notes to consolidated financial statements Diodes Incorporated and Subsidiaries Note 8 – Income Taxes Note 7 – Valuation of Financial Instruments The Company’s financial instruments include cash,  accounts receivable, accounts payable, working capital line  of credit, and long-term debt. The Company estimates the  carrying amounts of all financial instruments described  above to approximate fair value based upon current mar- ket conditions, maturity dates and other factors. The components of the income tax provisions are as follows: Reconciliation between the effective tax rate and the statutory tax rates for the years ended December 31, 2002,  2003, and 2004 are as follows: In accordance with the current taxation policies of  the People’s Republic of China (PRC), Diodes-China  received preferential tax treatment for the years ended  December 31, 1996 through 2004. Earnings were subject  to 0% tax rates from 1996 through 2000, and 12% from  2001 through 2004. Due to a $15.0 million permanent  re-investment of Diodes-China earnings in 2004, earn- ings from 2005 through 2007 will continue to be taxed at  12% (one half the normal central government tax rate).  Also due to the permanent re-investment, the Company  recorded a $1.2 million tax refund (net of U.S. taxes) in  the fourth quarter of 2004. Earnings of Diodes-China  are also subject to tax of 3% by the local taxing authority  in Shanghai. The local taxing authority waived this tax  from 2001 through 2004, and is expected to waive this  tax in 2005, but can re-impose the tax at its discretion.  For 2004, Diodes-Shanghai’s effective tax rate was 15%.  As an incentive for the establishment of Diodes-Shang- hai, beginning in 2005, earnings will be exempted from  income tax for two years. Then, beginning in 2007, earnings will be subject to 50% of the standard tax rate of 15% for the following three years. Earnings of Diodes-Taiwan are currently subject to a  tax rate of 35%, which is comparable to the U.S. Federal  tax rate for C corporations. Earnings of Diodes-Hong  Kong are currently subject to a 17.5% tax for local sales  and/or local source sales, all other sales are foreign  income tax-free. In accordance with United States tax law, the  Company receives credit against its U.S. Federal tax liability for corporate taxes paid in Taiwan and China.  The repatriation of funds from Taiwan and China to the Company may be subject to Federal and state income taxes.  40 2002  2003  2004 Current tax provision Federal  $ – $1,167,000  $ 4,922,000 Foreign  1,231,000  1,183,000  4,745,000 State 1,000  40,000  461,000 1,232,000  2,390,000  10,128,000 Deferred tax expense (benefit)  497,000  70,000  (3,614,000) Total income tax provision $1,729,000 $2,460,000  $ 6,514,000 2002  2003  2004 Percent of  Percent of Percent of  Amount   pretax earnings  Amount  pretax earnings  Amount   pretax earnings Federal tax  $ 2,669,000  34.0  $ 4,417,000  34.0  $11,131,000  34.0 State franchise tax, net of Federal benefit  455,000  5.8  753,000  5.8  1,588,000  4.8 Foreign income tax rate difference  (1,409,000)  (18.0)  (2,808,000)  (21.6)  (6,629,000)  (20.2) Other  14,000  0.2  98,000  0.8  424,000  1.3 Income tax provision  $ 1,729,000  22.0  $ 2,460,000  19.0  $ 6,514,000  19.9