E_mg_GB_03_vorne-29_3_04

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Since fiscal 2001/2002, a uniform corporation tax rate of 25% and the so-called half-income system
of taxation have applied to German limited companies. Under Germany’s flood victims’ solidarity
legislation of September 19, 2002, the rate of German corporation tax for fiscal 2003 was raised on a
one-off basis by 1.5 percentage points to 26.5%.
At December 31, 2002, German companies therefore calculated deferred taxes for fiscal 2003 based
on the corporation tax rate of 26.5% (28% including the solidarity surcharge) applicable for this year.
German companies’ computation of deferred taxes was thus based on the pertinent tax rates of
26.4% and 28.0% and the relevant trade tax rates of 13.3% and 13.0% respectively. The calculation
of German companies’ deferred taxes was therefore based on a total rate of 39.7% and 41.0% respectively.
The impact of this tax increase due to the flood victims’ solidarity legislation, which was
limited to one year, was not of material importance. At December 31, 2003, German companies are
calculating their deferred taxes based on an overall tax rate of 39.7%.
Deferred taxes are computed using national tax rates which, according to the enacted law in the
respective countries at the balance sheet date, will apply on the date on which the timing differences
are likely to be eliminated or net operating loss (NOL) carryforwards are likely to be utilized.
The following breakdown of tax expense for fiscal 2003 is based on an overall tax rate of 39.7% and
reconciliation to the effective tax rate of 30.6%:
1/1/2003 - 10/1/2002 -
12/31/2003 12/31/2002
u ’000 t ’000
Expected income tax benefit (prior year: income tax expense) – 71,870 10,391
Non-deductible expenses
Foreign tax rate differential (including change in
12,068 1,365
valuation allowance on deferred tax assets) – 12,910 3,350
Effect of deferred taxes from affiliated and related companies 13,087 9,128
Change in valuation allowance on deferred tax assets – Germany 12,960 45,117
Other – 8,726 – 11,318
Actual income tax benefit (prior year: income tax expense) – 55,391 58,033
Deferred tax assets and liabilities are recognized for all temporary differences between the amounts
reported in the tax accounts and those in the U.S. GAAP financial statements included in the consolidated
accounts. Deferred taxes are also recognized in relation to various consolidation measures.
Furthermore, deferred tax assets are recognized for losses carried forward. If deferred tax assets are
unlikely to be realized, a valuation allowance is reported. Deferred tax liabilities on retained earnings
at foreign subsidiaries of mg technologies ag were not established, because the vast majority of these
earnings are not intended to be distributed in the future either, but constitute a permanent investment.
The calculation of the deferred taxes not reported would have involved a disproportionate amount of
time and effort. The primary components of deferred tax assets and liabilities and the related valuation
allowances result from adjustments in the following items: