INCOME TAXES:

12 Months Ended

Dec. 31, 2023

INCOME TAXES:

INCOME TAXES:

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 tax return for AMC for U.S. federal income tax reporting.

Following its policy regarding the use of estimates, the Company estimates income taxes currently payable or receivable as well as deferred income tax assets and liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company provides current and deferred income taxes, as if it were filing a separate U.S. federal income tax return.

The components of the provision for income taxes for the three years ended December 31, 2023, are as follows:

(in millions)	2023		2022		2021
U.S. federal and state:
Current	$	4.6	$	0.1	$	—
Deferred		—		—		—
Uncertain tax positions		0.6		—		—
		5.2		0.1		—
Foreign (Peru and Mexico):
Current		1,491.0		1,443.1		2,425.5
Deferred		(59.1)		118.6		(126.3)
Uncertain tax positions		81.8		34.3		—
		1,513.7		1,596.0		2,299.2
Total provision for income taxes	$	1,518.9	$	1,596.1	$	2,299.2

The source of income is as follows:

(in millions)	2023		2022		2021
Earnings by location:
U.S.	$	23.3	$	0.5	$	(32.4)
Foreign
Peru		1,151.3		1,167.8		1,962.8
Mexico		2,781.2		3,079.5		3,766.4
		3,932.5		4,247.3		5,729.2
Earnings before taxes on income	$	3,955.8	$	4,247.8	$	5,696.8

The reconciliation of the statutory income tax rate to the effective tax rate for the three years ended December 31, 2023, is as follows (in percentage points):

	2023		2022		2021
Expected tax at U.S. statutory rate	21.0	%	21.0	%	21.0	%
Foreign tax at other than statutory rate, net of foreign tax credit benefit (1)	15.3		14.7		13.8
Percentage depletion	(2.4)		(2.1)		(1.8)
Other permanent differences	(0.3)		(0.1)		(0.3)
Additional valuation allowance on U.S. deferred tax assets, foreign tax credits and U.S. tax effect on Peruvian deferred taxes	6.3		5.5		8.4
Increase (decrease) in unrecognized tax benefits for uncertain tax positions	1.9		1.5		(0.5)
Amounts (over) / under provided in prior years	(0.4)		(1.7)		—
Other	(3.0)		(1.2)		(0.2)
	38.4	%	37.6	%	40.4	%

(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%, the United States tax rate was 21%, and the Peruvian tax rate was 29.5%. 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 that are nondeductible or nontaxable. Some permanent differences relate specifically to SCC, such as the allowance in the United States for percentage depletion.

On May 31, 2019, the Organization for Economic Cooperation and Development (“OECD”) published a two-pillar system designed to address the tax challenges created by an increasing digitalized economy. Pillar One focuses on the allocation of group profits among taxing jurisdictions based on a market-based concept rather than on historic “permanent establishment” concepts, but includes explicit exclusions for Extractives and as such, is not expected to have a material impact on the Company. Pillar Two addresses the remaining Base Erosion and Profit Shifting (“BEPS”) risk of profit shifting to entities in low tax jurisdictions by introducing a global minimum tax of 15% and a proposed tax on base eroding payments. Certain aspects of Pillar Two take effect January 1, 2024, while other aspects go into effect January 1, 2025. If jurisdictions do want to implement the GloBE rules, these rules will need to be implemented through domestic legislation. The countries in which the Company has significant operations have yet to enact Pillar Two into law and have not formally announced plans to implement these rules. The Company will continue to monitor the situation and analyze the potential impact that Pillar Two will have on future results.

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)	2023		2022
Assets:
Inventories	$	52.4	$	28.5
Capitalized exploration expenses		15.6		12.4
U.S. foreign tax credit carryforward, net of Uncertain Tax Positions		1,904.1		1,653.5
U.S. tax effect of Peruvian deferred tax liability		83.5		112.5
U.S. tax effect of Peruvian Uncertain Tax Positions		69.6		45.1
Reserves		315.4		249.6
Deferred workers participation		12.2		15.9
Accrued salaries, wages and vacations		7.7		7.4
Sales price adjustment (PUI)		(0.3)		—
Deferred charges		—		28.6
Valuation allowance on U.S. deferred tax assets, foreign tax credits and U.S. tax effect of Peruvian deferreds		(2,301.7)		(2,053.7)
Accrued royalty and special mining tax		29.6		10.8
Other		16.5		21.9
Total deferred tax assets		204.6		132.5
	At December 31,
(in millions)	2023		2022
Liabilities:
Property, plant and equipment		(68.1)		(19.7)
Social responsibility expenses		(9.7)		(7.7)
Sales price adjustment (PUI)		—		(29.0)
Deferred charges		(2.9)		—
Total deferred tax liabilities		(80.7)		(56.4)
Total net deferred tax (liabilities) / assets	$	123.9	$	76.1

