19. Income Taxes

Deferred taxes are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The income tax benefit for the years ended December 31, 2011 and 2010 results from changes in calculated deferred taxes, particularly liabilities associated with intangible assets. Deferred tax assets associated with net operating losses have a full valuation allowance recorded against them except to the extent that they are able to offset deferred tax liabilities that arise from temporary differences that are expected to reverse prior to the expiration of the availability of the net operating loss carryovers.

The Company's current management does not believe that China Broadband, Inc. has filed United States corporate income tax returns for several years prior to the January 23, 2007 merger transaction and accompanying change in management. Management believes that because of the lack of taxable income there will be no material penalties resulting from any previous non-compliance.

Management believes that it has $6,706,453 of pre-exchange transaction net operating loss carryovers that expire in various years through 2025. Since Management has not been able to determine whether income tax returns were filed prior to the January 23, 2007 merger transaction and may not be able to recreate the records to file them if they have not they may be unable to claim the pre-exchange transaction net operating loss carryovers. In addition, even if the net operating loss carryovers were to be properly established, the future use of any pre-exchange transaction net operating loss carryovers will be significantly limited under section 382 of the internal revenue code because of the change of control in January 2007 as well as by previous changes in the control of the Corporate entity. The extent of these limitations has not yet been determined.

As of December 31, 2011 the Company has available additional U.S. net operating loss carryovers of $10,235,212 which equals $11,954,186 shown on the tax returns less $1,718,974 resulting from the non-recognition for financial reporting purposes of the tax benefits of certain a tax position taken by the Company because of the uncertainty of the position being sustained. The net operating loss carryovers expire in the years 2027 through 2030. The non-recognition of the tax benefits, while reducing the net operating loss carryovers, gives rise to a capital loss carryover of $1,420,289 and an AMT credit of $17,952. The Company also has a charitable contributions carryover of $2,000 at December 31, 2011.

In addition to the U.S. net operating losses, Jinan Broadband, Shandong Media, AdNet, Sinotop Hong Kong and Sinotop Beijing have the following estimated Chinese (Hong Kong in the case of Sinotop) net operating loss carryovers at December 31, 2011 with the expiration dates as shown:

	Jinan		Shandong				Sinotop				Total
Expiring	Braodband		Media		Sinotop		Beijing		Other		Foreign
2013	$	-		14,567	$	-	$	-	$	103,498	$	118,065
2014		-		91,999		-		-		48,480		140,479
2015		124,951		462,288		322,921		350,571		41,551		1,302,282
2016		262,339		432,463		417,358		1,957,566		348,305		3,418,031
Total	$	387,290	$	1,001,317	$	740,279	$	2,308,137	$	541,834	$	4,978,857

The estimation of the income tax effect of any future repatriation of the Company's 51% share of any profits generated by its interests in Jinan Broadband, Shandong Media and AdNet is not practicable. This is because it may involve additional Chinese taxation on the distributions, or sale proceeds, to the extent that they are in excess of the investments made, but with credits for some or all of the Chinese taxes against U.S. taxes, plus the utilization of operating losses of the WFOE. All of the foregoing would be subject to various tax-planning strategies. China Broadband Ltd. is not subject to Cayman Islands taxation.

The Company has not recognized deferred tax assets relating to the excess of its income tax bases in its non-U.S. subsidiaries over their financial statement carrying value because the Company expects to hold the investments and reinvest future earnings indefinitely.

The Company's income tax benefit for the years ended December 31, 2011 and 2010 consisted entirely of foreign deferred taxes arising from net operating loss carryforwards.

The Company's United States income tax returns are subject to examination by the Internal Revenue Service (“IRS”) for at least 2008 and later years. Because of the uncertainty regarding the filing of tax returns for earlier years it is possible that the Company is subject to examination by the IRS for earlier years. All of the Chinese tax returns for the Chinese operating companies are subject to examination by the Chinese tax authorities for all periods from the companies' inceptions in 2007 through 2010 as applicable.

