AmCham Poland Tax Session Warsaw, Poland Tuesday, January 25 2005

1. I N T E R N A T I O N A L E X E C U T I V E S E R V I C E S American Jobs Creation Act of 2004: what it means for US citizens and tax residents T A X AmCham Poland Tax Session Warsaw, PolandTuesday, January 25 2005

2. Agenda • Overview of US tax system • Working Familes Tax Relief Act of 2004 • American Jobs Creation Act of 2004 • What it includes • What it does not include • Program Considerations • IRS Publications • KPMG Frankfurt • US tax practice

3. Fundamentals of US Taxation • Self Assessment System • Filing Status • Resident vs. Nonresident • US Citizens and Greencard holders • Regular tax calculation with parallel Alternative Minimum Tax (AMT) calculation for taxpayers exceeding income thresholds • §911 Foreign Earned Income Exclusion • $80,000

4. Prologue ... • Working Families Tax Relief Act of 2004 • Signed into law on October 4, 2004 • Revenue-neutral bill • Accelerates the phase-in of individual tax provisions of the 2001 tax bill • Extends certain provisions that were due to expire • Preserves the 10% income tax bracket and “marriage penalty relief” • Extends the child tax credit at its current level of $1,000 through 2010, and creates a uniform definition of “qualifying child” for the purposes of the credit, the dependency exemption, etc. • Extends the higher alternative minimum tax exemption amounts for one more year (2005)

5. American Jobs Creation Act of 2004 • Signed into law October 22, 2004 • Most significant tax law changes since 1986 • Started as response to WTO dispute resolution panel finding • Grew into sweeping change of the tax law with major changes to corporate, individual and international areas of the law • Bill was not revenue-neutral, but rather increases the deficit

6. American Jobs Creation Act of 2004 • Key provisions affecting international assignees • Foreign tax credit provisions • Expatriate provisions • Foreign financial account reporting • Deduction of state and local sales tax • Increase in withholding from supplemental wage payments

7. Foreign Tax Credit Provisions • Translation of foreign taxes • Paid vs. Accrued Method • Under current accrued method • Average exchange rate for the tax year • Fluctuation between tax return rate versus spot rate when paid • New law allows taxpayers to make election to use the spot rate on the date tax was paid • Irrevocable election applies to all future tax years • Effective beginning in 2005

8. Foreign Tax Credit Provisions – continued • Translation of foreign taxes – continued • Making the election may be a gamble and should be considered case-by-case • Currency stability and exchange rate fluctuation • Circumstances which cause the election to be desirable in a given year may cause the election to be undesirable in a future year Program Impact: Moderate

9. Foreign Tax Credit Provisions – continued • Foreign tax credit carryover rules • Current law allows excess foreign taxes to be carried • Back two years • Remainder forward five years • New law allows excess FTC to be carried • Back only one year for credits generated beginning in 2005 • Forward ten years for credits generated 1999 or later

10. Foreign Tax Credit Provisions – continued • Longer carry forward period may decrease unused foreign tax credit • Extends the period after end of assignment that the taxpayer’s foreign travel is tracked • Shorter carry back period could result in situations where taxes are not creditable Program Impact: Major

11. Foreign Tax Credit Provisions – continued • Repeal of 90% FTC limitation for Alternative Minimum Tax (AMT) • Prior law limited foreign tax credit to 90% of the AMT • Created residual US tax liability of approximately 3% - 4% on foreign-source income • New law allows full foreign tax credit for AMT • Effective beginning in 2005

12. Foreign Tax Credit Provisions – continued • Outbound assignees to countries with a tax rate higher than the US tax rate • Residual US tax liability will be lower, lowering overall cost of foreign assignment • May reduce required US federal withholding during foreign assignment • Minimum tax credit carry forward tracking reduced Program Impact: Moderate

13. Expatriation Provisions • Expatriation provisions • Affects US citizens and green card holders: • Held green card in at least 8 out of the preceding 15 years; AND • Surrender their citizenship or green card; OR • Risk being characterized as abandoning green card while living abroad

14. Expatriation Provisions • New Law strengthens the expatriation rules (IRC §877) • Higher thresholds for presumption of US tax avoidance as principal purpose if: • Average annual income tax liability over 5-year period greater than $124,000; OR • Net worth is equal to or greater than $2 million, OR • Taxpayer has failed to certify compliance with US tax laws for prior five years • If either test is met, individual is subject to expatriation tax • No ability to counter presumed tax avoidance motive with ruling request available under prior law • Very narrow exceptions to expatriation tax • Dual citizens • Certain minors with minimal US contacts

