13. INCOME TAX

The Company’s Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate tax adjustments. Under the Chinese tax law, the tax treatment of finance and sales-type leases is similar to US GAAP. However, the local tax bureau continues to treat CREG sales-type leases as operating leases. Accordingly, the Company recorded deferred income taxes.

The Company’s subsidiaries generate all of their net income from their PRC operations. Shanghai TCH’s effective income tax rate for 2013 and 2012 is 25%. Xi’an TCH’s effective income tax rate in 2012 until August was 15% as a result of its high tech enterprise status that was approved by the taxing authority. The 15% rate expired in August 2012, and Xi’an TCH’s effective income tax rate became 25%. Huahong and Erdos TCH’s effective income tax rate for 2013 and 2012 was 25%. Shanghai TCH, Xi’an TCH, Huahong, and Erdos TCH file separate income tax returns.

There is no income tax for companies domiciled in the Cayman Islands. Accordingly, the Company’s consolidated financial statements do not present any income tax provisions related to Cayman Islands tax jurisdiction where Sifang Holding is domiciled.

The parent company, China Recycling Energy Corporation, is taxed in the U.S. and, as of June 30, 2013, had net operating loss (“NOL”) carry forwards for income taxes of $11.4 million, which may be available to reduce future years’ taxable income as NOLs can be carried forward up to 20 years from the year the loss is incurred. Our management believes the realization of benefits from these losses may be uncertain due to the Company’s limited operating history and continuing operating losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

As of June 30, 2013, a total of $77.2 million, of our non-US subsidiaries’ accumulated undistributed earnings, has been indefinitely invested. At the existing U.S. federal income tax rate, additional taxes of approximately $14.1 million would have been owed if such earnings were currently remitted.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for six and three months ended June 30, 2013 and 2012, respectively:

	Six Months						Three Months
	2013			2012			2013			2012
U.S. statutory rates		34.0	%		34.0	%		34.0	%		34.0	%
Tax rate difference – current provision		(9.9)	%		(11.8)	%		(9.5)	%		(15.5)	%
Effective tax holiday		-	%		(9.4)	%		-	%		(12.5)	%
Non tax-deductible expense		-	%		0.3	%		-	%		11.0	%
Effect of tax rate change on deferred tax items		6.3	%		-	%		11.5	%		-	%
Valuation allowance on US NOL		3.5	%		8.1	%		2.0	%		8.1	%
Tax per financial statements		33.9	%		21.2	%		38.0	%		25.1	%

Non-tax deductible expenses represented permanent non-tax deductible interest expense resulting from an amortization of a beneficial conversion feature for a convertible note and changes in FV of conversion feature liability.

The provision for income taxes expense for the six and three months ended June 30, 2013 and 2012 consisted of the following:

	Six Months				Three Months
	2013		2012		2013		2012
Income tax expense – current	$	2,307,055	$	375,010	$	1,698,403	$	176,787
Income tax expense benefit - deferred		1,419,815		567,071		668,413		277,902
Total income tax expense	$	3,726,870	$	942,081	$	2,366,816	$	454,689