Barrett Presentation March 0805

Miami

2004 JOBS ACT AND WORLD TRADE

James H. Barrett

World Trade Center of Palm Beach

1111 Brickell Avenue, 17th Floor Miami, FL 33131 (305) 789-8900

Palm Beach, FL March 8, 2005

2004 AMERICAN JOBS CREATION ACT (the “ACT”) NEW TAX ACT LARGELY THE RESULT OF WTO TRADE DISPUTE U.S. ETI REGIME PROVIDES REDUCED TAX RATE FOR MANUFACTURING EXPORTERS

NEW DOMESTIC PRODUCTION AND REPATRIATION REGIMES ENACTED U.S. CONGRESS REPEALS ETI REGIME

EU OBJECTS IN WTO

WTO RULING IN FAVOR OF EU

©2005 Baker

Repeal of ETI – Overview (cont.)

• Congress repealed ETI to comply with U.S. obligations under the World Trade Organization (“WTO”), which ruled that the ETI provisions constituted illegal export subsidies.

• EU Trade Commissioner to recommend a “suspension” of previously-imposed trade sanctions as of January 1, 2005 but will ask for a new WTO ruling on the ETI-repeal transition rules.

• The EU and the US currently are awaiting the WTO’s decision after which a negotiated settlement is anticipated.

©2005 Baker

Repeal of ETI - Overview • Eliminates all provisions of the ETI exclusions, effective December 31, 2004, but provides for a two-year phase-out of ETI benefits.

– 80% of prior benefit in 2005 – 60% of prior benefit in 2006 • Revenue impact of repeal of ETI regime: $49.2 billion • Other revenue raisers resulted in total revenue increase of $146.4 billion • Offsetting revenue reductions totaled $146.4 billion so that the Act was revenue neutral ©2005 Baker

Domestic Production Deduction (Code §199) • The Act provides a new deduction for income arising from qualified production and services activities performed in the United States, and will effectively reduce the tax rate on such income to 31.85 percent after an extended phase-in period – The deduction is not contingent on products being exported or services being provided overseas – Phase-in is as follows: 2005-2006 – 1/3rd of the benefits (i.e. a 3% deduction) 2007-2008 – 2/3rds of the benefits (i.e. a 6% deduction) After Jan. 1, 2010 – 100% of the benefits (i.e. a 9% deduction) ©2005 Baker

Domestic Production Deduction Qualified Production Activities Income •

Deduction is based on “qualified production activities income” which is net income from: 1.

The lease, rental, license, sale, exchange or other disposition of: A. Tangible personal property, computer software or sound recordings which were manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part in the U.S. B. Electricity, natural gas, or potable water produced by the taxpayer in the U.S. C. Any non-explicit film produced by the taxpayer if 50% of wages are paid for services preformed in the U.S.

2.

Construction performed in the U.S., or

3.

Engineering or architectural services performed in the U.S.

©2005 Baker

Domestic Production Deduction • The deduction is limited to 50% of taxpayer’s wages.

• When fully effective, the deduction will also be limited to the lesser of 9% of “qualified production activities income” or taxable income.

• No carryforward/carryback mechanism (no benefits in loss years).

• Revenue effect : $76.5 billion.

©2005 Baker

Homeland Reinvestment – Repatriation of Earnings (Code §965) Overview • 85% DRD for dividends in excess of historical average.

• Effective rate of tax on excess eligible dividends is 5.25%.

• Cash dividends, including certain cash amounts treated as dividends.

• One-Time Opportunity – Taxpayers can pick one of two fiscal years (generally will pick 2005).

• Estimated revenue effect $3.3 billion.

©2005 Baker

Homeland Reinvestment US US

Foreign-Low Tax Jurisdiction

Š2005 Baker

Limitation Based on Repatriation History • Only applies to dividends in excess of average repatriation levels for the 5 most recent tax years ending on or before June 30, 2003 • High and low years are excluded from the average (unless foreign subsidiary has fewer than 5 tax years) • Repatriation level based on more than cash dividends • Based on returns filed or amended before June 30, 2003

©2005 Baker