15. Expatriation Provisions - continued • Expatriating individuals continue to be taxed as U.S. citizens • Until they fulfill expanded reporting requirements pertaining to expatriation (DOS or DHS) • Form 8854-Expatriation Initial Information Statement • Citizens file forms with consular office or federal court • Long Term Residents file with the IRS by attaching form to the return • After expatriation US nonresident tax and reporting requirements will be much more onerous than on nonresidents who never held a green card • Sanctions imposed on individuals who return to the U.S. for extended periods of time • Generally, more than 30 days, with exceptions • Effective date: Expatriations after June 3, 2004

16. Expatriation Provisions - continued • Taxpayers should ... • Consult immigration counsel regarding consequences of claiming IRC §911 exclusion for green card holders • Be careful not to cause inadvertent abandonment of green card • Be informed of risks Program Impact: Major

17. Foreign Financial Account Reporting-Form TD F90-22.1 • Prior law had penalty for willful reporting requirement violation • Applies to foreign bank and securities accounts • New penalty for non-willful failures to file • Up to $10,000 • Not being aware of the rule does not constitute reasonable cause • New penalty for willful reporting violations • Greater of $100,000 or 50% of the balance in the account • May also be subject to criminal penalties of up to $500,000 and prison sentencing

18. Foreign Financial Account Reporting • Impact on taxpayers is significant • Some taxpayers may object to reporting foreign accounts • Applies to US nationals with corporate bank account reporting requirements • Program materials must advise of new penalties • Inform assignee that company will not indemnify • Change policies to document Program Impact: Major

19. Deduction for State and Local General Sales Tax • Under new law, taxpayers may elect to deduct state and local general sales taxes in lieu of income taxes • Applies to 2004 and 2005 only • Greater of actual receipts or amount per IRS tables • Impact on foreign assignment programs • Should be minimal for employee in/from states with income tax • Communications on implementation with employees Program Impact: Moderate

20. Increase in Supplemental Withholding Rates • Under current law, supplemental wage payments to employees are subject to withholding at 25% • If a supplemental wage payment exceeds $1 million when added to all payments previously made during the year, the withholding rate will be the maximum marginal tax rate (currently 35%) • Impact on foreign assignment programs: hypothetical withholding rates should mirror actual Program Impact: Minor

21. Additional Tax Provisions • Application of Basis Rules to Pension Plans • Exclusion of ISOs and ESPP Options from wages • Sale of Principal Residence Aquired in Like-Kind Exchange • Expensing of Business Assets • Repeal of Foreign Holding Company Rules and Foreign Investment Company Rules

22. IRS §911-Foreign Earned Income and Housing Exclusions • Act does not repeal or amend these exclusions • May 2004 US Senate passed a bill imposing caps, however, it was dropped during the legislative process • HOWEVER, expect continued discussion to include caps or to eliminate these provisions • Significant revenue source

23. Updated IRS Publications for Expatriates with US Tax Compliance Obligations • Pub 54: Tax Guide for US Citizens and Resident Aliens Abroad • Pub 513: Information for Visitors to the United States • Pub 1542: Per Diem Rates (for travel within the United States) • Pub 1187: Specifications for Filing Form 1042-S, Foreign Person‘s US Source Income Subject to Withholding, Electronically or Magnetically • ITIN and Form W7-Information concerning the requirement for residents or nonresidents applying for an Individual Taxpayer Identification Number • Visit the IRS Website Forms and Publications at http://www.irs.gov

24. Jobs Creation Act of 2004 Questions?

25. KPMG Frankfurt-US tax return services • US tax services provided in Frankfurt and Munich • 3 managers and 13 professionals • Compliance services in the areas of - individual income tax (residents and nonresidents) - gift and estate tax - partnerships and corporations investing in the US • Consulting services in the areas of - individual income tax - gift and estate tax - structuring of US investments - tax equalization policies

26. KPMG Frankfurt US Team Members • Dagmar Gessner Gaspar, C.P.A. dgessner-gaspar@kpmg.com 49(69) 9587 2250 direct 49(69) 9587 2239 fax • Rashel Meiworm, C.P.A. rashelmeiworm@kpmg.com 49(69) 9587 2026 direct 49(69) 9587 2239 fax