NOTE 7—INCOME TAXES:

Since March 2009, Grupo Mexico, through its wholly-owned subsidiary AMC, owns an interest in excess of 80% of SCC. Accordingly, SCC's results are included in the consolidated results of the Grupo Mexico subsidiary for U.S. federal income tax reporting. SCC provides current and deferred income taxes, as if it were filing a separate U.S. federal income tax return.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law, making substantial changes to the 1986 Internal Revenue Code. Changes under the Act include, among others, a decrease in the corporate tax rate from 35% to 21%, the transition of the U.S. taxation of international operation from a worldwide system to a quasi-territorial system, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, and a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations.

Although most provisions of the Act begin January 1, 2018, ASC 740 "Income Taxes" requires that the effects of tax law changes be recognized in the year and period of the law change and be reflected in the company's financial results. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. SAB 118 requires a company to reflect the income tax effects of the Act for which the accounting under ASC 740 "Income Taxes" is complete; if it is incomplete but the Company is able to determine a reasonable estimate, a provisional estimate must be provided in the financial statements. If a provisional estimate cannot be reasonably prepared, the Company should continue to apply ASC 740 on the basis of the provision of the tax law that were in effect immediately before the enactment of the Act. Companies have one year from the enactment of the Act to finalize accounting for the impacts of the Act.

The Company adopted SAB 118 and accordingly, its accounting for the effect of the Act is based on its best estimate, which may require adjustment in 2018. However, the Company was able to make reasonable estimates of certain effects and, therefore, recorded a provisional $785.9 million non-cash tax expense for the estimated effects of the Act. These adjustments were related to the valuation allowances for foreign tax credits and other deferred tax assets, valuation of our net deferred tax assets due to the rate change from 35% to 21% and the transition tax on the repatriation of cumulative foreign earnings . The ultimate impact of the Act may differ from these provisional amounts, possibly materially. After the Company files its 2017 U.S. federal income tax return and finalizes certain tax positions it will conclude whether further adjustments are required to its net deferred tax assets or liabilities, current year foreign tax credits and any liability associated with the one-time mandatory tax on the repatriation of foreign earnings.

The Act also provides for two new taxes that become effective in tax years beginning after December 31, 2017: the Global Intangible Low Tax Income or GILTI tax and the Base Erosion Anti-Abuse or BEAT tax. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. FASB guidance released in January 2018 indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether we expect to have future US inclusions in taxable income related to GILTI depends on not only our current structure and estimated future results of global operations but also our intent and ability to modify our structure and/or our business, we are not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI. The BEAT tax is a 5% minimum tax for tax years beginning in 2018 (12.5% after 2025) and is calculated on a base equal to the Company's income determined without the tax benefit arising from base erosion payments. The erosion payments are a specifically defined set of deductible expenses. However, the provisions are unclear as to which payments should be characterized as base erosion payments. The tax reform prescribes that the Secretary issue Regulations to prevent the avoidance of the BEAT tax, which have still not been finalized. Additionally, the Company needs to evaluate any interaction between the GILTI and the BEAT taxes. Therefore, the Company is still is in the process of analyzing the provisions of these taxes and the effect they may or may not have on future results and financial reporting. Accordingly, for 2017, there is no change made to the accounting under ASC 740 and the Company is following current tax law with respect to these specific items.

The components of the provision for income taxes for the three years ended December 31, 2017, are as follows:

(in millions)	2017			2016			2015
U.S. federal and state:
Current	$	—		$	—		$	—
Deferred		686.2			(109.4	)		(143.0	)
Uncertain tax positions		16.2			20.3			80.0

		702.4			(89.1	)		(63.0	)

Foreign (Peru and Mexico):
Current		951.7			625.0			620.4
Deferred		(60.7	)		(34.8	)		(92.5	)

		891.0			590.2			527.9

Total provision for income taxes	$	1,593.4		$	501.1		$	464.9

The source of income is as follows:

(in millions)	2017			2016			2015
Earnings by location:
U.S.	$	(1.5	)	$	(1.9	)	$	(2.1	)
Foreign
Peru		284.6			(85.7	)		213.2
Mexico		2,019.6			1,343.6			978.1

		2,304.2			1,257.9			1,191.3

Earnings before taxes on income	$	2,302.7		$	1,256.0		$	1,189.2

The reconciliation of the statutory income tax rate to the effective tax rate for the three years ended December 31, 2017, is as follows (in percentage points):

	2017			2016			2015
Expected tax at U.S. statutory rate		35.0	%		35.0	%		35.0	%
Foreign tax at other than statutory rate, net of foreign tax credit benefit(1)		0.6			2.0			3.6
Percentage depletion		(2.9	)		(2.7	)		(5.9	)
Other permanent differences		5.2			—			0.7
Valuation allowance on US deferred tax assets, foreign tax credits and US tax effect on Peruvian deferred		26.9			—			—
Decrease in US deferred tax asset due to tax rate changes		4.8			—			—
US one time transition tax on accumulated foreign earnings		2.4			—			—
Increase (decrease) in unrecognized tax benefits for uncertain tax positions		0.7			0.2			6.7
Repatriated foreign earnings		(2.0	)		3.6			—
Amounts (over) / under provided in prior years		(0.1	)		(0.5	)		(2.2	)
Other		(1.4	)		2.3			1.2

Effective income tax rate		69.2	%		39.9	%		39.1	%


(1)	Foreign tax at other than statutory rates, net of foreign tax credit benefit, also includes the effects of permanent differences in Peru and Mexico, that are determined at the local statutory rate.

