NOTE 11 - INCOME TAXES

The Company is subject to United States of America (“United States” or “US”) and People’s Republic of China (“China” or “PRC”) income tax on any profit generated.

The Company did not record any provision for income tax for the both years ended December 31, 2016 and 2015 due to recurring losses.

United States

The Company is incorporated in the United States of America and is subject to United States federal taxation. The Company has no taxable income for the year so did not incur income taxes. The applicable income tax rate for the Company for both years ended December 31, 2016 and 2015 was 34%.

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets as of December 31, 2016 and 2015 is presented below:

	December 31,
	2016			2015
Net operating loss carryovers - US	$	57,582		$	54,132

Temporary differences, including
Stock based compensation		6,582			6,557
Fixed assets, due to differences in depreciation		288			288
Non-qualified options and warrants		6,728			6,728
Reserves on investments		2,069			2,069
Intangible assets, due to impairment		5,024			2,342
R&D credit		138			138
Amortization of debt discount		1,865			1,865

Total gross deferred tax assets - US	$	80,275		$	74,119
Valuation allowance - US		(80,275	)		(74,119	)
Net deferred tax assets	$	-		$	-

The net changes in the valuation allowances for the years ended December 31, 2016 and 2015 were an increase of $6.1 million and $3.1 million, respectively. Because there is uncertainty regarding the Company’s ability to realize its deferred tax assets, a 100% valuation allowance has been established.

As of December 31, 2016, the Company had net operating loss carry forwards of approximately $172 million for US federal income tax purposes, which expires in the years 2017 through 2032.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense recognized for the years ended December 31, 2016 and 2015. The federal tax returns of 2012, 2013, 2014 and 2015 remain subject to examination. And the state tax returns from 2010 to 2015 remain subject to examination.

PRC

Effective January 1, 2008, the PRC Enterprise Income Tax Law, EIT Law, and Implementing Rules impose unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in PRC, unless they qualify under certain limited exceptions. As such, the Company’s subsidiary in PRC is subject to an enterprise income tax rate of 25%. No provision for income taxes has been made as the Company has no taxable income for the periods.

The tax effect of temporary differences that gave rise to significant portions of the deferred tax assets at December 31, 2016 and 2015 is presented below (in thousand):

	December 31,
	2016			2015
Deferred tax assets - PRC:
Timing differences in depreciation and bad debt allowance	$	320		$	1,311
Property and equipment impairments		3,120			-
Inventories, due to impairment		97			651
Accrued liabilities		225			416
Net operating loss carry forward		15,429			10,053
Total deferred tax assets, gross – PRC		19,192			12,431
Valuation allowance - PRC		(19,192	)		(12,431	)
Deferred tax assets, net of valuation allowance	$	-		$	-

The net change in the valuation allowances for the years ended December 31, 2016 and 2015 was an increase of $6.8 million and $2.7 million, respectively.

As of December 31, 2016, the Company had net operating loss carry forwards of approximately of $61.7 million in PRC tax Jurisdiction, which expires in the years 2017 through 2021.