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INCOME TAXES:
 12 Months Ended
Dec. 31, 2011
INCOME TAXES:  
INCOME TAXES:

NOTE 8-INCOME TAXES:

 

The components of the provision for income taxes are as follows:

 

 

 

Years ended December 31,

 

(in millions)

 

2011

 

2010

 

2009

 

U.S. federal and state:

 

 

 

 

 

 

 

Current

 

$

(2.4

)

$

(11.2

)

$

3.3

 

Deferred

 

(45.3

)

6.2

 

59.1

 

Uncertain tax positions

 

(0.4

)

34.8

 

(63.6

)

 

 

(48.1

)

29.8

 

(1.2

)

Foreign (Peru and Mexico):

 

 

 

 

 

 

 

Current

 

1,238.7

 

843.5

 

463.2

 

Deferred

 

(86.3

)

(5.2

)

7.8

 

 

 

1,152.4

 

838.3

 

471.0

 

Total provision for income taxes

 

$

1,104.3

 

$

868.1

 

$

469.8

 

 

The source of income tax is as follows:

 

 

 

For the years ended December 31,

 

(in millions)

 

2011

 

2010

 

2009

 

Earnings by location:

 

 

 

 

 

 

 

U.S.

 

$

(1.1

)

$

(1.0

)

$

4.2

 

Foreign (Peru and Mexico)

 

3,449.8

 

2,431.8

 

1,400.2

 

Earnings before taxes on income

 

$

3,448.7

 

$

2,430.8

 

$

1,404.4

 

 

The reconciliation of the statutory income tax rate to the effective tax rate is as follows:

 

 

 

For the years ended December 31,

 

 

 

2011

 

2010

 

2009

 

Expected tax

 

30.0

%

30.0

%

30.0

%

Effect of income taxed at a rate other than the statutory rate

 

4.3

 

5.3

 

8.3

 

Percentage depletion

 

(4.0

)

(4.3

)

(5.0

)

Other permanent differences

 

1.2

 

1.8

 

2.1

 

Peru tax on net income deemed distributed

 

1.3

 

2.0

 

2.0

 

Mexican tax on dividends

 

—

 

0.4

 

1.6

 

Increase (decrease) in unrecognized tax benefits for uncertain tax positions

 

—

 

4.6

 

(3.9

)

Repatriated foreign earnings

 

2.1

 

—

 

—

 

Amounts (over) / under provided in prior years

 

(3.5

)

(4.5

)

(1.4

)

Other

 

0.6

 

0.4

 

(0.2

)

Effective income tax rate

 

32.0

%

35.7

%

33.5

%

 

The Company files income tax returns in three jurisdictions, Peru, Mexico and the United States.  For the three years presented above the statutory income tax rates for Peru and the United States were 30% and 35%, respectively.  The statutory income tax rate for Mexico was 30% in 2011 and 2010 and 28% in 2009.  The expected rate used above is the statutory tax rate for Peru for all three years and for Mexico in 2010 and 2011.  The Mexican statutory income tax rate increased from 28% to 30% from 2010 through 2012.  The Mexican rate will decrease to 29% in 2013, and will return to 28% in 2014 and thereafter.

 

The Company has chosen to use the Peruvian income tax rate of 30% for this tax rate reconciliation because the Peruvian income tax provision is the largest component of tax expense for each of the three years presented.  In addition, in 2011 and 2010 the Peruvian and Mexican rate were both 30%.  For all of the years presented, both the Peruvian branch and Minera Mexico filed separate tax returns in their respective tax jurisdictions.  Although the tax rules and regulations imposed in the separate tax jurisdictions may vary significantly, similar permanent items exist, such as items which are nondeductible or nontaxable.  Some permanent differences relate specifically to SCC such as the allowance in the U.S for percentage depletion.  SCC filed a separate full year U.S. federal income tax return for calendar year 2008 and a final short period separate return for the period January 1, 2009 through March 27, 2009.  SCC’s taxable income for the 2009 period post March 27 and for the fiscal year 2010 and 2011 were included in the U.S. federal income tax return of AMC, its parent company; see U.S tax matters, below. For financial reporting and presentation purposes SCC is providing current and deferred income taxes, as if it remains a separate U.S. tax filer apart from AMC.

 

The following items had the most significant impact in 2011 on the difference between the Company’s statutory income tax rate of 30% and its effective tax rate:

·                  A 4.3% increase resulted from income taxed subject to U.S. income tax rates, which are 5% higher than the statutory note.

