INTERNATIONAL FINANCE

International Finance

International Finance

Answer (a)

The focus of the American Jobs Creation Act of 2004 is the repeal of the Extraterritorial Income Exclusion (ETI) and the replacement of ETI with the domestic manufacturing deduction. Potential beneficiaries of this deduction include not only manufacturers, but also handlers of agricultural products; software companies; film production companies; electric, gas, and water companies; construction companies; engineering firms; and architectural firms. While the final regulations have not yet been issued for the domestic manufacturing deduction, it is not too early to start planning for tax purposes.

The American Jobs Act creates a 3, 6 or 9 percent deduction for domestic manufacturing activities. This deduction applies to all taxpayers deriving income from qualified domestic production activities, regardless of whether they are exporters. The deduction phases in at 0 percent for 2004, 3 percent for 2005-2006, 6 percent for 2007-2009 and 9 percent for years thereafter.

The deduction is a percentage of the lesser of the qualified production activities income (QPAI) of the taxpayer for the tax year or the taxable income for the tax year. Companies with net operating losses or net operating loss carryovers that eliminate current year income will not be able to take advantage of this deduction. The deduction is further limited by wages; the deduction cannot exceed 50 percent of W-2 wages, regardless of whether employees are engaged in qualifying production activities.

Part (b)

Analysis of advantages and disadvantages of domestic production

In addition to domestic production, the company also succeeded in expanding foreign markets through exports and licensing.

Compared to the export licensing, the benefits of domestic production for businesses

1. lower transportation costs. As for companies that agree to first horizontal national production are concerned, transport costs tend to be taken into account in the cost of production. When a company produces low cost and weight, such as margarine production of paper, etc., compared to exports, domestic production will be enough low-cost transport. But for products with a high ratio of cost and weight, transportation costs minor component of total landed cost. In this case, the advantage of domestic production for export is very limited.

2. Prevention of traffic restrictions. For various reasons, many countries, it may be inappropriate in many ways for businesses to reach their potential market by exports alone. The basic shape of the barrier to export is the main barrier to imports. Many governments place tariffs on imported goods and to restrict imports by imposing quotas, because it makes exports unprofitable. On the other hand, it increases the profitability of domestic production. Thus, entering the country, prices up, but there is great potential for growth markets like China, many firms choose domestic production and / or licenses to expand their markets overseas .

3. The advantage of tax benefits. In some developing countries, on the one hand, they must put tariffs on imported goods in order to protect their businesses, on the other hand, they also strive to create a promotional environment conducive to attracting production interior, which provides capital, technology transfer, institutional and managerial skills, as ...