2012 Americas School of Mines

Transcription

1 Americas School of Mines Tax Risks and Considerations in Mining Transactions Andrew Papadakis Kerry Gordon Darin Siders

2 Agenda Recap of 2011 for the Mining Sector Due Diligence Tax Drivers and Opportunities to Add Value Recent Legislative Proposals PwC 2

3 Section One Recap of 2011 for the Mining Sector PwC 3

4 Recent M&A Activity for the Mining Sector Based on reports, 2011 saw more than 2,600 M&A deals worth $149 billion announced in the global mining sectors (33% higher than 2010). This level of activity was attributable, first, to a continuing thirst for natural resources in developing countries, and, second, to solid financial footing in the sector (average mining company debt was at an all-time low and cash and profitability positions were high) Information Shows: Australia, U.S., and Canada led activity by transaction value Coal, Iron Ore, and Copper were the largest mineral transactions. Gold, as the prior commodity leader, was driven down in 2011 transactions primary due to price Most transactions were domestic transactions (buyer and seller within the same jurisdiction) Canada buyers were the most acquisitive during this period (accounting for approximately 30% of buyers) PwC 4

5 Recent M&A Activity for the Mining Sector (cont d) Mining M&A pick up following year of low prices and past disinterest by non-industry investors Mining deals were driven by: Pricing arbitrage Synergies Competitive landscape and strategy (acquiring market access, technology, reducing competitors, etc.) Ability to successfully access the capital markets PwC 5

6 Section Two The Significance of Tax Due Diligence PwC 6

7 The Significance of Tax Due Diligence Insight Gained in Recent M&A Due Diligence: Many mining companies paid less attention to taxes during prior periods with operational losses Structuring benefits/efficiencies are being ignored Short cuts are sometimes taken in the workpapers and/or inexperienced advisors are being used PwC 7

8 The Significance of Tax Due Diligence (cont d) Tax should be at the forefront of the M&A negotiations; otherwise, value may be left on the table. The following questions should be considered early on: Entity or assets transaction? If a stock acquisition, is a Section 338(h)(10) election available and can it be leveraged in the transaction to unlock value? Is there an exit strategy? If so, how does this strategy impact the need for a holding company (and where), the placement of guarantees and debt, how management should be compensated, etc.? In strategic transactions, how can varying tax profiles be joined? These are key questions that can be vetted in due diligence. PwC 8

9 The Significance of Tax Due Diligence (cont d) Other key questions that can addressed: What tax risks are being acquired? Are tax attributes being acquired? If so, how much are they worth, what are the limitations on utilization, and how will they be reflected in the financial statements? What movements of assets, debt or capital should be done in advance? What will need to be done after closing to unlock potential value? How strong is the tax department coming over? PwC 9

10 The Significance of Tax Due Diligence (cont d) Due diligence also provides an opportunity to vet structuring issues. These include: Addressing the question of which entity should incur the debt and will there be any limitations on interest deductibility (U.S. or Foreign)? How will the proposed structure impact other tax calculations (i.e., how may historic results differ from the go-forward profile): - Percentage Depletion? - Domestic Manufacturer's Deduction (Section 199)? - State Income Taxes and filing obligations? - Will a Consolidated Filing be of advantage or allowed? - The New Effective Tax Rate? PwC 10

11 The Significance of Tax Due Diligence (cont d) And in the International Context, Due Diligence May Highlight Questions Around: - The Foreign Tax Credit Implications - Alternative Financing Arrangements/Double Dip Transaction/Hybrid Instruments - The Impact of Double Tax Treaties - Impacts of Section 163(j) on interest - Transfer Pricing Arrangements (current / creditable) PwC 11

12 The Significance of Tax Due Diligence (cont d) Furthermore, Value May Be Preserved Or Unlocked Through Due Diligence, Which Can Address The Following: Are there tax risks related to pre-acquisition periods? - How can they be managed in the due diligence process, through contractual protection, etc.? - How should identified risks be reflected in bid price? Which acquisition structure(s) optimize the company's tax position and attributes? - What should be the due diligence posture to best unlock their value? - Can this structure help unlock cash? How does this impact the go-forward financials? PwC 12

