LEADERSHIP FLY-IN Washington, D.C. June 26-28, 2012 US GAPP LEADERSHIP FLY-IN Washington, D.C. June 26-28, 2012 US GAPP

Congressional Tax Issues 2012 J.V. Schwan Director Government Affairs & Public Policy

Baxter Tax Messaging Lowering the corporate rate and adopting a territorial system could help: CREATE JOBS IN THE US: Baxter employs over 20,000 individuals in the U.S., with 2205 US jobs supporting our overseas investments -- desirable, high quality jobs. In addition, we have over 11,000 manufacturing employees in the United States. INCREASE EXPORTS AND FOREIGN SALES: At Baxter, 60% of our sales are outside the U.S. We export over a billion dollars- $300 million in finished products and over $700 million in US manufactured components that support our foreign facilities. Lowering the corporate rate and allowing profits to flow back to the U.S. would help our exports. INCREASE GLOBAL COMPETITIVENESS: Foreign-based competitors enjoy lower tax rates at home and most are allowed to exempt foreign profits from tax. This gives them a competitive advantage over U.S.-based companies, both in pricing products and in bidding for acquisitions.

Agenda Budget Outlook Immediate Tax and Fiscal Issues Baxter’s Corporate Tax Issues

Budget Outlook

Budget Deficits Continue Source: Office of Management and Budget

Tax Revenues Below Historical Average/Expenditures Above Historical Average Source: Office of Management and Budget

Percentage of Taxes Collected by Source Corporate tax collection remains modest compared to other sources

Budget Outlook Takeaways Revenue/Expenditure trajectory is unsustainable Current budget expected to drive election debate (cut vs. tax) Current budget led to the first downgrade of US Debt- downgraded from AAA to AA+

Immediate Tax and Fiscal Issues

Approaching the “Fiscal Cliff” If Congress fails to act by the end of the year: Taxes increases for individuals and corporations and Significant spending cuts take effect.

Tax Increases Corporate: Research and Development Tax Credit is not renewed (currently expired) Tax deductions for “bonus depreciation” on capital expenditures is not renewed (currently expired) Individual: Top four individual rates, currently 35%, 33%, 28%, 25%, increase to 39.6%, 36%, 31% and 28%. Capital gains increase from 15% to 20% Dividend rate increases from 15% to individual rates. Above list is of most significance to Baxter. Other provisions also expire.

Spending Cuts As part of last summer’s deal to raise the debt ceiling, Congress agreed to draconian budget cuts (sequestration) unless Congress agreed to other cuts or revenue increases. To date, Congress has failed to act. If Congress doesn’t act, the planned sequester will slash the federal budget to the tune of $1.2 trillion over 10 years. The reduction includes $500 billion in defense spending and $123 billion in payments to Medicare providers.

Immediate Tax and Fiscal Issues Takeaways The looming tax increases and spending cuts put corporate tax reform “in play” for 2012, but will most likely be addressed in 2013 In 2012, Congress will do one of three things on taxes and spending: 1. Strike a long-term “grand bargain” (5%) 2. Fail to act (30%) 3. “Punt”-extend the status quo for six months (65%)

Baxter’s Corporate Tax Issues

What Kind of Corporate Tax Code do We Want? We need corporate tax code that creates jobs, enhances global competitiveness and increases exports. We need a corporate tax code that aligns the U.S. rate with international norms and unlocks foreign cash to the US. We need a corporate tax code that allows Baxter to fairly compete with foreign companies.

President’s Corporate Tax Proposal Beneficial Elements: Reduces the corporate rate from 35% to 28%. Provides a lower tax on manufacturing activities in the U.S. Provides for a permanent Research and Development Tax Credit. Detrimental Elements: Creates a minimum tax on all overseas profits Maintains a “word wide” taxation system Baxter Position: Increase in international taxes far outweigh the lower rate and R&D credit

Republican Corporate Tax Proposal Positive Elements: Reduces the corporate rate from 35% to 25%. Provides for a territorial tax system. Negative Elements: Effectively creates a minimum tax on all overseas profits Does not clarify what other deductions will be removed to achieve a 25% rate. Baxter Position: Increases in international taxes far outweigh the lower rate and adoption of a territorial system.

Baxter Tax Messaging Lowering the corporate rate and adopting a territorial system could help: CREATE JOBS IN THE US: Baxter employs over 20,000 individuals in the U.S., with 2205 US jobs supporting our overseas investments -- desirable, high quality jobs. In addition, we have over 11,000 manufacturing employees in the United States. INCREASE EXPORTS AND FOREIGN SALES: At Baxter, 60% of our sales are outside the U.S. We export over a billion dollars- $300 million in finished products and over $700 million in US manufactured components that support our foreign facilities. Lowering the corporate rate and allowing profits to flow back to the U.S. would help our exports. INCREASE GLOBAL COMPETITIVENESS: Foreign-based competitors enjoy lower tax rates at home and most are allowed to exempt foreign profits from tax. This gives them a competitive advantage over U.S.-based companies, both in pricing products and in bidding for acquisitions.

Device Tax Issue: The Affordable Care Act created a 2.3% tax on sales of medical devices effective in Impact to Baxter: Preliminary estimates suggest our liability may at least $30 million in Outlook: House voted to repeal the tax. Legislation is stalled in the Senate and the Administration is unlikely to support repeal. Baxter Message: Repeal the device tax.

Agenda Budget Outlook Immediate Tax and Fiscal Issues Baxter’s Corporate Tax Issues

Budget Outlook