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 2014 and 2013 was 25%. During 2013, Xi’an TCH was re-approved for high tech enterprise status and enjoyed 15% preferential income tax rate for 3 years effective January 1, 2013. Huahong, Zhonghong and Erdos TCH’s effective income tax rate for 2014 and 2013 was 25%. Shanghai TCH, Xi’an TCH, Huahong, Zhonghong 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 March 31, 2014, had net operating loss (“NOL”) carry forwards for income taxes of $12.43 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.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended March 31, 2014 and 2013, respectively:

	2014		2013
U.S. statutory rates	34.0	%	34.0	%
Tax rate difference – current provision	(9.6)	%	(10.5)	%
Effective tax holiday	(7.0)	%	-	%
Other	0.2	%	-	%
2013 income tax adjustment per income tax return filed in 2014	8.6	%	-	%
Effect of tax rate change on deferred tax items	-	%	(0.5)	%
Valuation allowance on US NOL	2.3	%	5.5	%
Tax per financial statements	28.5	%	28.5	%

The provision for income taxes expense for the three months ended March 31, 2014 and 2013 consisted of the following:

	2014		2013
Income tax expense - current	$	889,247	$	608,652
Income tax expense - deferred		348,282		751,402
Total income tax expenses	$	1,237,529	$	1,360,054