Freeport-McMoRan 2008 Annual Report Download - page 31

Management’s Discussion and Analysis
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 29
Our effective tax rate for 2009 is expected to be highly sensitive
to changes in commodity prices and the mix of income between
U.S. and international operations. At current prices, we would
generate losses in the U.S. that could not be used to offset income
generated from international operations, and for which we would
not record a tax benefit. Taxes provided on income generated
from our South America and Indonesia operations are recorded at
the applicable statutory rates. As a result, our consolidated
effective tax rate may be substantially higher than the U.S.
federal statutory rate of 35 percent. Assuming average prices of
$1.50 per pound of copper, $800 per ounce of gold and $9.00 per
pound of molybdenum, we estimate our consolidated effective
tax rate for 2009 would approximate 75 percent and would
increase with lower prices and decrease with higher prices.
Refer to Note 14 for further discussion of income taxes.
Minority Interests in Consolidated Subsidiaries
2008 Compared with 2007
Minority interests in consolidated subsidiaries totaled $617 million
in 2008 compared with $791 million in 2007. Lower minority
interests in 2008 primarily reflected lower net income at PT Freeport
Indonesia and at our South America copper mines during 2008.
Because of the decline in copper prices, minority interests in
consolidated subsidiaries is expected to be significantly lower in
2009, compared with 2008.
2007 Compared with 2006
Minority interests in consolidated subsidiaries totaled $791 million
in 2007 compared with $168 million in 2006. Higher minority
interests in 2007 primarily reflected amounts associated with our
acquired South America operations ($603 million) and an increase
related to higher earnings at PT Freeport Indonesia ($20 million).
OPERATIONS
For comparative purposes, certain of the operating data included
in this section for our North America copper mines, South
America copper mines and Molybdenum operations for the year
2007, combines our historical data beginning March 20, 2007,
with Phelps Dodge pre-acquisition data through March 19, 2007,
and for the year 2006 reflects Phelps Dodge pre-acquisition data.
As the pre-acquisition data represents the results of these
operations under Phelps Dodge management, such combined
data is not necessarily indicative of what past results would
have been under FCX management or of future operating results.
Year Ended December 31, 2008 Year Ended December 31, 2007
Income Tax Income Tax
Income Effective Provision Income Effective Provision
(Loss)
a
Tax Rate (Benefit) (Loss)
a
Tax Rate (Benefit)
U.S. $ 2,023 24% $ 489 $ 1,871 30% $ 568
South America 2,086 32% 677 2,623 33% 868
Indonesia 1,432 43% 612 2,860 46% 1,326
Asset impairment charges (10,867) 39% (4,212) – N/A –
Goodwill impairment charges (5,987) N/A – – N/A –
LCM inventory adjustments (782) 38% (299) – N/A –
Purchase accounting adjustments (1,102) 38% (423) (1,264) 38% (479)
Eliminations and other (112) N/A (47) 21 N/A 6
Adjustments N/A N/A 359
b
N/A N/A 111
c
Consolidated FCX $ (13,309) 21% $ (2,844) $ 6,111 39% $ 2,400
a. Represents income (loss) from continuing operations before income taxes, minority interests and equity in affiliated companies’ net earnings.
b. Represents an adjustment to establish a valuation allowance against U.S. federal alternative minimum tax credits.
c. Represents an adjustment for a one-time charge associated with the reversal of the Phelps Dodge APB Opinion No. 23 indefinite reinvestment assertion on certain earnings in South
America. This adjustment was fully offset by a reduction in minority interests’ share of net income.
The income tax provision from continuing operations for 2007
resulted from taxes on international operations ($2.2 billion) and
U.S. operations ($215 million). The difference between our
consolidated effective income tax rate of approximately 39
percent for 2007 and the U.S. federal statutory rate of 35 percent
primarily was attributable to (i) withholding taxes related to
earnings from Indonesia and South America mining operations,
(ii) a U.S. foreign tax credit limitation and (iii) an adjustment
associated with the reversal of the Phelps Dodge APB Opinion
No. 23, “Accounting for Income Taxes – Special Areas,” indefinite
reinvestment assertion on certain earnings in South America,
partly offset by a U.S. benefit for percentage depletion and an
international tax rate differential.
The income tax provision for 2006 ($1.2 billion) primarily
reflected taxes on PT Freeport Indonesia’s earnings. The
difference between our effective income tax rate of approximately
43 percent for 2006 and PT Freeport Indonesia’s Contract of
Work rate of 35 percent primarily was attributable to withholding
taxes related to earnings from Indonesia mining operations and
income taxes incurred by PT Indocopper Investama.
A summary of the approximate amounts in the calculation
of our consolidated (benefit from) provision for income taxes for
2008 and 2007 follows (in millions, except percentages):