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 rate for Mexico was 30% and 35% for the United States. The Peruvian tax rate was 29.5% for 2017 and 28% for 2016 and 2015. While the largest components of income taxes are the Peruvian and Mexican taxes, the Company is a domestic U.S. entity. Therefore, the rate used in the above reconciliation is the U.S. statutory rate. 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 United States for percentage depletion.

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

	At December 31,
(in millions)	2017			2016
Assets:
Inventories	$	47.0		$	27.9
Capitalized exploration expenses		9.5			17.5
U.S. foreign tax credit carryforward, net of FIN 48 liability		280.2			284.2
U.S. tax effect of Peruvian deferred tax liability		174.1			162.6
Property, plant and equipment		—			1.2
Reserves		152.6			108.9
Mexican tax on consolidated dividends		14.5			13.6
Prepaids		—			11.1
Valuation allowance on US deferred tax assets, foreign tax credits and US tax effect on Peruvian deferred		(619.6	)		—
Other		9.4			29.7

Total deferred tax assets		67.7			656.7

Liabilities:
Property, plant and equipment		(130.3	)		—
Deferred charges		(16.9	)		(35.4	)
Unremitted foreign earnings		—			(45.7	)
Other		(1.2	)		(10.9	)

Total deferred tax liabilities		(148.4	)		(92.0	)

Total net deferred tax (liabilities) / assets	$	(80.7	)	$	564.7

U.S. Tax Matters—

As of December 31, 2017, 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 $6.7 billion.

As of December 31, 2017, $517.7 million of the Company´s total cash, cash equivalents, restricted cash and short-term investments of $1,055.3 million was held by foreign subsidiaries. The cash, cash equivalents and short-term investments maintained in our foreign operations are generally used to cover local operating and investment expenses. At December 31, 2016, Minera Mexico determined that it had $470.5 million in earnings available for dividends to the United States. These earnings had not been remitted, but U.S. federal income tax, net of foreign tax credit was recognized in 2016 resulting in an increase tax of $45.7 million. At December 31, 2017, Minera Mexico had determined that it had earnings available for dividends to the United States of $555.5 million. The 2017 U.S. tax reform introduced a one-time transition tax that is based upon the Company's total accumulated post-1986 prescribed foreign earnings and profits ("E&P") estimated to be $8.9 billion, the majority of which was previously considered to be indefinitely reinvested and accordingly, no U.S. federal and state income taxes were provided. Upon enactment of the 2017 U.S. tax reform, the Company calculated and recorded a provisional tax amount of $181.1 million as a reasonable estimate for its one-time transition tax liability, which was completely offset by foreign tax credit carryforward utilization. Because of the complexities of tax reform and the transition tax calculation, the Company is still finalizing its calculation of the total accumulated post-1986 prescribed E&P for the applicable entities. Further, the transition tax is based in part on the amount of those earnings held in liquid and non-liquid E&P. Until the calculation of E&P is completed and the transition tax is finalized during 2018 it is not practicable to estimate any amount of unrecognized deferred tax liability, if any, to any additional outside basis differences in the Company's foreign subsidiaries. Earnings from the Company's Peruvian branch to the United States are not subject to transition taxes since they are taxed on a current basis, regardless of remittances.

At December 31, 2017, there were $485.8 million of foreign tax credits available for carryback or carryforward. These credits have a one year carryback and a ten year carryforward period and can only be used to reduce U.S. income tax on foreign earnings. There were no other unused U.S. tax credits at December 31, 2017. These credits expire as follows:

Year	Amount
2022		20.3
2023		69.2
2024		102.0
2025		189.5
2026		104.8

Total	$	485.8

These foreign tax credits are presented above on a gross basis and have not been reduced here for any unrecognized tax benefits. These foreign tax credits have been adjusted to include the 2017 Net Operating Loss carryback in the U.S. jurisdiction, increasing foreign tax credits by approximately $15.9 million. In accordance with ASU 2013-11 the Company has recorded $205.7 million of an unrecognized tax benefit as an offset to the Company's deferred tax asset for foreign tax credits. The remaining foreign tax credits of $280.2 million are being re-valued to zero at December 31, 2017. It is the opinion of management that with the reduction in the U.S. corporate tax rate to 21% and the tax rates in Mexico and Peru at 30% and higher, it is unlikely the excess foreign tax credits can be utilized. Additionally, foreign dividends will no longer be taxed in the U.S. thereby reducing the U.S. tax on the foreign source income that the credits can be used to offset.