13 The Significance of Tax Due Diligence (cont d) Due Diligence Can Also Help Identify Missed Elections (Statutory Versus Administrative) Lack of documentation of election -- Can the current tax accounting method be proved and maintained? Formal elections versus claimed treatment Consideration of 9100 relief PwC 13

14 The Significance of Tax Due Diligence (cont d) Due Diligence Issues can be Caused by: Prior Changes in Control Effecting Loss Companies: - Lack of testing documentation - Built-in Loss rule (not considering the mineral property) - Excess credits (special rule for electing out of bonus) DTL s - Recapture Issues (Exploration Costs) Treatment of Exploration & Development Expenses Accounting Method Changes (Affirmative Elections) Tax Treatment of Environmental Liabilities (Section 198) Obsolete Equipment Tax Treatment of Performance Based Agreements (Royalty agreements) PwC 14

15 The Significance of Tax Due Diligence (cont d) Due Diligence Issues can be Caused by (cont.): Changes in Depletable Property Percentage Depletion: Is the Representative Field or Market Price Sustainable? Aggregation of Mines Abandonment of Sites (No deduction) Reclamation Elections (right to claim [Section 468] and 10 year carry back [Section 172(f)]) Reclamation Liabilities Inconsistency in the Section 263A Method Alternative Minimum Tax treatments (no AMT or ACE adjustments) PwC 15

16 The Significance of Tax Due Diligence (cont d) Due Diligence Issues can be Caused by (cont.): FIRPTA (U.S. Real Property Holding Corporation or Real Property Assets) Significant change in business results (loss companies becoming profitable without increase in tax focus) Lack of communication (e.g., management, operations and engineering on a different wave length than tax) Being deficient in obtaining the facts or questioning the summaries on facts which do not describe a complete transaction Failure to document prior transactions and there legal and tax conclusions PwC 16

17 The Significance of Tax Due Diligence (cont d) Due Diligence Issues can be Caused by (cont.): Consideration of other doctrines of law: - step transactions, - duty of consistency, - economic substance, - origin of claim, - rescission doctrine, - cost reimbursement, - income assignment, - sham partnership, - substance over form, - void for vagueness doctrine, and - Cohen rule PwC 17

18 The Significance of Tax Due Diligence (cont d) Use Of Safe Harbor Without Documentation Meeting Required Tests De minimis rule under Section 199 Small Reseller under Section 263A Repairs and maintenance non-capital rule Deemed safe harbor for following GAAP Debt-to-equity ratio for excess interest under Section 163(j) Passive Foreign Investment Company asset and income tests PwC 18

19 Things to Look Out for Multiple states of business/international locations State Nexus issues Reorganization and post transaction improvements State or Local transaction taxes or fees Golden Parachute (280G) plans Asset deals Does not necessarily lead to no tax diligence PwC 19

20 Section Three Tax Drivers and Opportunities to Add Value in Deal Execution PwC 20

21 Tax Drivers and Opportunities to Add Value in Deal Execution Structuring considerations Attribute monetization Debt placement/pushdown Opportunity to combine businesses or leverage activity combinations Cleaning up old entities without a current business purpose Limiting intercompany transactions on which tax benefits are immaterial Intercompany balances (debt, equity or something else) Worthless assets/entities (determination of the proper timing of deduction) PwC 21

22 Tax Drivers and Opportunities to Add Value in Deal Execution (cont d) Change in Control Tax Attributes - NOLs/capital losses/amt credits/other - Depreciation and Amortization - Limitations - Loss Corporation and NUBILs/NUBIGs Acquirer's Limitation - Right to Use - Limitations (Sections 267, 382, 383) - Lack of documentation on prior transactions necessary to substantiate PwC 22

