(13) Income Taxes

United States

Orient Paper and Shengde Holdings are incorporated in the State of Nevada and are subject to the U.S. federal tax and state statutory tax rates up to 34% and 0%, respectively.

PRC

HBOP and Baoding Shengde are PRC operating companies and are subject to PRC Enterprise Income Tax. Pursuant to the PRC New Enterprise Income Tax Law, Enterprise Income Tax is generally imposed at a statutory rate of 25%.

The provision for income taxes for the three months ended September 30, 2012 and 2011 were as follows:

	Three Months Ended September 30,
	2012			2011
Provision for Income Taxes
Current Tax Provision - PRC	$	1,955,264		$	1,884,909
Deferred Tax Provision - PRC		(385,166	)		-
Total Provision for Income Taxes	$	1,570,098		$	1,884,909

The provision for income taxes for the nine months ended September 30, 2012 and 2011 were as follows:

	Nine Months Ended September 30,
	2012			2011
Provision for Income Taxes
Current Tax Provision - PRC	$	5,055,892		$	5,860,066
Deferred Tax Provision - PRC		(385,166	)		-
Total Provision for Income Taxes	$	4,670,726		$	5,860,066

During the three months ended September 30, 2012 and 2011, the effective income tax rate was estimated by the Company to be 26.4% and 25.8%, respectively, while during the nine months ended September 30, 2012 and 2011, the effective income tax rate was estimated by the Company to be 26.9% and 26.6%, respectively. The effective tax rate is lower than the U.S. statutory rate of 35% primarily because the undistributed earnings of our PRC subsidiary Baoding Shengde and the VIE, HBOP are considered or are expected to be indefinitely reinvested offshore to support our future capacity expansion.

On June 1, 2012, the Company's Board of Directors declared a quarterly cash dividend of $0.0125/share for four quarters starting the first record date of June 15, 2012. Total cash dividends for the four quarters are expected to be approximately $922,989 based on the total shares issued and outstanding as of September 30, 2012. The source of fund for the first and second cash dividend paid by the Company as of September 30, 2012 was provided by HBOP, the Company's VIE. For purposes of the condensed consolidated financial statements, the dividend paid has been recorded as a distribution from the Company's retained earnings. For U.S federal income tax purposes, the Company made the assumption that, despite the repatriation of fund was made by a variable interest entity and not the Company's wholly-owned subsidiary, the receipt of a profit distribution from its Chinese VIE constitute a tax item of income that will be fully offset by the Company's current year ordinary tax deductions and accumulated Net Operating Losses (NOLs), which amounted to $5,149,592 as of December 31, 2011. The Company's Board of Directors does not believe that its current and future dividend policy and the available U.S. tax deductions and NOLs will cause the Company to recognize any substantial current U.S. federal or state corporate income tax liability. Nor does the Board of Directors believe that the amount of the repatriation of the VIE's earnings and profits for purposes of paying dividends will change the Company's position that its PRC subsidiary Baoding Shengde and the VIE, HBOP are considered or are expected to be indefinitely reinvested offshore to support our future capacity expansion. If these earnings are repatriated to the U.S. resulting in U.S. taxable income in the future, or if it is determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required.

The Company has adopted ASC Topic 740-10-05, Income Taxes (former FIN 48, Accounting for Uncertainty in Income Taxes). To date, the adoption of this interpretation has not impacted the Company's financial position, results of operations, or cash flows. The Company performed self-assessment and the Company's liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company's liability for income taxes. Any such adjustment could be material to the Company's results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of September 30, 2012 and December 31, 2011, management considered that the Company had no uncertain tax positions affecting its consolidated financial position and results of operations or cash flows, and will continue to evaluate for any uncertain position in future. There are no estimated interest costs and penalties provided in the Company's consolidated financial statements for both the three months and the nine months ended September 30, 2012 and 2011, respectively. The Company's tax positions related to open tax years are subject to examination by the relevant tax authorities and the major one is the China Tax Authority.