deducting the "prima and is paid after the delivery of the vessel. Payments to shipyards for both types of rebates may be estimated at about $80 million in 1973. 1/ The three yards that dominate Spanish construction of large ocean-going vessels are government-owned. One is primarily a naval yard, wholly government-owned, though it does about 10% of Spanish commercial shipbuilding. Another suffered severe losses on fixed price contracts that included 325, 000 DWT tankers to be delivered at $27 $28 million each. INI acquired a 60% equity in the firm with an investment of some $30 million to help it fulfil its contracts. It is still writing off losses. The third, which provided about two-thirds of the vessel tonnage delivered by Spanish yards in 1972, is 50%-owned by INI and appears to be highly profitable. Spanish shipbuilding companies did about $700 million worth of business in 1972 and paid little more than $1 million in corporate income taxes. The present configuration of the industry is a result of a "concerted action" program that produced a series of regroupings and mergers in the late 1960s. Participants were permitted to depreciate investments freely for five years, in addition to the various tax free reserves generally available to Spanish business firms. The profit and loss accounts published by Spanish firms are too summary in nature to permit careful analysis. However, changes in the balance sheet of the one large profitable shipbuilder provide some evidence of the impact of the system available to Spanish shipbuilders. 1/ New contracts on similar sized ships were entered into in 1973 by the same yard at $49 million, with the buyer liable for wage increases in excess of 12% per year, steel price increases in excess of 6% per year and any further peseta revaluation. The company reported pre-tax profits of $5. 3 million on sales of $400 million and net worth of $88 million. It estimated its tax liabilities for the year at $950 thousand, about 18% of reported pre-tax profits and one-fourth of 1% of sales. Write-offs before profits included $1.7 million to a bad-debt reserve, $7.2 million for devaluation losses to be realized in future years, and $1.9 million for investments to be made under the concerted action program. Were these funds included, pretax profits would have totalled $16.1 million, equal to 4% of sales and 18% of net worth. Tax liabilities would have been $5.3 million at the 32.69% corporate tax rate. With tax liabilities thus reduced, only $3.8 million was added to the sinking fund for other fixed assets. With dividend payment of $4 million, cash flow may thus be estimated at about $15 million, and tax liabilities at about 6% of cash flow. Half the payment of dividends accrued to INI, the government-owned holding company. The 1973 government budget anticipated dividend receipts from INI of some $8 million. (2) Ship Operators The Spanish fleet is owned by 149 independent organiza- tions and industry-wide financial data are not reported. About 45% of the gross tonnage of the Spanish fleet consists of tankers and another 15% of bulk carriers. To the extent that bulk carriers are operated by companies to import their own raw materials, neither freight revenues nor tax payments because of shipping services can be calculated independently. About 5% of the gross tonnage (mostly bulk carriers) is owned, chartered or operated by a government-owned shipping company. The company is still carrying over large losses that it hopes to write-off finally in 1974. Another 5% of the fleet is owned by the monopoly established by the government to distribute petroleum domestically. That fleet is used solely in the coastal trades. In addition to the general rules with respect to reserves applicable to all companies, shipping companies may establish a tax-free reserve fund for extraordinary repairs. The shipping industry also benefits from two special rules with respect to depreciation. (1) Ships may be depreciated on the basis of the double declining balance method, though companies should continue to use the method initially adopted for each vessel. (2) Losses incurred by a shipping affiliate may be used to reduce consolidated tax returns up to an amount that does not reduce the tax rate of the profitable affiliates below 20%. The normal depreciation period of a ship is 8% for the hull and 12% for the machinery, the average being about 9 to 9.5% per year. Companies can establish their own depreciation rules with the Finance Ministry, so that actual practice varies with the tax position of the company. Thus one company uses the full privilege of the 9 9-1/2% double declining balance method (18 to 19% per year of the depreciated balance of each ship). A governmentowned company uses 8.33% straight line. Another company uses 6.2%, except in years of high earnings when it has used as much as 10% with government approval. The results reported by an important independent operator of tankers illustrates the value of the special tax benefits to a profitable operator with an expanding fleet. In 1972, the company had fleet revenues of $7.5 million and pre-tax profits of $2.0. Taxes were some $450 thousand, or 23.5% of reported profits. If allocations to the special reserve for extraordinary repairs were included in profits, the effective tax rate would have been 17.5%. For 1972, the company could have written off some $4.5 million in depreciation, if it did in fact take full advantage of the special rules available to shipping companies. The tax saving, as compared to straight line depreciation, would have been about $620 thousand, compared to actual tax payments of some $450 thousand. At the permitted depreciation rate, its 1972 effective tax on cash flow would have been about 8.5%. Without special write-offs available only to shipping lines, its 1972 tax liabilities might have been nearly $1 million larger. Since it operated almost 10% of the carrying capacity of the Spanish ocean-going fleet, the industry as a whole may have realized tax savings of $10 million. The company had a new VLCC delivered in 1973 and was awaiting deliveries on contracts for one more in 1974 and another in 1975. The 3 new vessels will almost triple the 1972 carrying capacity of the company fleet. Assuming that charters on the new vessels continue to be very profitable, it could take advantage of the double declining balance privilege to reduce its tax liabilities. Its consequential 1975 tax savings, as compared with the use of straight line depreciation, may be estimated at $2.5 million. The strong cash flow has permitted substantial selffinancing of new vessels, despite a dividend payment in 1972 equal to 9% of net worth. Given the Spanish system of controlled interest rates and directed credit, the availability of credit may be as important as the interest charges. In the 1970s, the Spanish system is providing cheap credit to the yards, to Spanish operators and to foreign buyers of Spanish-built ships all without direct cost to the government for new - loans. Outstanding balances of older loans issued at rates of interest below the cost of government borrowing continue to be a burden. Moreover, even on the new loans, credit to the maritime industry continues to be a burden on the economy, though the subsidy does not appear in the accounts of the government. A free market rate for longterm capital in Spain would at least range around 10 12%, meaning that borrowers could use capital productively and profitably at such rates. With its protected market, even parts of the maritime industry might be able to pay such rates, but the industry would be less dynamic. On the other hand, other sectors would have more access to credit and could use it more productively. In this sense, the Spanish maritime industry receives material financial support from the rest of the economy. INI has invested about $60 million in the capital stock of the two largest commercial shipbuilding companies. Its 1972 dividends on that investment equalled about 3%. The government's participation is financed through 7% tax-free bonds which the savings banks and social security institutions are required to purchase from INI. Under the concerted action program, the Bank for Construction Credit has lent about $75 million to the shipyards, largely at 6% to be repaid in 9 years with 3 years of grace on amortization. The 1972 - 76 Plan foresees about $160 million in new investments in Spanish shipyards. Actual investments in 1972 were near the planned level of $40 million. At the end of 1972, only $15.4 million was outstanding in Construction Bank loans to shipyards. A new credit in the amount of $5. 3 was authorized during the year. However, new loans were limited to 70% of the cost of the investment and interest rates were up to 6.5%. Restriction in the credits foreseen from the Bank forced the yards to increase their shortterm borrowing to finance investments. |