The valuation allowance increased by $248.0 million in 2023, which was primarily due to the valuation of unutilized Foreign Tax Credits generated in 2023 and the valuation of the anticipatory foreign tax credits for the U.S. Tax effect of Peruvian deferred tax related to uncertain tax position liabilities. The Peru branch operations are taxed in the U.S. as a flow through entity to SCC. Since the Peruvian tax rate of 29.5% now exceeds the U.S. tax rate of 21%, management expects that it is more likely than not that the benefit of excess credits generated in the current year will not be realizable. 

U.S. Tax Matters—

As of December 31, 2023, the Company considers its ownership of the stock of Minera Mexico to be essentially permanent in duration. Income from subsidiaries, such as Minera Mexico, is included in the Global Intangible Low Tax Income (“GILTI”) on a current year basis.

GILTI imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company has not had U.S. tax liability from the GILTI inclusion since the introduction of this tax in 2018 and does not anticipate a tax in the future because of increased fixed asset amounts and the Mexican tax rate of 30%. No U.S. deferred taxes have been recorded as the Company has elected that if GILTI were to apply in the future, a current period expense would be recorded when incurred.

The Base Erosion Anti-Abuse Tax (“BEAT”) is a 10% minimum tax for the years 2019 through 2025 and 12.5% in years thereafter. It is calculated on a base equal to the Company’s income determined without the tax benefit arising from base erosion payments. Since this tax was imposed in 2018 the Company has had no U.S. tax liability for BEAT since it has met the safe harbor rule that provides a Company is not to be subject to the BEAT if related party payments from the U.S. to foreign entities do not exceed 3% of expenses, excluding cost of goods sold. The Company will continue to analyze the applicability of the BEAT provisions yearly.

As of December 31, 2023, $512.2 million of the Company´s total cash, cash equivalents and short-term investments of $1,750.8 million were 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. The Company has determined that as of December 31, 2023, a deferred tax asset of $0.1 billion exists with respect to its investment in foreign subsidiaries. Tax accounting guidance provided in ASC 740 requires this asset to be recognized only if the basis difference will reverse in the foreseeable future. Management has no plans that would result in the reversal of this temporary difference and consequently, no deferred tax asset has been recorded. Future dividends from these subsidiaries may not be subject to federal income tax in the U.S., and the Company incurs no state income tax liability. Additionally, there are no withholding taxes due to the tax treaty between the United States and Mexico. Distributions of earnings from the Company's Peruvian branch to the United States are not subject to U.S. taxes on repatriation. The Company's branch operations are not foreign corporations. They are mainly comprised of operations that are branches of the Company's U.S. operations and are taxed on a current basis.

As of December 31, 2023, there were $1,915.8 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 as of December 31, 2023. These credits will expire if not utilized by the end of the years listed below:

Year	Amount
2024		59.7
2025		146.7
2026		95.1
2027		-
2028		171.8
2029		219.9
2030		247.6
2031		582.3
2032		161.2
2033		231.5
Total	$	1,915.8

These foreign tax credits are presented above on a gross basis and have not been adjusted for any unrecognized tax benefits. In accordance with ASC 740, the Company has recorded $11.7 million for the U.S. jurisdiction unrecognized tax benefit as an offset to the Company’s deferred tax asset for foreign tax credits. The remaining foreign tax credits of $1,904.1 million have a full valuation allowance against them at December 31, 2023. It is the expectation of management that with the reduction in the U.S. corporate tax rate to 21% and considering the corporate tax rates in

Mexico of 30% and in Peru at 29.5%, it is unlikely the excess foreign tax credits can be utilized. Additionally, foreign dividends may no longer be taxed in the U.S. due to the GILTI rules and thereby reducing the U.S. tax on foreign source income and limiting the ability to utilize foreign tax credits generated before the 2017 Tax Cuts and Jobs Act.

On December 28, 2021, the U.S. Treasury and the IRS released final regulations addressing various aspects of the foreign tax credit regime. The regulations apply to years beginning after December 28, 2021. The Company reviewed and revised the foreign tax credits generated under the new regulations, which is not expected to have a material impact on the Company’s financial statements as excess foreign tax credits generated are fully valued. See below for discussion of Peruvian tax mattes and the Peruvian Special Mining Tax.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”), which includes, among other provisions, (i) a new corporate alternative minimum tax of 15% on the adjusted financial statement income (AFSI) of corporations with average AFSI exceeding $1.0 billion over a three-year period, and (ii) a new excise tax of 1% on the fair market value of net corporate stock repurchases. The provisions of the Inflation Reduction Act are effective for tax years beginning in fiscal year 2023. The Company continues to analyze the impacts that the Inflation Reduction Act will have on future operating results.