·                  A 4.0% decrease resulted from the percentage depletion deduction which is a U.S. permanent item.

·                  A 1.2% increase resulted from permanent items that are not deductible in the Peruvian, Mexican or U.S. jurisdictions.

·                  A 1.3% increase resulted from tax on financial income deemed distributed from the Company’s Peruvian Branch.

·                  A 2.1% increase resulted from repatriation of foreign earnings.

·                  A 3.5% decrease related to amounts (over) / under provided in prior years.

 

Deferred taxes include the U.S., Peruvian and Mexican tax effects of the following types of temporary differences and carryforwards:

 

 

 

As of December 31,

 

(in millions)

 

2011

 

2010

 

Assets:

 

 

 

 

 

Inventories

 

$

 

23.2

 

$

 

8.0

 

Trade receivables

 

18.1

 

2.3

 

Capitalized exploration expenses

 

31.9

 

22.9

 

U.S. foreign tax credit carryforward

 

174.4

 

—

 

U.S tax effect of Peruvian deferred tax liability

 

3.7

 

38.6

 

Capital loss carryforward

 

—

 

30.0

 

Metal hedging

 

—

 

82.5

 

Reserves

 

69.7

 

51.7

 

Mexican tax loss carryforward

 

35.7

 

37.5

 

Labor share buyback

 

30.1

 

30.0

 

Valuation allowance

 

—

 

(30.0

)

Other

 

14.0

 

23.3

 

Total deferred tax assets

 

400.8

 

296.8

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Property, plant and equipment

 

(166.2

)

(216.3

)

Deferred charges

 

(35.3

)

(25.0

)

Mexican tax on consolidated dividends

 

(32.6

)

(32.7

)

Outside basis difference

 

(91.6

)

(20.0

)

Metal hedging

 

(4.0

)

—

 

Other

 

(2.1

)

(8.2

)

Total deferred tax liabilities

 

(331.8

)

(302.2

)

 

 

 

 

 

 

Total net deferred tax assets / (liabilities)

 

$

69.0

 

$

(5.4

)

 

U.S. Tax Matters—

 

For the years ending December 31, 2010, the Company had unused U.S. net capital losses carryover of $30.0 million which expired, unutilized in 2011.  The Company had a full valuation allowance on the capital loss carryforwards.

 

As of December 31, 2011, the Company considers its ownership of the stock of Minera Mexico to be essentially permanent in duration. The excess of the amount for financial reporting over the tax basis of the investment in this stock is estimated to be at least $2.9 billion.

 

The Company has provided a deferred tax liability of $91.6 million as of December 31, 2011 for the U.S. income tax effects of $951 million of foreign earnings that may potentially be repatriated in the future by Minera Mexico.

 

At December 31, 2011, there were $174.4 million of foreign tax credit available for carryback or carryforward.  These credits have limited carryback and carryforward periods and can only be used to reduce U.S. income tax on foreign earnings included in the annual U.S. consolidated income tax return.  There were no other U.S. tax credits at December 31, 2011.

 

As of March 27, 2009, Grupo Mexico, through its wholly-owned subsidiary, AMC, became the beneficial owner of 80% of SCC’s common stock.  As a result of this new level of ownership, beginning March 27, 2009, SCC’s operating results are included in the AMC consolidated U.S. federal income tax return.  In addition to holding an 80.9% interest in SCC, AMC also owns 100% of Asarco and its subsidiaries.  In accordance with paragraph 30-27 of ASC 740-10-30, it is expected that current and deferred taxes will be allocated to members of the AMC group as if each were a separate taxpayer.  SCC provides current and deferred income taxes, as if it were filing a separate income tax return.

 

Peruvian Tax Matters—

 

The Company obtains income tax credits in Peru for value-added taxes paid in connection with the purchase of capital equipment and other goods and services, employed in its operations and records these credits as a prepaid expense.  Under current Peruvian law, the Company is entitled to use the credits against its Peruvian income tax liability or to receive a refund.  The carrying value of these Peruvian tax credits approximates their net realizable value.

 

Special Mining tax

 

In September 2011, the Peruvian government enacted a new tax for the mining industry.  This tax is based on operating income and its rate ranges from 2% to 8.4%. It begins at 2% for the first 10% of operating income margin and for each additional 5% of operating income margin is increased by an additional rate of 0.4% until 85% of operating income margin is reached. In the last quarter of 2011 we made provisions of $16.4 million for this tax. This provision is included as “income tax” in the consolidated statement of earnings.

