CHAPTER 3 SETTING UP THE BUSINESS IN THE HOST COUNTRY
| Jurisdiction | United States |
(Sep 2015)
SETTING UP THE BUSINESS IN THE HOST COUNTRY
Senior Vice President, Tax
Goldcorp Inc.
Vancouver, British Columbia
D. Scott Farmer
Principal
Mining Tax Plan LLC
Centennial, Colorado
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MARK A. RUUS has been Senior Vice President of Tax at GoldCorp Inc. since July 8, 2010 and also served as its Vice President of Tax from November 15, 2006 to July 8, 2010. Mr. Ruus is responsible for global tax planning, tax-related support of corporate development and finance activities, and tax compliance. He joined GoldCorp in July 2006. Mr. Ruus served as Vice President-Taxation with Placer Dome where he played leading tax roles for 10 years. Prior to this, he spent 14 years with Price Waterhouse (premerger with Coopers & Lybrand) servicing primarily international resource companies. He is a Chartered Accountant and holds a Bachelor of Commerce from the University of Calgary.
D. SCOTT FARMER, Principal with Mining Tax Plan LLC, specializes in federal, state, and foreign taxation of precious metal, non-metallic ores, coal, and quarry mining companies. He has extensive experience with extractive and natural resource industries. He has provided consulting services to clients in such areas as mergers and acquisitions, corporate distributions and restructuring, and foreign investment. Prior to establishing Mining Tax Plan LLC in July 2007, Scott was the tax mining leader at a Big Four accounting firm. Scott has over 35 years of tax consulting experience and has also conducted numerous seminars on U.S. Income Taxation of Mining. He is currently working with mining clients in North and South America, Europe, and Australia.
Mining is a global business and companies must go where the mineral deposits reside, regardless of where the head office may be located. Canada has a significant number of mining company head offices and mining represents a significant portion of the Canadian Gross Domestic Product ("GDP"). The United States ("U.S.") also has a number of mining company head offices but mining represents a less significant portion of the U.S. economy. Outside of North America the United Kingdom, South Africa, Switzerland, and Australia come to mind as to where significant numbers of global mining companies reside.
In the interest of limiting the scope of the discussion to the majority of the expected audience at the Vancouver Conference the discussion will focus on outbound investment from a Canadian and U.S. home country perspective. However many of the concepts discussed will be relevant no matter where a mining company's home country may be.
Cradle to Grave Planning - Mining Exploration, Development, Operations, Reclamation, and/or Disposition
Planning an investment in a host country requires advanced planning in order to steer clear of future problems before they present themselves. While tax planning is an important part of structuring investments into foreign jurisdictions the primary issue is how to legally and effectively set up operations in a country that will allow the potential future exploration, development, operation, closure and or disposition of the operation while allowing a return of invested capital and a return of profits. Once the options available have been identified or an effective legal and operational structure has been determined, tax planning can be overlaid to optimize the after-tax result. In some circumstances the legal structure may change as the mining project progresses through the mine development cycle. While typically a mining company will set-up a structure with full intent of developing the project, it is common that projects and mines are sold at various stages of the development and operation and therefore good planning also considers a structure that allows the potential disposition of the project or mine without incidence of significant taxes payable. For example in early stage exploration a company may have the choice to hold the exploration permits in a branch of a foreign company, thereby allowing exploration costs to be deductible in the home country and later incorporate that branch once the exploration project advances to a more likely to be developed project. Some countries only allow deductions for reclamation on a cash basis and therefore this may result in tax losses in later years and the tax law may not allow loss carry-backs. If a company already has profitable operations in a country, this might influence how the legal and operation structure would be set-up.
The discussion herein is intended to be thought provoking but not necessarily inclusive of all potential situations, as each company, project, and country will have unique facts, circumstances and applicable laws.
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Understanding the Mining Law First
It should be of no great surprise that given that we are discussing the mining business that we must first understand the local mining law before determining a legal and operation structure in the host country. While Canada and the U.S. are both common law countries, given the historic colonization of most of central and South America by Spain and Portugal these countries are generally civil law based and typically based on the Napoleonic code. The primary distinction between the two systems is that in most civil law countries the mineral right exploration permits are contractual rights to extract and the permit owners do not physically own the minerals while they are in the ground. In common law jurisdictions mining companies can actually own the minerals in the ground in certain circumstances, although contractual rights to extract may also exist.
Certain countries allow mineral exploration permits to be held in branches of foreign companies where as others do not. A number of countries allow contractual third party royalties to be given on the mining concessions. Certain countries allow exploration permits to be granted to branches but force companies to incorporate those branches once the project reaches the exploitation phase. These countries often mandate a government ownership in the local mining company.
Once a mineral deposit reaches the development project phase, some countries' mining laws may not permit exploitation permits to be granted to foreign legal entities. As well, once a project reaches the development stage the mining company will expect to be able to utilize the costs incurred in the host country to reduce taxable income in that host country. If a mineral exploration project was originally structured as a branch to allow the exploration costs for example to be deductible in the home country the host country law may force the incorporation of the branch for exploitation which may result in some recapture of the tax benefits of the deduction of the foreign exploration costs in the home country. Monitoring the exploration project results may alert a tax planner to locally incorporate an exploration project before it becomes too valuable, thereby avoiding a significant tax liability from being incurred as a result of an increase in value due to future development activity.
The mining law dealing with the mine operation phase generally is intertwined with the mining law at the development stage. If the country law forces foreign companies to incorporate in order to receive an exploitation permit, the project at the operational phase will remain within the local corporation. Some countries allow branches to operate mines which depending on the other local law may make operations less or more burdensome from a governance or currency perspective.
Understanding the Corporate, Branch and Partnership Law
Once one has obtained a general understanding of the applicable host country mining law it is necessary to consider the law applicable to and the various choices of legal entities available. Depending on whether the mining investment is ultimately held by a Canadian or U.S. ultimate parent company may influence the choice of the legal entity utilized. This typically is for tax planning reasons. Most countries allow branches and limited liability companies in the form of corporations. Partnerships are also common in common law and civil law jurisdictions and popular in Canada and the U.S.
Many countries now offer legal entities that offer characteristics that appear to be a hybrid between a partnership and a corporation. In the U.S. these entities are Limited Liability Companies ("LLC"). In most South American countries these entities are known as an SRL ("Sociedad de Responsabilidad Limitada").
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Similar legally in many ways to corporations, for U.S. income tax purposes these entities can be treated as flow-through or look-through entities. Historically in Chile the SRL form allowed for the tax deferral of Chilean taxes by providing an avenue to reinvest profits subject to tax in Chile. In fact Chile allows the refund of income taxes paid by one legal entity where the after-tax profits are reinvested in another SRL, with tax losses to offset the previously taxed profits. The Canadian foreign affiliate taxation rules were primarily drafted before LLC and SRL legal forms existed. For Canadian income tax purposes one needs to ensure that the SRL entity will be treated as a corporation by the Canada Revenue Agency to ensure that the application of the Canadian foreign affiliate taxation rules will be as expected.
Branches offer benefits such as allowing easier contracting for services, as the legal entity engaging the services in the home and host country will be the same, potentially reducing the number of contracts that are required to be negotiated and signed. It also reduces the number of board meetings and other administrative functions and filings necessary. Branches, where legally possible, are therefore popular during early stages of exploration and with junior mining companies. It should be noted that...
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