content_image/129526.jpg content_image/129527.jpg
A reconciliation between the Company’s effective income tax rate and the U.S. Federal statutory rate is as follows: 

<img src='content_image/129526.jpg'>

The Company’s deferred tax assets and liabilities are comprised of the following at December 31: 

<img src='content_image/129527.jpg'>

At December 31, 2004, Cognizant has estimated net operating loss carryforwards for U.S. tax purposes of approximately $94,200. For Federal purposes, these losses have expiration dates ranging from December 31, 2022 through December 31, 2024. For state purposes, the date of expiration varies but will generally be less than or equal to the Federal expiration period. The Company has foreign net operat- ing loss carryforwards of approximately $8,000, of which approximate- ly $6,700 relates to pre-acquisition net operating losses. The Company has recorded a full valuation allowance on the foreign net operating loss carryforwards. If tax benefits are recognized through reduction of the valuation allowance, approximately $2,300 of such benefits will reduce goodwill. The foreign net operating loss carry- forwards do not have an expiration date. 

Cognizant’s Indian subsidiary, Cognizant India, is an export-oriented company, which, under the Indian Income Tax Act of 1961 is entitled to claim tax holidays for a period of ten consecutive years for each Software Technology Park (“STP”) with respect to export profits for each STP. Substantially all of the earnings of Cognizant India are attributable to export profits. In 2004, the ten-year tax holiday period 

expired for one STP and, accordingly, the export profits for that STP are subject to income tax. Export profits from the remaining STPs in India are currently entitled to a 100% exemption from Indian income tax. Under current law, these tax holidays will be completely phased out by March of 2009. For the years ended December 31, 2004, 2003 and 2002, the effect of the income tax holiday was to reduce the overall income tax provision and increase net income by approximate- ly $24,208, $12,423 and $7,683, respectively, and increase diluted EPS by $0.17, $0.09 and $.06, respectively. 

Prior to January 1, 2002, it was the Company’s intent to repatriate all accumulated earnings from India to the United States. Accordingly, Cognizant has provided deferred income taxes in the amount of approximately $24,115 on all such pre–2002 undistributed earnings. During the first quarter of 2002, Cognizant made a strategic decision to pursue an international strategy that includes expanded infrastruc- ture investments in India and geographic expansion in Europe and Asia. As a component of this strategy, Cognizant intends to use 2002 and future Indian earnings to expand operations outside of the United States instead of repatriating these earnings to the United States. Accordingly, effective January 1, 2002, pursuant to APB No. 23, Cognizant no longer accrues incremental U.S. taxes on all Indian earnings recognized in 2002 and subsequent periods as these earn- ings are considered to be indefinitely reinvested outside of the United States. As of December 31, 2004, the amount of unrepatriated Indian earnings upon which no incremental U.S. taxes has been recorded is approximately $155,858. If such earnings are repatriated in the future, or no longer deemed to be indefinitely reinvested, Cognizant will accrue the applicable amount of taxes associated with such earnings. Due to the various methods by which such earnings could be repatri- ated in the future, it is not currently practicable to determine the amount of applicable taxes that would result from such repatriation. 

The lower effective income tax rate of 17.9% for the year ended December 31, 2004 as compared to 20.6% for the year ended December 31, 2003, is principally attributed to India’s conversion of the withholding tax on dividends to an additional corporate tax on the distribution of profits. 

Deferred U.S. income taxes on unremitted earnings from other foreign entities have not been provided for as such earnings are deemed to be permanently reinvested. 

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was enacted into law. The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is sub- ject to a number of limitations, and as of today, uncertainty remains as to how to interpret numerous provisions in the Act. As such, the Company is not yet in a position to decide on whether, and to what extent, Cognizant might repatriate foreign earnings that have not yet been remitted to the U.S. Under the provisions of the Act and sub- 