Beginning in fiscal year 2022, the U.S. Tax Cuts and Jobs Act of 2017 (“TCJA”) enactment of IRC Section 174 requires the capitalization and amortization of research and experimental expenditures. The Company does not believe this legislation will have a material impact on the Company’s Consolidated Financial Statements and will continue to assess the effects.

Peruvian Tax Matters—

Mining royalty 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. The minimum royalty charge is recorded as cost of sales and those amounts assessed at higher rates are included in the income tax provision. The Company has accrued $84.8 million, $71.4 million and $140.8 million of royalty charges in 2023, 2022 and 2021, respectively, of which $44.6 million, $35.8 million and $97.8 million were included in income taxes in 2023, 2022 and 2021, respectively.

Peruvian special mining tax: This tax is based on operating income with graduated rates increasing from 2% to 8.4%. The Company recognized $71.7 million, $56.4 million and $114.0 million in 2023, 2022 and 2021, respectively for this tax. These amounts were included as income taxes in the Consolidated Statement of Earnings.

Mexican Tax Matters—

Since 2014, Mexican mining entities have been required to pay a mining royalty of 7.5% on taxable earnings before taxes, depreciation, and interest; and an additional royalty of 0.5% over gross receipts from sales of gold, silver and platinum. In 2023, the mining royalty was $142.8 million and the additional royalty was $1.5 million.

On September 8, 2022, the Federal Executive, through the Ministry of Finance and Public Credit, presented the tax bill package for the year 2023 to the Congress of the Union, which relies on the General Criteria for Economic Policy (CGPE). The Revenue Law (LIF) for 2023 was approved by both the House of Deputies and Senators in October.

As has been the case in recent years, the Federal Executive proposed no new taxes or tax rate increases. However, more requirements to make tax deductible expenses and investments have been added to the tax laws, and the tax authorities are exercising more scrutiny via audits.

Accounting for Uncertainty in Income Taxes—

The total amount of unrecognized tax benefits, excluding interest and penalties, in 2023, 2022 and 2021, was as follows (in millions):

	2023		2022		2021
Unrecognized tax benefits, opening balance	$	56.0	$	—	$	66.1
Gross decreases—tax positions in prior period		—		—		(10.9)
Gross increases—tax positions in prior period		50.2		104.2		—
Gross increases—current-period tax positions		8.6		—		—
Gross decreases—current-period tax positions		—		(10.7)		(1.1)
Decreases related to settlements with taxing authorities		(15.7)		(37.5)		(54.1)
Lapse in statute of Limitations		10.8		—		—
Foreign Currency Effects		1.1		—		—
		55.0		56.0		(66.1)
Unrecognized tax benefits, ending balance	$	111.0	$	56.0	$	—

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes within the Consolidated Statements of Earnings. For the Peruvian jurisdiction, the Company recorded $19.7 million and $26.7 million of accrued interest and penalties in 2023 and 2022, respectively. For the U.S. jurisdiction, the Company recorded $0.2 million of accrued interest and penalties in 2023. There were no interest or penalties accrued in the Mexican jurisdiction for uncertain tax positions in any of the years presented above.

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $99.3 million at December 31, 2023 and relates to the Peruvian, Mexican and U.S. jurisdictions.

Unrecognized tax benefits in the U.S. jurisdiction of $11.7 million were offset by U.S. deferred tax assets including foreign tax credits. Offsetting expense related to the change in liability for uncertain tax positions within the U.S. jurisdiction and the change in valuation allowance of the U.S. deferred tax asset for foreign tax credits was presented as a net amount in the components of income taxes.

The Company expects that foreign exchange rates will have an impact on the amount of unrecognized tax benefits in the Peruvian and Mexican jurisdictions.

As of December 31, 2023, the Company’s liability for uncertain tax positions included penalties and interest of $0.2 million in the U.S. jurisdiction and $46.4 million in the Peruvian jurisdiction. There was no liability for uncertain tax positions penalties and interest for the Mexican jurisdictions as of December 31, 2023. Interest and penalties are not included in the table of unrecognized tax benefits above.

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

Peru:	2018 and all subsequent years
U.S.:	2020 and all subsequent years
Mexico:	2016 and all subsequent years

Management does not expect that any of the open years will result in a cash payment within the U.S. and Mexican jurisdictions in the upcoming twelve months ending December 31, 2024. Management expects to make cash payments of $67.8 million within the Peruvian jurisdiction in the upcoming twelve months ending December 31, 2024.