My name is John R. Greenlee. I am the Director of Taxes of The Hanna Mining Company, Cleveland, Ohio. I welcome and appreciate this opportunity to appear before you today in my capacity as Chairman of the Tax Committee of the American Iron Ore Association. The American Iron Ore Association is a trade association represent ing companies which mine over 94% of the iron ore produced in the United States and Canada. The Association headquarters is located at 600 Bulkley Building, in Cleveland, Ohio. Our testimony today will deal with Sections 431, 432, 501 and 521 of HR 13270 as passed by the House of Representatives on August 7, 1969. Sections 431 and 432 of that bill affect the computation of the credit for foreign taxes, Section 501 is concerned with the taxation of income derived from the mining of natural resources, and Section 521 deals with the depreciation of real estate. We have purposely limited our discussion to the application of these provisions as these proposed changes affect the iron ore mining industry. We have collaborated with the American Mining Congress in the preparation of the statement presented to your Committee by them and concur with it. We wish to add however, certain points that have particular reference to the iron ore mining industry. HISTORY The statement of the American Mining Congress has traced the development of the legislative history of percentage depletion in some detail which we will not repeat. We would add to that history the following additional facts. In the early years of the income tax, depletion was based on what the taxpayer had paid for the acquisition of the mineral deposit. This was Cost Depletion which is still a part of the law today. Between cost and percentage depletion, which first became a part of the law in 1926, came Discovery Value Depletion. This method is the missing link" which connects the original cost depletion with percentage depletion. What discovery value depletion sought to do was to allow depletion to be based on the value of the deposit rather than the cost of acquiring it, i.e., the capital value created, rather than the cost of its creation. Because of the many difficulties encountered in administration, discovery value gave way to percentage depletion. Percentage depletion represented an effort to allow roughly the same amount of depletion as had been -2 realized under discovery value. Discovery value, as stated earlier, was enacted to prevent the taxation of the capital value created. Percentage depletion was introduced to present similar results but with substantially fewer administrative problems. It again recognized that an equitable tax system must and should take into account the capital value of mineral resources and exclude such value from a tax on income. This is a fact that seems to be lost in the discussions of percentage depletion in the tax reform movement. We emphasize one fact which we think is not generally understood. Mineral industries must operate, not only under economic laws which hold for other industries, but also under conditions which hold only for the mineral industry. There are at least three principal factors that distinguish the mineral industry from other types of business: 1. The irregular distribution of mineral deposits; 2. The high risk of exploration and development; and 3. The exhaustibility of the capital assets without a reasonable manner of replacement. Certain provisions of the Internal Revenue Code were developed to recognize the unique position of the mineral industries and were inserted into the law for sound and thoroughly considered reasons. They have been reviewed periodically and have been found on a continuing basis to fulfill the purpose and need for which they were originally enacted. PERCENTAGE DEPLETION RATES The percentage depletion rate of 15% on domestic iron ore as set forth in the House Bill should be retained for the reasons stated under the caption "Economic Factors and National Security". There is equal validity for maintaining the 15% rate for foreign iron ore deposits for the reasons later discussed under the caption "Foreign Tax Credit". Most importantly, in light of the operation of the foreign tax credit provisions, the denial of full -3 depletion on foreign deposits would result in the U. S. taxpayer paying additional tax to the foreign countries and no additional tax to the United States. No reasonable distinction can be made between domestic and foreign depletion rates as applied to the production of iron ore and we therefore strongly urge that both remain at 15%. ECONOMIC FACTORS AND NATIONAL SECURITY A viable, healthy iron ore mining industry (and the industry it supports the basic steel industry) is absolutely essential to the security of our nation. For almost forty years, percentage depletion has been and continues to be an important factor in the making of decisions to expend money on mining as compared to other investment opportunities. What makes the iron ore mining industry unique? Never before in the history of that industry has capital in such enormous amounts been so requisite to survival in the industry. Plants to process the present reserves of iron ore in order to make them acceptable in the current market require capital investments. tremendous For example, the top 500 industrial companies in the United States, as listed by Fortune magazine, require an average investment of $19,000 per employee, whereas iron ore processing plants today require an investment in the order of $150,000 per employee. A capital investment of at least $35 million is needed for each million tons of annual capacity. Since 1954 the The industry iron ore industry has invested $2.5 billion in mining facilities. faces an even larger capital investment program in future years to provide for the expanding needs of our domestic steel industry. The enormous future capital requirements of the iron ore mining industry may be illustrated by a quote from a recent book, "Affluence in Jeopardy'' written by Charles F. Park, Jr., Professor of Geology and of Mineral Engineering at Stanford University: -4 "In the year 1967 the per capita consumption (of iron) in the United Where are these capital funds to be obtained? Fundamentally, capital funds can be obtained only by (1) attracting new investment, or (2) by retaining profits in the business. Both of these sources exist only if there is an adequate return on investment in the iron ore mining industry. FOREIGN TAX CREDIT The American Iron Ore Association strongly urges that the present rules for the computation of the foreign tax credit be retained. Sections 431 and 432 of HR 13270 as drafted miss the point of the foreign tax credit. In attempting to eliminate a possible "double benefit" these sections of the House Bill do violence to other sections of the code and should be rejected. From the enactment of the first income tax law in 1913 the taxation philosophy of the United States has been predicated on the pattern of applying the income tax to all United States citizens on a world-wide basis regardless of residency or source of income. The U. S. citizen is also taxed by most foreign countries on income arising from sources within their respective borders regardless of his U. S. citizenship. Without these foreign tax credit provisions the resulting double taxation of foreign source income would render foreign operations competitively impossible. As a result, almost from the 33-758 O 69 No. 149 -5 |