on many common factors. Personnel trained and experienced in one or the other may be usefully employed in either; management and conservation techniques are also transferable. As you know, the administration is currently reassessing its position on legislation. It is my hope that a decision will be forthcoming in the very near future. I would like now to take just a few minutes to give you an overview of the current state of knowledge in ocean mining. I do so in order to illustrate why we need to use the early stages of a deep sea mining system as a means of improving our understanding and, subsequently, of refining the legal regime for commercial develop ment. My first comments relate to resource occurrence. Data available on worldwide distribution of manganese nodules and other subsea resources were consolidated into a set of maps of worldwide subsea mineral resources and published by the United States Geological Survey in 1970 as map I-632. Subsequently, considerable work has been done in the northeast equatorial Pacific Ocean under the manganese nodule project of the National Science Foundation and under various academic investigations under sea grant programs. Detailed prospecting and exploration have been conducted by industrial concerns, both United States and foreign, but this information is generally not in the public domain, nor is it presently available to the Government. Data available on the worldwide distribution of potential mine sites, which were summarized in a 1976 staff study by the Department of the Interior's ocean mining administration, do indicate, however, that the resource is very large by any standard. All available data indicate that the nodule concentrations and relative grades vary widely, both on large scale areas and within potential mine sites. For the Pacific Ocean nodules in the region of current and immediate interest, nickel and copper each average about 1%, cobalt about 0.25%, and manganese about 25%. These relatively rich concentrations occur in the belt north of the equator extending from the Hawaiian Islands to the west coast of Mexico, a region of about 2,600 miles long by 500 miles wide (the area noted above for the current NSF manganese nodule project). At the same time, we do not have sufficient information to determine what may constitute economic concentrations of nodules for purposes of specific license and permit terms. This can only come with increased exploration and prototype commercial operations as contemplated by S. 2053. With the data from actual prototypical experience, we can then design a full operational system. In the meantime, the Bureau of Mines is developing a comprehensive computerized data base on nodule location, analyses, and sample information; data have been entered for more than 5,000 samples from more than 2,700 stations in the Pacific and Indian Oceans. The information is compiled under contracts and grants with universities and other oceanographic institutions, including, where available, company data. These data are being incorporated into a series of mineral resource and bathymetric maps to be published this coming spring. The Lamont-Doherty Geological Observatory of Columbia University provided the basic topography at a scale of 1:1,000,000. A composite map at a scale of 1:5,000,000 has been prepared which will contain, in addition to the basic topographic information on the sea floor, the data from the data bank on nodules assays, sediment characteristics, and photographic coverage. In addition and based on this data, minable units are being identified in specific localities from analyses of these resources for tonnage, grade, and operational costs. In support of the NOAA Domes program, the United States Geological Survey has been, and is continuing to study basic scientific information on details of nodule characteristics, sediments, sedimentary water, plume dispersions and settling rates, and associated geologic investigations. We must recognize, however, that adequate understanding of the environmental effects of ocean mining activities will depend on evaluation of the results of the prototype operations. As you know, the economic feasibility of ocean mining depends primarily upon the recovery and marketing of the nickel contained in the manganese nodules. Nickel sales will yield nearly 70% of gross revenues for most contemplated operations, although the profitability will depend on the recovery and marketing of some co-products in addition to nickel-copper, cobalt, and in some cases, manga nese. A study of the economics of nodule mining published by Interior's ocean mining administration concludes that manganese nodule projects can compete effectively for new nickel demand only as the nickel market expands. Present projections indicate that, in the early 1980s, world nickel mine capacity must expand in order to keep pace with demand. This expansion will take place either in land-based laterite nickel deposits or in deep seabed manganese nodules. Our study shows that investment costs for ocean mining projects will be somewhat lower than those for new laterite nickel projects, while operating costs will be similar. Based on this analysis, manganese nodules could be competitive with new lateritic operations, but they would not compete with existing nickel mines. The copper recovered from manganese nodules will contribute to the profitability of seabed mining, but it will represent an insignificant portion of the world copper supply. Revenues from cobalt will be relatively small, although nodules will represent an alternative source of cobalt, and the decision whether to recover manganese may be determined solely by market forces. Accordingly, the principal growth factor in the ocean mining industry during its early years will be its competitiveness with other new sources of nickel. This indicates that we have the time to proceed carefully before entering a full commercial regime. As you know, the various consortia with U.S. interests have developed new technology for exploration and new mining systems for recovery of the nodules from the deep seabed, tests of shore facilities and at-sea have demonstrated this recovery technology. They have also selected favorable sites where they plan complete mining systems tests and which show promise of early commercial production feasibility. They have also been compiling seabed nodule resource data and have recovered sufficient bulk samples for completing the development of metallurgical processes. From all reports, including government research, the metallurgical processing techniques for recovering metals from