17. 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. Yinghua and Shanghai TCH’s effective income tax rate for 2016 and 2015 was 25%. During 2013, Xi’an TCH was re-approved for high tech enterprise status and enjoyed 15% preferential income tax rate for three years effective January 1, 2013 through December 31, 2015, and is subject to 25% income tax rate in 2016 unless the renewal of preferential income tax rate is approved by the tax authority; as of December 31, 2016, the preferential income tax rate is not yet approved. Huahong, Zhonghong and Erdos TCH’s effective income tax rate for 2016 and 2015 was 25%. Yinghua, 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 US parent company, China Recycling Energy Corporation, is taxed in the US and, as of December 31, 2016, had net operating loss (“NOL”) carry forwards for income taxes of $14.15 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 US parent company’s continuing operating losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

Consolidated foreign pretax earnings approximated $1.21 million and $22.38 million for the years ended December 31, 2016 and 2015, respectively. Pretax earnings of a foreign subsidiary are subject to US taxation when repatriated. The Company provides income taxes on the undistributed earnings of non-US subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. As of December 31, 2016, $113.16 million of accumulated undistributed earnings of non-US subsidiaries were indefinitely invested. At the existing US federal income tax rate, additional taxes of $23.85 million would have to be provided if such earnings were remitted currently.

The following table reconciles the US statutory rates to the Company’s effective tax rate for the years ended December 31, 2016 and 2015, respectively:

	2016 (Restated)			2015
U.S. statutory rates		(34.0	)%		34.0	%
Tax rate difference – current provision		8.9	%		(9.3	)%
Effective tax holiday		-	%		(7.2	)%
Other		-	%		(2.0	)%
Tax rate change for future deferred tax items		(0.1	)%		-	%
Prior periods income tax adjustment per income tax return filed		-	%		(1.8	)%
Permanent differences		(1.9	)%		-	%
Valuation allowance on PRC NOL		14.3	%		0.1	%
Valuation allowance on US NOL		0.3	%		1.2	%
Tax per financial statements		(12.5	)%		15.0	%

The provision for income taxes expense (benefit) for the years ended December 31, 2016 and 2015 consisted of the following:

	2016 (Restated)			2015
Income tax expense – current	$	1,899,005		$	4,497,150
Income tax benefit - deferred		(8,832,530	)		(1,252,455	)
Total income tax expense (benefit)	$	(6,933,525	)	$	3,244,695