Peruvian Tax Matters—

Royalty mining charge: The royalty charge is based on operating income margins with graduated rates ranging from 1% to 12% of operating profits, with a minimum royalty charge assessed at 1% of net sales. If the operating income margin is 10% or less, the royalty charge is 1% and for each 5% increment in the operating income margin, the royalty charge rate increases by 0.75%, up to a maximum of 12%. The minimum royalty charge assessed at 1% of net sales is recorded as cost of sales and those amounts assessed against operating income are included in the income tax provision. The Company has accrued $23.4 million, $16.8 million and $22.9 million of royalty charges in 2017, 2016 and 2015, respectively, of which $2.5 million and $2.7 million were included in income taxes in 2017 and 2015, respectively; no amounts were included in income tax in 2016.

Peruvian special mining tax: This tax is based on operating income with graduated rates increasing from 2% to 8.4%. The Company recognized $23.3 million, $10.8 million and $18.1 million in 2017, 2016 and 2015, respectively, with respect to this tax. These amounts are included as "income taxes" in the consolidated statement of earnings.

In December 2016, the Peruvian Government enacted income tax law changes to both the income tax and dividend tax rate that become effective on January 1, 2017. The rates are as follows:

Year	Income Tax Rate			Dividend Tax Rate
2015 - 2016		28.0	%		6.8	%
2017 and later		29.5	%		5	%

The recalculation of the deferred tax liability for the Peruvian jurisdiction using the new tax rates did not have a material effect on the deferred tax liability or the financial statements of the Company.

Mexican Tax Matters—

In 2013, the Mexican Congress enacted tax law changes that became effective on January 1, 2014. Among other effects, the amounts that the subsidiary companies of Minera Mexico recorded during 2017 were:


	•	Mining royalty at the rate of 7.5% on taxable earnings before taxes: $87.8 million.
	•	Additional royalty of 0.5% over gross income from sales of gold, silver and platinum: $0.8 million.
	•	Income tax payable stemming from changes to tax consolidation: $0.3 million.

On October 2017, the Federation's Revenue Law for 2018 was approved by the House of Representatives and the Senate. There are certain modifications that are worth highlighting:

i) The incentive of crediting of the special use and service tax to income tax. In the case of fuel, it includes purchased diesel for final consumption in certain mining equipment. The crediting of the special use and service tax was extended to the purchase of imported diesel.

ii) The Federal Revenue Law allows the deduction of statutory profit sharing paid, on advance monthly payments of income tax.

iii) The withholding rate applied by banks and other members of the financial system on interest will decrease from an annual rate of 0.58% to 0.46%.

iv) The obligation to provide certain information regarding relevant transactions will be incorporated to the Federation's Revenue Law for 2018 given the recent rulings issued by the Mexican Supreme Court. Taxpayers will be obligated to provide on a quarterly basis to the Mexican tax authorities information regarding financial derivative transactions, transactions with related parties, transactions related to the participation in the equity of other companies and changes of tax residence, corporate restructures and other similar transactions.

It is worth noting that there are no further amendments in connection with the Base Erosion and Profit Shifting action plan.

Accounting for Uncertainty in Income Taxes—

The total amount of unrecognized tax benefits in 2017, 2016 and 2015, was as follows (in millions):

	2017			2016			2015
Unrecognized tax benefits, opening balance	$	304.0		$	400.0		$	319.4
Gross increases—tax positions in prior period		(89.5	)		3.9			36.3
Gross increases—current-period tax positions		—			23.3			44.3
Decreases related to settlements with taxing authorities		—			(123.2	)		—

		(89.5	)		(96.0	)		80.6

Unrecognized tax benefits, ending balance	$	214.5		$	304.0		$	400.0

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $214.5 million and $304.0 million at December 31, 2017 and 2016, respectively. These amounts relate entirely to U.S. income tax matters. The Company has no unrecognized Peruvian or Mexican tax benefits.

The Company is currently under examination by the Internal Revenue Service for the years 2011-2013 as part of the audit of the AMC consolidated tax group.

As of December 31, 2017 and December 31, 2016 the Company's liability for uncertain tax positions included accrued interest and penalties of $1.9 million.

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

Peru:		2012 and all subsequent years
U.S.:		2012 and all subsequent years
Mexico:		2012 and all subsequent years

Management does not expect that any of the open years will result in a cash payment within the upcoming twelve months ending December 31, 2018. The Company's reasonable expectations about future resolutions of uncertain items did not materially change during the year ended December 31, 2017.