the nodules have been developed and tested satisfactorily. At-sea systems tests are under way by Deepsea Ventures, Inc. for ocean mining associates; other consortia are planning full-scale tests in the next two years. You will undoubtedly receive more details on these plans during the industry testimony I understand will be given tomorrow. I would like to spend the remainder of my time discussing substantive issues raised by this legislation. The administration's position on the pending legislation has already been outlined by the Department of the Treasury. The Department of the Interior concurs with this position. I also want to commend you, Mr. Chairman, for what I would consider to be a number of significant improvements in S. 2053. The flexible effective date and the international contribution sections are marked improvements over previous bills introduced in the Congress. There are other issues, however, that I believe need further consideration. We noted that this proposed legislation addresses priority of rights and that it grandfathers in existing operations. In my judgment, this provision may create some conflicts. The membership within the international consortia is quite complex and has been subject to many changes, including the dates of entry, activities and expenditures. Deepsea Ventures, Inc., for example, one of the early explorers in deep seabed mining, is no longer a consortium member, but it continues to act as a service manager to an international consortium headed by a subsidiary of United States Steel. These kinds of circumstances suggest that there is a need in this legislation for establishing some equitable means of arbitrating disputes over priority rights. In my view, responsibility may be more properly vested in the Federal Mediation Board than in the Secretary. I am also concerned by the general lack of congressional guidance or mandates provided in this legislation. I am keenly aware of some of the problems that can result from becoming too specific or restrictive. But I am also aware of problems that can develop if we err on the other extreme, in the absence of such legislative guidance or requirements, we must establish a system based on administrative rulemaking and secretarial discretion. Legislation is the basis for consistency in minerals resource management programs. It is the department's belief that some legislative standards are necessary in order to avoid the unstable conditions that could result from an administratively based program. We in Interior have learned from our experiences in managing licenses and leases for energy and other minerals that questions of size, duration of both licenses and leases and, most of all, diligence requirements are matters that must be addressed both by legislation and administrative rulemaking, otherwise, our license and leasing programs will not service the principal objectives. As you members of these committees know so well, the principal purposes of a license are to explore and develop necessary technology. The most important purposes of a permit are to manage production operations within the concept of resource conservation and multiple use of land, and to protect the environment. To that end, it is my judgment that legislation should provide a mechanism whereby the secretary must approve exploration and production plans prior to granting licenses or permits. From a management standpoint, this planning and review process is one of the most essential ingredients in any diligence mechanism. I would also like to call your attention to the functions of the Federal officers aboard mining vessels. It appears that their functions are limited to the "protection of the quality of marine environment." While this is a very critical component in any supervisory function, I find many other activities that these Federal officers should be performing relating to the terms, conditions and restrictions of a license or permit. It would seem that these officers will be in the best position to assess technological capabilities and problems, and to determine if diligence requirements are being maintained. For these reasons, I would recommend that the committees broaden the range of their permissable functions so they could serve as full-fledged supervisors for the secretary. I want to reaffirm the department's deep interest in this issue and assure you that we are prepared to work very closely with you on any matters where we can be helpful. Thank you for this opportunity to testify and I am now prepared to answer your questions. Senator METCALF. Thank you very much, Secretary Davenport. Now we shall hear from Assistant Secretary Junz. STATEMENT OF HON. HELEN JUNZ, DEPUTY ASSISTANT SECRETARY FOR COMMODITIES AND NATURAL RESOURCES, DEPARTMENT OF THE TREASURY Ms. JUNZ. Mr. Chairman, members of the committees, coming last in this interagency effort, I now despense with all the introductory remarks of my statement. If you don't mind, I will turn directly to those provisions in your bill, S. 2053 that give us some concern. It will not surprise you that the provisions for tax treatment and investment guarantees give us some problems. In regard to tax policy, we do agree, as a general proposition, that there should be no tax discrimination between U.S. deep-seabed mining and U.S. domestic mining. Although this concept can be stated simply, it raises some very complex issues. We believe the tax provisions in the bill before us are in need of further refinement in order to take explicit account of a number of problems. Under the principle of domestic treatment, deep-seabed mining conducted by a U.S. individual or corporation would be subject to U.S. tax. However, under present law, capital expenses incurred in connection with this mining activity would not be accorded accelerated depreciation, that is, a class life shorter than the normal guideline life provided under the asset depreciation range (ADR). Nor would the investment tax credit be available because these incentives generally are limited to fixed assets physically located in the United States. Exploration expenses, which currently may be deducted if incurred with respect to mineral deposits located in the United States must be capitalized and recovered through depletion when the deposits are located outside the United States. Finally, percentage depletion, if available at all, would be at the rates prescribed for foreign mineral deposits-14 percent for manganese, nickel, copper and cobalt-rather than the higher rates for domestic deposits-22 percent for manganese, nickel, and cobalt and 15 percent for copper. In