qualify under certain limited exceptions.

The Company is located in a special region, which had a 15% corporate income tax rate before the new EIT Law. The new EIT Law abolished the preferential corporate income tax rate in the special region. However, because the Company was in existence prior to the March 16, 2007 China tax law change, it is gradually transitioning to the new 25% tax rate over a five year period beginning on January 1, 2008. The phase-in income tax rate is 22% for 2010 and 25% for 2011. Also, the Company is permitted to use its remaining tax holiday, so it continued to have a favorable income tax rate at the rate of half of the phase-in income tax rate during 2010 of 11%. During 2010, the Company applied for and received a favorable tax rate of 15% for fiscal 2011 through 2013 due to its status in the PRC as a high technology enterprise. Under current tax law in the PRC, the Company is and will be subject to the following enterprise income tax rates:

		Enterprise Income
Year		Tax Rate
2012		15%
2013		15%
2014 and after		25%

The provision for income taxes consisted of the following:

	Years Ended December 31,
	2011			2010
Current	$	3,458,568		$	2,809,615
Deferred		(16,213	)		(123,177	)
Total income tax expense	$	3,442,355		$	2,686,438

Following is a reconciliation of income taxes calculated at the federal statutory rates to the provision for income taxes:

	Years Ended December 31,
	2011			2010
Tax at statutory rate of 25%	$	5,677,999		$	6,525,196
Non-deductible expenses (non-taxable income)		261,122			324,258
Effect of change in tax rate		-			(118,868	)
Effect of tax holiday		(2,330,566	)		(3,610,134	)
Change in valuation allowance		(166,200	)		(434,014	)
Income tax expense	$	3,442,355		$	2,686,438

The effect of the tax holiday amounted to savings of $2,330,566 and $3,610,134 for the years ended December 31, 2011 and 2010, which was equivalent to basic and diluted earnings per share of $0.05 and $0.08 per share for the years ended December 31, 2011 and 2010, respectively. The temporary differences which give rise to the deferred income tax assets and liability are as follows:

	December 31,
	2011			2010
Deferred income tax assets:
Allowance for doubtful trade receivables	$	530,461		$	497,553
Allowance for doubtful other receivables		5,838			2,350
Expenses not deductible in current year		29,927			28,781
Share based compensation		172,911			106,208
Derivative warrant liability		-			317,648
U.S. net operating losses		618,236			200,791
Total deferred income tax assets		1,357,373			1,153,331
Valuation allowance		(791,147	)		(624,647	)
Net deferred income tax asset	$	566,226		$	528,684
Deferred income tax liability:
Intangible assets	$	128,909		$	71,673

As of December 31, 2011, the Company has net operating loss from continuing operations for United States federal income tax purposes of $1,818,341 which are available to offset future taxable income, if any, through 2031. In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those differences become deductible or tax loss carry forwards are utilized. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and projections for future taxable income over the periods on which the deferred tax assets are deductible or can be utilized, Management believes it is not likely the Company will realize all of the benefits of the deferred tax assets as of December 31, 2011. Therefore, the Company has provided for a valuation allowance against its deferred tax assets of $791,147 as of December 31, 2011.

The Company has also incurred various other taxes, comprised primarily of business taxes, value-added taxes, urban construction taxes, education surcharges and others. Any unpaid amounts are reflected on the balance sheets as accrued taxes payable. During 2011 and 2010, the Company received an incentive payment from the tax authority of the Hainan provincial government in the PRC totaling $301,672 and $469,509, respectively, which has been recorded as government subsidy income on the accompanying statements of operations and comprehensive income for the years ended December 31, 2011 and 2010.

Management is required to evaluate tax positions taken by the Company and to recognize a tax liability or asset if it is more likely than not that the tax positions taken would not be sustained upon examination by tax authorities. Management has analyzed the tax positions taken and has concluded that, as of December 31, 2011, there were no uncertain positions taken or expected to be taken that would require recognition of a liability or asset or disclosure in the financial statements. The Company is subject to routine audits by taxing jurisdictions and could be subject to income tax if certain issues were found. Although, there are currently no audits of any tax periods, tax returns for tax years after 2008 remain subject to examination.