is required to recapture, as ordinary
income, depletion and other deductions
taken with respect to the property.
A foreign taxpayer will also be taxable
on the disposition of a US real property
interest (USRPI), even if the taxpayer is
not engaged in a US trade or business.
A USRPI is defined to include an
interest in real property, including an
interest in a mine, well, or other natural
deposits located the United States or
the Virgin Islands, as well as certain US
corporations whose value is primarily
derived from other USRPI. For this
purpose, the term “real property”
includes land and unsevered natural
products of the land, improvements, and
personal property associated with the
use of real property.
If a foreign person disposes of a USRPI,
a purchaser should withhold tax at the
rate of 10% on the amount realized on
the disposition. The amount realized is
the sum of the cash paid or to be paid,
the fair market value of other property
transferred or to be transferred, and
the outstanding amount of any liability
assumed by the purchaser.
To equalize the tax treatment of the
foreign person disposing of a USRPI
with the treatment of a US person, the
US tax law provides that the amount
withheld cannot exceed the vendor’s
maximum tax liability on the sale of the
USRPI.The maximum tax liability is
the amount realized minus the adjusted
basis of the property multiplied by the
vendor’s maximum tax rate applicable
to long-term capital gains.
For example, if the sales price is
US$1 million for USRPI and the basis
is $1.5 million, then the potential
withholding tax should be US$100,000.
The vendor will then be required to file
a US income tax return and calculate
actual US income tax on the amount
of the loss from the disposition. Under
these facts, the vendor should receive
a refund of the tax withheld, because
the amount of tax withheld ($100,000) is
higher than the maximum tax liability.
PFIC Regime
US investors in Canadian-based mining
companies may be subject to taxation
under the passive foreign investment
company (PFIC) rules. A foreign
corporation is a PFIC if 75% or more
of its gross income for a taxable year
is passive (the 75% passive-income
test) or at least 50% of the average
fair market value of the assets held by
the corporation during a taxable year
consists of passive assets (the 50%
passive asset test).
Generally, passive income includes
dividends, interest, rents and royalties,
annuities, net gains from transactions
in any commodities, and net gains on
the sale of property producing passive
income; passive assets are defined as
assets that produce, or are held for the
production of, passive income.
Where a US person invests in a PFIC,
the US investor will not be entitled to
the long-term capital gains tax rate on
any gain resulting from the sale of the
shares of the PFIC (a maximum of 20%
for tax years after 2012 if the shares are
held for more than one year). In addition,
the individual US investor will not be
entitled to the qualified dividend tax rate
(also a maximum of 20% for tax years
after 2012). Instead, any gain is allocated
over the period throughout which the
PFIC shares were held, and is taxed at
the highest rate applicable to ordinary
income in the year (39.6% for tax years
after 2012), plus an interest charge.
The items of income noted above may
also be subject to the 3.8% unearned
income Medicare contribution tax if
earned by certain individual taxpayers
and trusts whose adjusted gross income
(as modified) exceeds a specified
threshold amount.
The punitive provisions of the PFIC
rules – in general, the allocation of gains
and certain distributions to various
years during the holding period, and the
taxation of those gains and distributions
as ordinary income at the highest rates
plus interest – do not apply to a taxpayer
that makes the qualifying electing fund
(QEF) election. In general, the company
must have been a QEF with respect
to the taxpayer for each taxable year
(since 1986) in which the company was
a PFIC and that included any part of the
taxpayer’s holding period.
As a result of the QEF election,
the US shareholder must include
his or her share of ordinary income
of the QEF in income annually (as
ordinary income) – whether or not
distributed – as well as net capital gains
(as long-term capital gains). This election
is shareholder-specific and does not
affect foreign (non-US) shareholders.
Another available option is to make
the mark-to-market election. This
requires that the shareholder mark
the foreign stock to market each year.
The shareholder must include in gross
income (as ordinary income) the excess,
if any, of the fair market value of the
stock at the end of the year over its
adjusted basis. In addition, in contrast to
the QEF election, any gain on the sale of
the stock is treated as ordinary income.
Though the IRS has not yet finalized
PFIC reporting requirements, it is
expected that all US persons who hold
an interest in a PFIC will be required to
report such interest in the future.
© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Overview of the US Mining Tax Environment
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