 

Mexican Tax Matters—

 

In 2009, Mexico enacted new rules related to the income tax law, which, among other things, impose restrictions on certain benefits of tax consolidation and temporarily increased the statutory tax rate.

 

Under the previous tax consolidation rules, Mexican companies were allowed to indefinitely defer taxes assessed on dividends in excess of tax-basis retained earnings accounts that are distributed among entities of a consolidated tax group, and the offsetting net operating losses (NOL’s) incurred by one entity against the profits of another entity, until the occurrence of certain events, such as the dissolution of the tax consolidation regime.  The new law, which applies retroactively to qualifying dividends paid and the net operating losses since 1999, eliminates the indefinite deferral period and requires payment of the tax beginning in the sixth year following the dividend.  The new law applies retroactively and reduced the NOL carryforward period from ten years to five years.  The total liability affected by these amendments is $106.6 million.  This amount includes an additional liability of $22.6 million recognized in 2009 and recorded as income tax expense in the consolidated statement of earnings; the balance of the liability $84 million has been recorded as a deferred tax charge in prior years.

 

In March 2011 and in June 2010, the Mexican parent company made tax payments of 125 million Mexican pesos and 121 million Mexican pesos (approximately $9.3 million and $10 million), respectively in accordance with the changes in the law.  In subsequent years these taxes will continue to be paid in March.

 

The Mexican statutory income tax rate increased to 30% from 2010 through 2012, will decrease to 29% in 2013, and to 28% in 2014 and thereafter.

 

Mexican companies are subject to a dual tax system comprised of regular income tax and a corporate flat tax that was enacted in 2007.  The rate under the corporate flat tax law is 17.5%.  Mexican companies pay the greater of the corporate flat tax or regular income tax and determine its deferred income taxes based on the tax regime it expects to be subject to in the future.  Based on earnings projections, the Company believes it will be subject to regular income tax for the foreseeable future and has calculated its temporary differences and deferred taxes based on the regular income tax law.

 

Accounting for Uncertainty in Income Taxes-

 

The total amount of unrecognized tax benefits in 2011, 2010 and 2009, was as follows (in millions):

 

 

 

2011

 

2010

 

2009

 

Unrecognized tax benefits, opening balance

 

$

75.7

 

$

30.7

 

$

64.9

 

Gross increases — tax positions in prior period

 

21.6

 

46.3

 

—

 

Gross decreases — tax positions in prior period

 

(26.8

)

(1.8

)

(44.1

)

Gross increases — current-period tax positions

 

0.1

 

0.5

 

11.4

 

Decreases related to settlements with taxing authorities

 

—

 

—

 

(1.5

)

Unrecognized tax benefits, ending balance

 

$

70.6

 

$

75.7

 

$

30.7

 

 

The overall decrease in the 2011 unrecognized tax benefit of $5.1 million relates primarily to settlement of the IRS audit of the years 2005 through 2007.

 

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $70.7 million at December 31, 2011 and $46.4 million at December 31, 2010.  These amounts relate entirely to U.S. income tax matters.  The Company has no unrecognized Peruvian or Mexican tax benefits.

 

As of December 31, 2011, the Company’s liability for uncertain tax positions included no amount for accrued interest and penalties due to the 2011 settlement with the IRS and the excess foreign tax credits as of December 31, 2011.  At December 31, 2010, the Company’s liability for uncertain tax positions included accrued interest and penalties of $8.0 million.

 

Management does not expect that any of the open years will result in a cash payment within the upcoming twelve months ending December 31, 2012.  The Company’s reasonable expectations about future resolutions of uncertain items did not materially change during the year ended December 31, 2011.

 

In the second quarter of 2011, the Company reached agreement with the IRS and settled tax years 2005, 2006, and 2007.

 

The following tax years remain open to examination and adjustment by the Company’s three major tax jurisdictions:

 

Peru:

 

2008 up to 2011 (years 1997 through 2006 have been examined by the Peruvian tax authority and the issues raised are being contested; no new issues can be raised for these years. Year 2007 is being examined since December 2011)

U.S.:

 

2008 and all future years

Mexico:

 

2004 and all future years

 

In the fourth quarter of 2011, the IRS commenced its U.S. federal income tax audit of the Company for the years 2008 through 2010.