NETSOL Technologies, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note 16 - Income Taxes

Note 16 - Income Taxes

12 Months Ended

Jun. 30, 2013

NOTE 16 – INCOME TAXES

The Company is incorporated in the State of Nevada and registered to do business in the State of California and has operations in primarily three tax jurisdictions - the United Kingdom (“UK”), Pakistan and the United States (“US”).

Consolidated pre-tax income (loss) consists of the following:

	Years Ended June 30,
		2013			2012
US operations		(2,878,018	)		(3,614,853	)
Foreign operation		15,431,499			10,406,380
	$	12,553,481		$	6,791,527

The components of the provision for income taxes are as follows:

	Years Ended June 30,
	2013		2012
Current:
Federal	$	-	$	-
State and Local		-		-
Foreign		465,426		55,384

Deferred:
Federal		-		-
State and Local		-		-
Foreign		-		-
Provision for income taxes	$	465,426	$	55,384

A reconciliation of taxes computed at the statutory federal income tax rate to income tax expense (benefit) is as follows:

	Years Ended June 30,
	2013					2012
Income taxes at statutory rate		4,268,184		34.0	%		2,309,119		34.0	%
State income (benefit) taxes, net of federal tax benefit		(114,630	)	-0.91	%		418,384		6.2	%
Foreign earnings taxed at different rates		(4,781,284	)	-38.1	%		(3,615,004	)	-53.2	%
Change in valuation allowance for deferred tax assets		1,056,139		8.4	%		356,979		5.3	%
Other		37,017		0.3	%		585,906		8.6	%
Provision for income taxes		465,426		3.7	%		55,384		0.82	%

Deferred income tax assets and liabilities as of June 30, 2013 and 2012 consist of tax effects of temporary differences related to the following:

	Years Ended June 30,
	2013			2012
Net operating loss carry forwards	$	11,396,640		$	10,493,537
Other		182,987			29,951
Net deferred tax assets		11,579,627			10,523,488
Valuation allowance for deferred tax assets		(11,579,627	)		(10,523,488	)
Net deferred tax assets	$	-		$	-

(A)	United States of America

The Company has established a full valuation allowance as management believes it is more likely than not that these assets will not be realized in the future. The valuation allowance increased by $1,056,139 for the year ended June 30, 2013 mainly due to adjusting the Company's net operating loss carry forwards for the current year operating loss.

At June 30, 2013, federal and state net operating loss carry forwards were $31,594,869 and $4,486,769 respectively. Federal net operating loss carry forwards begin to expire in 2020, while state net operating loss carry forwards begin to expire in 2014. Due to both historical and recent changes in the capitalization structure of the Company, the utilization of net operating losses may be limited pursuant to section 382 of the Internal Revenue Code.

As of June 30, 2013, the Company does not have any unrecognized tax benefits related to various federal and state income tax matters. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.

The Company is subject to U.S. federal income tax, as well as various state and foreign jurisdictions. The Company is currently open to audit under the statute of limitations by the federal and state jurisdictions for the years ending June 30, 2010 through 2012. The Company does not anticipate any material amount of unrecognized tax benefits within the next 12 months.

The cumulative amount of undistributed earnings of foreign subsidiaries that the Company intends to permanently invest and upon which no deferred US income taxes have been provided is $43,672,745 as of June 30, 2013. The additional US income tax on unremitted foreign earnings, if repatriated, would be offset in part by foreign tax credits. The extent of this offset would depend on many factors, including the method of distribution, and specific earnings distributed.

(B) Pakistan

As of June 30, 2013 the Company's Pakistan subsidiaries had net operating loss carry forwards which can be carried forward six years to offset future taxable income. The deferred tax assets for the Pakistan subsidiaries at June 30, 2013 and 2012 consists mainly of net operating loss carry forwards in which the Company established a full valuation allowance as the management believes it is more likely than not that these assets will not be realized in the future.

Components of deferred tax asset - Pakistan
	Years Ended June 30,
	2013			2012
Net operating loss carry forwards	$	615,324		$	619,549
Total deferred tax assets		215,363			216,842
Less: valuation allowance		(215,363	)		(216,842	)
Net deferred tax asset	$	-		$	-

(C)	United Kingdom

As of June 30, 2013 the Company's UK subsidiaries had net operating loss carry forwards which can be carried forward indefinitely to offset future taxable income. The deferred tax assets for the UK subsidiaries at June 30, 2013 and 2012 consists mainly of net operating loss carry forwards in which the Company established a full valuation allowance as the management believes it is more likely than not that these assets will not be realized in the future.

Components of deferred tax asset - UK
	Years Ended June 30,
	2013			2012
Net operating loss carry forwards	$	278,993		$	438,900
Total deferred tax assets		83,698			131,670
Less: valuation allowance		(83,698	)		(131,670	)
Net deferred tax asset	$	-		$	-

- 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.

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