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INCOME TAXES | 12 Months Ended
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Dec. 31, 2014
INCOME TAXES |
INCOME TAXES | NOTE 12 - 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 $68.3 million as of December 31, 2014. 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. Liabilities are established for uncertain tax positions expected to be taken in income tax return when such positions are judged to meet the “more-likely-than-not” threshold based on the technical merits of the positions. Estimated interest and penalties related to uncertain tax positions are included as a component of other expenses. Through December 31, 2014, the Company has not identified any uncertain tax positions that it has taken. U.S. income tax returns for the years ended December 31, 2011 through December 31, 2014 and the Chinese income tax return for the year ended December 31, 2014 are open for possible examination. On March 16, 2007, the National People’s Congress of China passed the 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. The Company transitioned to the new 25% tax rate over a five year period which began on January 1, 2008. 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. In 2013, the Company again applied for and received the same favorable tax rate for 2014 to 2016. Under the 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
2013 |  | 15%
2014 |  | 15%
2015 |  | 15%
2016 |  | 15%
2017 |  | 25%
Thereafter |  | 25%
The provision for income taxes consisted of the following:
|  | Year Ended December 31, |
|  | 2014 |  |  | 2013 |
|  | (As restated) |  |  |  |
Current |  | $ | - |  |  | $ | - |
Deferred |  |  | 77,042 |  |  |  | 1,061,413 |
Total income tax expense (benefit) |  | $ | 77,042 |  |  | $ | 1,061,413 |
Following is a reconciliation of income taxes calculated at the federal statutory rates to the provision for income taxes:
|  | Years Ended December 31, |
|  | 2014 |  |  | 2013 |
|  | (As restated) |  |  |  |
(Benefit) tax at statutory rate of 25% |  | $ | (9,868,430 | ) |  | $ | (4,736,660 | )
Stock based compensation from current and prior years |  |  | - |  |  |  | 8,534 |
Effect of tax holiday |  |  | 3,906,336 |  |  |  | 1,834,517 |
Other, primarily the difference in U.S. tax rates |  |  | 7,815 |  |  |  | - |
Change in valuation allowance |  |  | 6,031,321 |  |  |  | 3,955,022 |
Income tax expense |  | $ | 77,042 |  |  | $ | 1,061,413 |
The effect of the tax holiday amounted to a change in the tax expense (benefit) of $3,906,336 and $1,834,517 for the years ended December 31, 2014 and 2013, which was equivalent to basic and diluted earnings per share of ($0.09) and ($0.04) per share for the years ended December 31, 2014 and 2013, respectively. The temporary differences which give rise to the deferred income tax assets and liability are as follows:
|  | December 31, |
|  | 2014 |  |  | 2013 |
|  | (As restated) |  |  |  |
Deferred income tax assets: |  |  |  |  |  |
Allowance for doubtful trade receivables |  | $ | 6,652,118 |  |  | $ | 1,995,243 |
Allowance for doubtful other receivables |  |  | 9,049 |  |  |  | 6,460 |
Inventory obsolescence reserve |  |  | 1,040,107 |  |  |  | 1,501,687 |
Expenses not deductible in current year |  |  | 31,000 |  |  |  | 31,143 |
Deferred revenue |  |  | 377,457 |  |  |  | - |
PRC net operating loss carry forward |  |  | 1,676,852 |  |  |  | 328,643 |
U.S. net operating loss carry forward |  |  | 1,181,679 |  |  |  | 1,052,784 |
Total deferred income tax assets |  |  | 10,968,262 |  |  |  | 4,915,960 |
Valuation allowance |  |  | (10,968,262 | ) |  |  | (4,915,960 | )
Net deferred income tax asset |  | $ | - |  |  | $ | - |
As of December 31, 2014, the Company had net operating loss carryforwards for PRC tax purposes of approximately $11.2 million which are available to offset any future taxable income through 2019. The Company also has net operating losses for United States federal income tax purposes of approximately $3.5 million which are available to offset future taxable income, if any, through 2034. 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 for the Company to realize all benefits of the deferred tax assets as of December 31, 2014 and 2013. Therefore, the Company provided for a valuation allowance against its deferred tax assets of $10,968,262 and $4,915,960 as of December 31, 2014 and 2013, respectively. The Company 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.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 + Details
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