The Tax Structure Of Foreign Mining Investments In The United States

INTRODUCTION The tax structure of foreign mining investment into the United States has a significant impact on the financing and the profitability of the operation. For these reasons, it is critical for the foreign investor to develop and implement a well planned tax strategy that will enable its venture to: (1) reduce its U.S. income tax liability (2) lower U.S. withholding taxes when funds are transferred from the United States, and (3) decrease or defer home country taxation on its U.S. earnings ALTERNATIVE FORMS OF INVESTMENT A threshold business and tax consideration is the form in which the investment is to be made. The most common alternatives include: forming or acquiring a U.S. mining corporation, directly establishing a branch mining operation, or entering into a joint venture or partnership with a U.S. mining company. U.S. Corporations The most common structure through which foreign mining companies engage in business in the United States is to form a U.S. mining corporation. Forming a U.S. Corporation. If the investor decides to establish a new U.S. corporation the organization is relatively simple. No distinctions are made in the United States between "public" and "private" forms of incorporation. Minimum share capital is not usually required and share capital may consist of shares with no par value. Since corporate law is the responsibility of the individual states, the foreign investor must choose a state in which to incorporate. If appreciated mining property is transferred to a corporation solely in exchange for stock or securities in that corporation, and the transferors have control of the corporation (defined as at least 80 percent of all voting shares and at least 80 percent of all other shares) immediately after the exchange, no gain or loss will be recognized. However, if the transferors receive cash or other mining properties in addition to stock, any resulting gain may, in certain situations, be taxed to the extent of the cash and the fair market value of other property received. Acquiring an Existing U.S. Corporation. Acquiring an existing U.S. mining corporation is not as straight-forward as forming a corporation. This alternative may be accomplished through either a stock or an asset acquisition. Generally, with a stock acquisition the purchaser inherits all of the business and tax attributes of the former mining corporation. If the investor is able to acquire mining assets, however, the purchaser will usually be able to avoid any unknown or hidden liabilities that could be attached to an existing corporation. Another principal advantage in acquiring assets is that the purchase price may be directly allocated to the acquired mines or other mineral-related assets with the result that the assets' depreciable base may be increased. Assuming the domestic seller and the foreign purchaser can agree, it is generally advisable to allocate the purchase price in the sales agreement to specific individual assets. From the foreign investor's standpoint, it is preferable to allocate the purchase price to depreciable assets such as buildings and equipment versus an allocation to mineral land holdings or intangibles such as goodwill, which are generally not depreciable. It is not uncommon, however, for a seller mining company being acquired to insist for tax reasons that the investor purchase shares rather than assets. If the foreign