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tries such as Brazil, Iran, Indonesia, Zaire, and Yugoslavia. GIRM would examine mining possibilities in mineral-rich countries, intervene more actively as a service company in the developing countries, and generally promote new possibilities for French private mining industries over the long run.

a. Selection of a Commodity. For stockpile purposes, selection would be made on the following conditions:

1. France is a substantial consumer but not a major producer of the commodity.

2. Suppliers of the commodity are relatively few and are concentrated in politically unstable areas.

b. Copper Priority. Because France was totally dependent on non-French companies for its copper supplies, copper was given priority over other materials. The Government's goal was to have French-owned companies provide from one-quarter to one-third of France's imports of this metal. To this end, GIRM planned a program of copper development which would eventually embrace activities ranging from extraction to refining. The program anticipated expenditures of some 300 million francs over a period of 4 years, with the French Government subsidizing 35 to 40 percent of the outlays. At the end of 1972, GIRM was maintaining a copper stockpile of about 60,000 tons for the benefit of French industry.

c. Nickel.-The 1972 program also gave special attention to nickel. France's Societe Le Nickel (SLN) signed a nickel stockpiling agreement estimated to add $20 million to the company's coffers, and permitting SLN to continue mining New Caledonia ore at the 1972 rate, while expanding facilities in northern New Caledonia to meet anticipated future demands. Under this agreement, GIRM was to purchase 10,000 tons of SLN nickel ore in 1973 at a negotiated price, with SLN to repurchase the nickel at the same price over the next 5 years, depending on market conditions.

2. Specific Actions Taken

Although discussions of the pros and cons of stockpiling continued within Government circles, the 1972 stockpiling program appears not to have been implemented to any substantial degree, mainly because of opposition from the Ministry of Finance.

Early in 1975, however, following a year's study of France's vulnerability to deficiencies in supplies of hard minerals, the Government of France apparently made some major policy decisions for corrective action. These decisions were inspired by interministeral studies showing that the supply of over half of France's mineral imports (which account for 55 percent of total consumption) could become critical under certain eventualities. The Government's policy decisions, which were taken at a special session of the Council of Ministers, chaired by President Giscard, contemplated action in four areas:

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a. Mineral Geological Research and Exploration. A multiyear approximation of 125 million francs (10 million in 1975 and approximately 25 million annually thereafter) has been made for increased hard mineral prospecting in France, and revision of the mining code is being studied to improve the economic conditions of mineral production. The goal is to double France's own mineral production or, at a minimum to achieve a more complete inventory of the country's available resources. Development or subsidy of noneconomic mines is not presently being considered. French geological research activities overseas are also to receive priority attention.

b. Increased Recycling. -A new office will be created in the Ministry of Industry to provide increased recycling of metals, as well as other materials. Legislation on recycling will soon be presented to Parliament.

c. Negotiation With Producers.—Maintenance of good relations with mineral exporting countries will continue to be emphasized as the most important factor in securing mineral imports, 65 percent of which come from lessdeveloped countries. To this end, the Government will continue to seek arrangements for cooperating with traditional and potential suppliers of minerals in such fields as geological research, minerals exploration, and manpower training. Relationships that promise to stimulate new export sales for French manufacturers will be emphasized.

d. Stockpiling. A national minerals stockpile will be created to contain stocks equivalent to 2 months' average imports for each category of raw or processed materials normally imported. An appropriation of 100 million francs (approximately $23 million) has been provided in 1975 for this purpose. The appropriations are expected to double in 1976 and remain at that level during the expected buildup period of 3 to 4 years. (U.S. Embassy

officials believe that given gross French mineral imports of approximately 12 billion francs in 1974, the buildup may take longer.) Stockpiles will be maintained at Government expense and will be available only under Government authorization, which could include drawdowns in time of extreme market shortages or price rises.

According to the Ministry of Industry officials, France would not try to use the stock to intervene in the marketplace. The relative unimportance of potential French stocks in proportion to world supply would make such an effort fruitless in any event. Officials hoped, however, that creation of a national stockpile would enable France to negotiate with minerals producers from a stronger position.

3. References

Buttner, F. H. Draft Report on Stockpiling Effects on Economic and Supply Stability, National Commission on Materials Policy, Apr. 9, 1973.

Minerals Yearbook, Area Reports: International, U.S. Bureau of Mines, 1972.

Airgram A-95, from American Embassy, Paris, to U.S. Department of State, Feb. 25, 1975. Metals Bulletin, Apr. 14, 1972.