this connection, it should be noted that under present law, depletion is allowed only if the taxpayer has an "economic interest" in the minerals in place. Although the concept of an "econom ic interest" is not well delineated in the law, it is something akin to an ownership right in the minerals prior to extraction. Because there are no clear ownership rights to deposits in the deep seabed, it is not likely that under present laws deep-seabed mining would have the requisite economic interest to qualify for depletion allowances. With this background, it is apparent that nondiscriminatory domestic tax treatment for deep-seabed mining cannot be achieved without modification of the tax provisions in this legislation, and, indeed, modification of existing tax law. Further, the definition of U.S. citizenship in this bill can lead, under varying circumstances, to inequities in tax treatment. For example, as we read section 6(15), a "U.S. citizen" is defined to include a foreign corporation or other foreign entity if "controlled" by a single U.S. individual or other U.S. legal entity. Putting aside the troublesome omission of a standard for determining control, this provision can lead to double taxation or tax avoidance. For example, if control were to be defined as a 51percent interest, a joint venture incorporated in France "controlled" by a U.S. corporation, could be a "U.S. citizen" subject to full U.S. tax under this bill. As a French corporation, the joint venture would also be legitimately subject to French taxation— hence double taxation could result. Conversely, if the U.S. corporation did not "control" the joint venture, since it owned say only 49 percent, then the United States would have no tax jurisdiction. If a "U.S. citizen" incorporates such a joint venture in a tax haven area, for example in the Bahamas, it would escape all tax. Under the provisions of the bill, which require control by a single U.S. entity, two U.S. corporations each owning one-third interest in a Bahamian corporation also would escape all U.S. tax liability. Mr. Chairman, in the statement I am submitting to you, we elaborate some of the principles that we feel should guide legislation on tax issues. I will not take your time now to set those out. The second point I would like to make is with respect to investment guarantees. As has already been said, the administration beileives strongly in the desirability of developing the mineral resources of the seabed. However, in our view, an investment guarantee program for such activities is both undesirable and unnecessary. Investment guarantees are undesirable because they imply an obligation on the part of the Government to indemnify firms for possible adverse consequences of future Government policies. But it is a fact of life that Government decisions often dramatically affect an industry's profitability. The claim made for seabed mining in favor of Government guarantees in that it is in a unique situation because the conclusion of a treaty may profoundly alter its profit calculations. However, the Administration has concluded that the situation of deep seabed mining consortia is not sufficiently unique to justify institution of a new guarantee program. Investment guarantee programs currently in place cover certain domestic and foreign land-based mineral operations of U.S. corpo rations. For example, the Overseas Private Investment Corp. (OPIC) has programs to insure foreign investments in the minerals industries in developing countries. These programs are now under review, and theoretically, such a review might yield provisions that would allow extension of coverage to seabed mining activities. However, it seems to me, that if we are recommending an investment tax credit on the basis of nondiscriminatory tax treatment of ocean mining as compared with domestic mining, it would be difficult to add to that the kinds of advantages that are normally reserved to foreign investments. This sort of policy would raise questions with respect to the equity of treatment of domestic mining versus ocean mining. In addition, we would like to point out that we believe that investment guarantees are unnecessary. The lending climate for major investments has changed in recent years, partly in response to the tumultuous conditions of the early seventies. Banks are no longer willing to make loans solely on the merits of specific projects. They now require that specific investments be fully backed by the corporations undertaking them and hence, the testimony you may be hearing argues quite correctly that banks will not fund projects without corporate guarantees. But this increasingly applies across-the-board and not solely to seabed mining. Consultations we have had with major U.S. banks and other financial agencies in Washington lead us to conclude that funds are available for deep seabed mining operations without Government guarantees if firms are willing to assume the risk. The decision that there would be rich returns from seabed mining and that this justifies investment in this new area-under license by the U.S. Government and with assurances, the Government will do all it can to protect such mining interests-is a decision which we firmly believe is best left to the companies themselves. In conclusion, it is clear that the U.S. economy will ultimately benefit from the existence of a viable and productive seabed mining industry. But we find arguments in favor of preferential treatment of seabed development through Government guarantees neither convincing nor equitable. Therefore, we could not support diversion of official financial resources into seabed production and away from competing claims for Federal funds. I would be happy to anwer any questions you may have. Thank you. [The prepared statement of Ms. Junz follows:] STATEMENT OF HON. HELEN B. JUNZ, DEPUTY ASSISTANT SECRETARY FOR I am very pleased to appear before you today to discuss the Treasury Department's views on deep seabed mining legislation. We feel, however, that the timing of our discussions is somewhat unfortunate. As you know, since the end of the last session of the LOS Conference, the Executive Branch has undertaken a full review of our posture towards the Law at the Sea Conference, including also the question of legislation. The LOS review will carefully balance advantages against disadvantages over the full range of our interests in this area in order to arrive at decisions that protect them adequately. While this review will still take several weeks to complete, we expect to have a decision on legislation in a matter of days and certainly before |