Note 7 - INCOME TAXES

The Company was incorporated in the United States of America (“USA”) and has operations in one tax jurisdiction, i.e. the PRC. The Company generated substantially all of its net income from its operations in the PRC for the year ended December 31, 2016 and 2015, and has recorded income tax provision for the periods.

The provision for income taxes consists of the following:

The reconciliation of USA statutory income tax rate to the Company’s effective income tax rate is as follows:

For the years ended December 31, 2016 and 2015, the change in valuation allowance is mainly arise from the tax benefit on net operating loss carry forward for PRC and USA operation and the temporary differences on the carrying amount of accounts receivable, loans receivable, and intangible assets.

The deferred tax assets for the USA operation as of December 31, 2016 and 2015 consists mainly of net operating loss carry-forwards and for which a full valuation allowance has been provided, as the management believes it is more likely than not that these assets will not be realized in the future. Components of deferred tax assets in the USA were as follows:

As of December 31, 2016 and 2015, the Company had federal and state net operating loss carry-forwards of $8.6 million and $8.6 million available to offset future taxable income in the USA respectively. The net operating loss carry-forwards will expire, if unused, in varying amounts through the year ending December 31, 2036.

The Company’s subsidiaries and VIE were incorporated in the PRC and are governed by the Income Tax Law of the PRC and various local income tax laws. Effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises).  Components of deferred tax assets in the PRC were as follows:

As of December 31, 2016, the Company had net operating loss carry-forward of approximately $13.4 million (RMB 93.2 million) available to offset future taxable income in the PRC. The net operating loss carry-forward of $0.4 million, $6.2 million, $6.8 million will expire, if unused, in the years ending December 31, 2018, 2020, 2021, respectively.

A valuation allowance against deferred tax assets of $2.5 million as of December 31, 2016 is considered necessary because it is more likely than not the deferred tax asset will be fully realized. In particular, because of the unexpected further delay of the renewal of GMP certificates in Aoxing Pharmaceutical from the second half of 2016 to the first half of 2017 and the expiry of PRC tax losses brought forward from last year, additional valuation allowance of US$2,653,054 has been made for 2016.

Interest associated with unrecognized tax benefits are classified as income tax, and penalties are classified in selling, general and administrative expenses in the statements of operations. For the years ended December 31, 2016 and 2015, the Company had no unrecognized tax benefits and related interest and penalties expenses.  Currently, the Company is not subject to examination by major tax jurisdictions.