23 Tax Drivers and Opportunities to Add Value in Deal Execution (cont d) Earnings and Profits Are records available? Can past and future distributions be determined as non-taxable or taxable with certainty? How will excess credits or previously taxed income be used in the future? PwC 23

24 Tax Drivers and Opportunities to Add Value in Deal Execution (cont d) Purchase Price Allocation vs. Cost Segregation Why not the same as book? Risk of short-cut methods Force of excess purchase price to goodwill without stepping down the waterfall Determination of existing built-in gains in mineral inventory, intangible assets, and contract rights PwC 24

25 Tax Drivers and Opportunities to Add Value in Deal Execution (cont d) Costs of Transactions Transaction Costs (deductible inside/outside) - Safe Harbor Notice ( ) Regarding Success Based Fees - Deductible versus Capitalizable Sales and Use w/exclusion for occasional sales Real Estate registration requirement Excise Taxes Shared services agreements PwC 25

26 Tax Drivers and Opportunities to Add Value in Deal Execution (cont d) Foreign Investment in U.S. Real Property Tax Act Consideration of mandatory withholding Reliance on GAAP Assets Can a reasonable determination of gain / loss be made? PwC 26

27 Section Four Recent Legislative Proposals PwC 27

28 Recent Legislative Proposals The Administration Proposed the Repeal of Incentives Last-In, First-Out Inventory Method Lower of Cost or Market Inventory Method For Fossil Fuels Including Coal, a Repeal of: Exploration and Development Expense Section 199 Deduction Percentage Depletion Levy a fee on the production of hardrock minerals to restore abandoned mines PwC 28

29 Recent Legislative Proposals State Tax Proposals: Many States proposed new statutory provisions for minerals producers, but few enacted. Most enacted provision where related to extensions of rates, deductions, or credits Florida -- Extension of fees on limestone and phosphate production Minnesota -- Expanded Net Proceeds of Minerals to process minerals Nevada -- Net Proceeds of Minerals West Virginia -- Safety Technology tax credit PwC 29

30 Recent Legislative Proposals Rulings and Cases: CCA Non-productive lease sales is not domestic production gross receipts Esgar Corp. v. Comm'r, T.C. Memo , Feb. 6, 2012, overstated the value of the conservation easements Peco Foods v. Comm'r, T.C. Memo (Jan. 17, 2012) acquirer is obligated to the purchase price agreement (binding on assets) unless inappropriate or unenforceable AM Worthless stock deduction not allowed when tax refunds and other legal claims exist which attribute value to the entity (see Treas. Reg. Sec (c)(1)(iii)(A) PwC 30

31 Mining Tax Top Ten (Due Diligence Reviews) Single Property Deal: 1. Type of Seller / Buyer 2. Type of Entity / Tax Treatment (Like Kind) 3. Consideration to be Paid 4. Liabilities to be Assumed (Real / Contingent) 5. List of Assets to be Acquired with Existing Tax Basis 6. Market Value of the Assets 7. How much Value should be Attributable to Mineral Reserves 8. Other Intangible Assets or Rights 9. Unpaid Taxes (Assessed Against Assets) 10. Recapture, Accounting Methods, Elections Consolidated Group Deal: 1. Consideration to be Paid 2. Tax Free Reorganization / Not 3. Value of Tax Attributables 4. Core Entities and Assets 5. Deal Objectives (core / non-core assets) 6. Market Value of the Assets 7. Documentation of Tax Elections 8. Exit Strategies 9. Inside / Outside tax basis (non-core) 10. Recording of Deferred Tax Assets / Liabilities PwC 31

32 Summary Many mining related transactions are occurring and we expect this activity to continue. The tax group is important in all phases of the transaction. For a successful mineral acquisition transaction, one must: Have a clear understanding of the Target's business and objects; Model how this Target may be incorporated into your existing tax returns and plans; Have good interview skills, but allow the other party to talk; and Be skeptical but hear their story. PwC 32

33 PwC 33 Questions/Comments?

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