Income Tax

6 Months Ended

Jun. 30, 2012

Note 11 — Income Tax

The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.

SKY Digital Stores, Corp. is incorporated in the U.S. and has incurred a net operating loss for income purposes for 2011. As of June 30, 2012, the estimated net operating loss carry forward for U.S income tax purposes amounted to approximately $196,000, which may be available to reduce future taxable income. These carry forward will expire if not utilized by 2031. Management believe that the realization of the benefits arising from this loss appears to be uncertain due to the Company’s limited operating history and continuing losses for U.S. income tax purposes. Accordingly, the Company has provided a 100% deferred tax asset valuation allowance at June 30. The net change in valuation allowance for the six months ended June 30, 2012 was an increase of approximately $67,000. Management reviews this valuation allowance periodically and makes adjustments as necessary.

First Digital is a company incorporated in Hong Kong and has operations in the PRC, the tax jurisdiction. First Digital did not earn any income that was derived in Hong Kong for the six months ended June 30, 2012 and 2011 and therefore was not subject Hong Kong Profit tax. All of the Company’s income is generated in the PRC. Accordingly, its income tax provision is calculated based on the applicable tax rates and existing legislation, interpretations and practices in respect thereof.

On March 16, 2007, the PRC promulgated New Enterprise Income Tax Law (the “New Income Tax Law”). The New Taxation Law which became effective on January 1, 2008. Under the New Taxation Law, all enterprises (both domestic enterprises and foreign invested enterprises) have one unified income tax rate of 25%.

On December 6, 2007, the State Council of the PRC issued Implementation Regulations on the New Taxation Law. The New Taxation Law and Implementation Regulations have changed the tax rate from 15% to 18%, 20%, 22%, 24% and 25% for the years ending December 31, 2008, 2009, 2010, 2011, 2012, respectively, for enterprises in Shenzhen, a “Special Economic Zone” in the PRC. Donxon is located in Shenzhen and is thus entitled to the preferential tax rates for years from 2008 to 2012.

The income tax rate for Shenzhen Dasen is 25%.Vaslink is located in a Guangzhou High-tech Park and is entitled to the preferential income tax rate of 10% granted by local tax authority.

The Company’s subsidiary Xinyang Donxon is located in Xinyang High-tech Park in the PRC and has been granted a favorable tax treatment by local taxing authority which stipulated a 100% income tax exemption for the first two years and 50% income tax exemption for the following consecutive three years (“tax holiday”).

The following table reconciles the statutory rates to the Company’s effective tax rate for the six months ended June 30, 2012 and 2011:

	June 30,			June 30,
	2012			2011

U.S. Statutory rates		34	%		34	%
Foreign income not recognized in the U.S.		(34	)		(34	)
China Statutory income tax rate		25			24
Net operating loss in the PRC		(19	)		-
Nondeductible expenses - permanent differences		-			15
Effective tax rate		6	%		39	%

The Company’s PRC subsidiaries had tax loss carry forwards of approximately $663,000 and $80,000 for the periods ended June 30, 2012 and 2011, respectively which expire 5 years after the Company incurs the loss unless utilized. The Company has made a full valuation allowance against its net deferred tax assets. Future reversal of the valuation allowance will be recognized either when the benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future earnings.

Uncertain tax position

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in its consolidated statements of income. There were no unrecognized tax benefits for the six months ended June 30, 2012 and 2011. Management does not anticipate any potential future adjustments in the next twelve months which would result in a material change to its tax positions. As of June 30, 2012 and December 31, 2011, the Company did not accrue any interest and penalties.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References

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-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

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+ Details

SKY DIGITAL STORES CORP. 10-Q/A