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2011 and 2010:

	2011		2010
Balance, beginning of year	$	20,255	$	18,577
Increase from prior years' tax positions		1,620		1,678
Balance, end of year	$	21,875	$	20,255

Included in the determination of income tax expense (benefit) for the years ended December 31, 2011 and 2010 were estimated interest and penalties of $1,620 and $1,678 respectively.

The Company's deferred tax assets and liabilities at December 31, 2011 and 2010 consisted of:

	2011			2010
Deferred tax assets

U.S. NOL - pre-stock exchange transaction	$	2,280,194		$	2,280,194
U.S. NOL - subsequent to stock exchange transaction		3,416,311			1,451,778
Foreign NOL		1,181,792			468,588
Deferred revenue		439,521			391,068
Fixed assets cost basis		1,404,826			1,222,181
Accrued payroll		8,500			-
Inventory reserves		150,927			150,927
Allowance for doubtful accounts		34,090			22,500
Nonqualified options		9,214			9,214
Marketable securities		100,795			98,346
AMT credits		17,952			17,952
Capital loss carryover		482,898			482,898
Charitable contribution carryover		680			-
Total deferred tax assets		9,527,699			6,595,646

Less: valuation allowance		(9,036,711	)		(6,094,672	)

Deferred tax liabilities

Intangible assets		(1,279,729	)		(1,661,041	)

Net deferred tax liability	$	(788,741	)	$	(1,160,068	)

The deferred tax valuation allowance increased $2,942,039 during the year ended December 31, 2011. Of this amount $2,939,590 offset deferred tax assets that would have affected net income and $2,449 that would have affected other comprehensive income.

The deferred tax valuation allowance increased $1,182,648 during the year ended December 31, 2010. Of this amount $1,177,951 offset deferred tax assets that would have affected net income and $4,696 that would have affected other comprehensive income.

The Company's income tax expense (benefit) for the years ended December 31, 2011 and 2010 consisted of the following:

	2011			2010

Benefit of operating loss carryforwards	$	(177,546	)	$	(198,065	)
Other deferred benefits		(193,782	)		(321,330	)
Unrecognized tax positions		1,620			1,672
	$	(369,707	)	$	(517,723	)

A reconciliation of the expected income tax derived by the application of the 34% U.S. corporate income tax rate to the Company's loss before income tax benefit is as follows:

	2011			2010

Net loss before income taxes	$	(12,815,550	)	$	(16,037,729	)

Expected income tax benefit at 34%		(4,357,287	)		(5,452,828	)

Nondeductible expenses		379,091			2,690,131
Rate-differential on foreign income invested indefinitely		1,166,938			679,548
Nontaxable gain on the disposal of AdNet		(563,319)			-
Increase in valuation allowance		2,939,589			1,177,951
Change in estimates - offset by changes in valuation allowance above		63,661			331,457
Other changes in estimates		44,289			44,289
Unrecognized tax benefits		1,620			1,672
Other		-			10,000

Income tax expense (benefit)	$	(369,707	)	$	(517,723	)

The changes in estimates in 2011 related principally to

The changes in estimates in 2010 related principally to reduce Chinese NOL carryovers as a result of the disallowance of certain expense deductions by tax authorities. The amounts reported in the table above for increase in valuation allowance and changes in estimates in 2009 have been adjusted to remove the portion of the valuation allowance increase that relates to other comprehensive income and conform to the 2010 presentation.

China passed a new Enterprise Income Tax Law (“EIT Law”) and implementing rules, both of which became effective January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.

If the EIT Law were to be applied to You On Demand, Inc., (the Nevada Corporation itself) and/or to China Broadband Cayman those entities would be subject to Chinese corporate income tax, currently at a rate of 25%. To date, these two entities have generated no net income so there would be no Chinese tax liability even if the EIT Law were to apply to them.

Furthermore, we believe that the law does not apply to our non-Chinese entities and have substantial defenses that we believe would prevail, if the Chinese tax authorities were to try to apply the EIT Law to us. It is, of course reasonably possible that the Chinese tax authorities would successfully make that claim.