Taxation on overseas profits has been calculated on the estimated assessable profits for the year at the rates of taxation
prevailing in the country in which the Company operates.
China Precision Steel,
Inc. is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has
been made as China Precision Steel, Inc. had no taxable income in fiscal years 2012 and 2011.
PSHL and Blessford
International were incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, are not
subject to income taxes.
Provision for the
PRC enterprise income tax is calculated at the prevailing rate based on the estimated assessable profits less available tax relief
for losses brought forward. The Company does not accrue taxes on unremitted earnings from foreign operations as it is the
Companys intention to invest these earnings in the foreign operations indefinitely.
On March 16, 2007,
the National Peoples Congress of China passed The Enterprise Income Tax Law (the New EIT Law), and on December
6, 2007, the State Council of China passed the Implementing Rules for the EIT Law (Implementing Rules) which took
effect on January 1, 2008. The New EIT Law and Implementing Rules impose a unified enterprise income tax (EIT) of
25% on all domestic-invested enterprises and foreign invested entities (FIEs), unless they qualify under certain
limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than
benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008.
Despite these changes,
the EIT Law gives the FIEs established before March 16, 2007 (Old FIEs) a five-year grandfather period during which
they can continue to enjoy their existing preferential tax treatments, commonly referred to as tax holidays, until
these holidays expire. As an Old FIE, Chengtongs tax holiday of a 50% reduction in the 25% statutory rates expired on December
31, 2008 and it is currently subject to the 25% statutory rates since January 1, 2009; Shanghai Blessfords full tax exemption
from the enterprise income tax expired on December 31, 2009, and it is subject to a 50% reduction for the three subsequent years
expiring on December 31, 2012. Subsequent to the expiry of their tax holidays, Chengtong and Shanghai Blessford will be subject
to enterprise income taxes at 25% or the prevailing statutory rates. The discontinuation of any such special or preferential tax
treatment or other incentives would have an adverse effect on any organizations business, fiscal condition and current operations
Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry
forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change
during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities
are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized.
The Company follows
the provisions of the ASC Topic No. 740 Accounting for Income Taxes and Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (ASC 740). ASC 740 requires the recognition of tax
benefits or expenses based on the estimated future tax effects of temporary differences between the financial statements and tax
bases of its assets and liabilities. Deferred tax assets and liabilities primarily relate to tax basis differences on unrealized
gains on corporate equities, stock-based compensation, amortization periods of certain intangible assets and differences between
the financial statements and tax bases of assets acquired.
The Company recognizes
that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes in the
PRC. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current
officials in the PRC.
Based on all known
facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of September
30, 2012 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total
amount of unrecognized tax benefits as of September 30, 2012, if recognized, would not have a material effect on its effective
tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese
tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing,
individually or in the aggregate, a material effect on the Companys results of operations, financial condition or cash flows.
Value added tax
The Provisional Regulations
of the Peoples Republic of China Concerning Value Added Tax promulgated by the State Council came into effect on January
1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the Peoples Republic of China
Concerning Value Added Tax, value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and
replacement services provided within the PRC.
Value added tax payable
in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price
collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services
provided, but excluding, in respect of both goods and services, any amount paid in respect of value added tax included in the price
or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same
Peoples Republic of China Tentative Regulations on Value Added Tax became effective on January 1, 2009 with the issuance
of Order of the State Council No. 538. With the implementation of this VAT reform, input VAT associated with the purchase of fixed
assets is now deductible against output VAT.