NOTE 6 INCOME TAX

The Company’s operating subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (“the Income Tax Laws”).

All PRC subsidiaries, except for He Meida, are subject to income tax at the 25% statutory rate.

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2017.

Perfect Dream was incorporated in the British Virgin Islands (BVI), and under the current laws of the BVI dividends and capital gains arising from the Company’s investments in the BVI are not subject to income taxes.

Ever-Glory HK was incorporated in Samoa, and under the current laws of Samoa has no liabilities for income taxes.

Although the Company’s parent entity is a US entity, the Company’s primary operations are through subsidiaries located in China, certain apparel manufacturing is performed outside of China in Southeast Asia, and sales are made globally. Therefore, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, the Company formed its subsidiary, Ever-Glory HK, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating our tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3,186,000 as of December 31, 2013 based on the probability for such outcomes.

The Company and the PRC Tax Bureau have agreed that payments on the tax liability $ 3,186,000 will be made by the Company prospectively over the next two to three years period. Approximately $346,421 was paid as of June 30, 2015. Beginning January 1, 2014, all net income generated from Ever-Glory HK has been reported as a taxable income at 25% tax rate in PRC.

The PRC’s Enterprise Income Tax Law imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise in PRC to its immediate holding company outside China; such distributions were exempted under the previous income tax law and regulations. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax starting from January 1, 2008. Given that the undistributed profits of the Company's subsidiaries in China are intended to be retained in China for business development and expansion purposes, no withholding tax accrual has been made.

The pre-tax income for the three and six months ended June 30, 2015 and 2014 was taxable in the following jurisdictions:

	Three months ended						Six months ended
	June 30,						June 30,
	2015			2014			2015			2014
PRC	$	4,900,055		$	7,439,468		$	8,213,264		$	10,713,481
BVI		(982	)		(24,572	)		(90,999	)		(24,935	)
Others		(2,500	)		(5,000	)		(5,000	)		(10,000	)
	$	4,896,573		$	7,409,896		$	8,117,265		$	10,678,546

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 2015 and 2014, respectively:

	Three months ended						Six months ended
	June 30,						June 30,
	2015			2014			2015			2014
PRC statutory rate		25.0	%		25.0	%		25.0	%		25.0	%
Preferential tax treatment		(0.3	)		-			(0.7	)		-
Effect of foreign income tax rates		-			0.1			0.3			0.1
Other		3.5			0.3			2.6			0.7
Effective income tax rate		28.2	%		25.4	%		27.2	%		25.8	%

Income tax expense for the three and six months ended June 30, 2015 and 2014 is as follows:

	Three months ended					Six months ended
	June 30,					June 30,
	2015		2014			2015		2014
Current	$	1,245,118	$	4,281,918		$	2,184,402	$	5,216,018
Deferred		133,709		(2,402,166	)		19,562		(2,457,344	)
Income tax expense	$	1,378,827	$	1,879,752		$	2,203,964	$	2,758,674

The Company has not recorded U.S. deferred income taxes of approximately $73,653,615 of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. If these earnings were repatriated to the United States, the Company would be required to accrue and pay U.S. federal income taxes and foreign withholding taxes, as adjusted for foreign tax credits. Determination of the amount of any unrecognized deferred income tax liability on these earnings is not practicable.