D. STOCKPILING INCENTIVES IN SWEDEN

In view of the immense investment in the U.S. strategic stockpile, a search for a method of financing stockpiling less costly to the Government should not be surprising. Sweden has decided to eliminate the expense of stockpiling through a system of tax incentives to support production and encourage industry to maintain its own inventories. The explanation of this plan is as follows.

1. Taxation of Corporate Income

The Government of Sweden maintains Government-owned stockpiles of raw material for strategic or economic purposes. At the same time, it provides incentives to industry to do so too. It does this through its unusual system of taxation of corporate income. The rules governing the taxation of corporate income in Sweden apply to three special areas:

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The Swedish tax rules in these areas have contributed to the ability of Swedish industry to compete in world markets. By providing substantial incentives to industry and commerce. The rules have encouraged the use of private capital to deal with economic fluctuations and the business cycle.

a. Use of Tax Incentives. An essential feature of these devices is the degree of control they give business taxpayers over the amount of profit to be reported. The corporation has the option of taking larger or smaller deductions in any particular year. To that extent, corporate and other taxpayers are permitted a substantial degree of latitude in leveling out their annual results and in building up

77-119 0-76-20

reserves.

b. Inventory Valuation. - Sweden's tax provisions governing the valuation of inventories are designed to eliminate taxation of merely inflationary profits and permit the strengthening of corporate resources against the possibility of inventory price declines. Although provisions exist in other countries for similar purposes, none takes the same form as Sweden's, where the basic rule is that the valuation of the inventory entered by the taxpayer in his account books shall govern for tax purposes. However, the right to value inventories in the taxpayer's business discretion is subject to certain limitations established by the tax laws.

The main rule governing inventory valuation is complemented by two supplementary rules. The first of these is the rule of "comparable value." If the value of the inventory at the end of a corporation's fiscal year-at cost or market and after deducting obsolete or unsalable items is less than the average of the value of the inventory at the close of the 2 prior years (this average value is called the "comparable value"), the corporation may write its inventory down by 60 percent of that comparable value, rather than by 60 percent of the value at the end of the income year in question.

The second supplementary rule relates to the valuation of raw materials or staple commodities in the inventory. The corporation has an option to value these inventory assets at the lowest market price in effect during the income year or in any of the 9 previous years, and then to reduce that figure by 30 percent to give an inventory valuation equal to 70 percent of the 10-year low. If the corporation chooses to value raw materials or staple commodities in this way, it may not also take advantage of the rule of "comparable value" outlined above.

In any event, a corporation may always write its inventory down to its actual value

despite the foregoing rules and take appropriate deductions from taxable income.

So far as the company's books are concerned, it is immaterial whether the amount of an authorized writeoff is deducted directly from the cost or market value of the inventory on the asset side, or is set up instead as a reserve for inventory price decline on the liability side. The latter method is customarily used, however, when the use of the "comparable value" rule results in a negative inventory value.

c. Depreciation. The main rule provides that a taxpayer, after first writing off all obsolete or unsalable items in full, may write down the balance of the inventory by 60 percent to a floor of 40 percent of cost or market value, whichever is lower. Cost is determined on a first-in, first-out basis. The amount of this inventory writeoff is deductible from taxable income.

d. Reserves for Future Investment.-A special provision, enacted in 1964, permits a Swedish parent company selling inventory assets to a foreign subsidiary for further resale on the foreign market to defer tax on profits attributable to goods which remain unsold in the hands of the subsidiary at the end of the parent's fixed year. The parent may take a deduction from taxable income, by an amount not exceeding the difference between (1) the price at which the parent sold these goods to the subsidiary (minus any amount of inventory writeoff deducted by the subsidiary), and (2) the parent's cost of these goods. The allocation must be restored to taxable income during the following fiscal year; at the end of that year, the question of a deduction for a renewed allocation is considered in view of current circumstances.

2. Incentives Preferred to

Stockpiling

While the tax system of Sweden was not designed to create a national stockpile, but rather to support a health industrial economy in good rapport with Government, it has tended to obviate the need for a national stockpile by encouraging industry to maintain inventories large enough to meet emergency situations.

True, the inventories thus supported include many items not necessarily of a strategic and critical nature, as well as those that are. On the other hand, the coverage becomes much greater than would be possible if the Government were to purchase and store only those items it could afford and which were deemed vulnerable enough to warrant the Government effort.

In brief, the Swedish tax rules as they apply to inventories, along with other tax measures, are designed to increase the efficiency of Swedish industry as a competitor in world markets. The creation of a "Swedish stockpile" is more or less a byproduct. Whether or not it might be desirable to extract at least the principle from the Swedish tax system for application to the United States would seem to warrant further examination.

3. Reference

The Tax System in Sweden, Skandinaviska Enskilda Banken, February 1972.

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