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November 9, 2004 --
The American Jobs Creation Act of 2004 (AJCA) signed
by President Bush on
October 22, 2004
, finally put to rest the case of the World Trade
Organization’s (WTO) argument that the Extraterritorial
Income Exclusion (EIE) was an illegal export subsidy.
The AJCA repealed the EIE and replaced it with a
Production Activities Deduction (PAD).
The EIE was enacted in 2002 shortly after the WTO
declared the longstanding Foreign Sales Corporation benefit
was an illegal export subsidy.
Congress repealed the FSC and enacted the EIE to
replace the lost FSC benefit.
Basically, both the FSC and EIE benefits enabled
U.S. Exporters who produced products in the
U.S.
for consumption outside the
U.S.
to exclude a portion of their income from
U.S.
taxation. In the
AJCA, Congress allowed for a two-year transition period
during which companies will be allowed to take 80% of the
EIE benefit in 2005 and 60% of the EIE benefit in 2006.
The new production activities deduction
allows a 3% deduction of the lesser of a taxpayer’s net
income from
U.S.
manufacturing, production, growth, or extraction activities,
U.S.
film production,
U.S.
construction activities, and
U.S.
engineering and architectural services or the taxpayers
taxable income. In
the case of an individual, modified adjusted gross income
will be applied. The
deduction percentage will increase as follows:
- 2005
or 2006:
3%
- 2007
through 2009:
6%
- 2010
and thereafter:
9%
However, the deduction may not exceed
50% of the W-2 wages paid by the taxpayer for the tax year.
The key point of this legislation is
that it brings to an end many years of U.S. efforts to
provide tax benefits to exports of U.S. manufactured goods,
and replaces it with benefits to U.S. manufactured goods,
regardless of where the goods are sold.
For more information, contact Bill
Burns at 215-564-1900.
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