2.8 INCOME TAX AND DEFERRED TAXES

2.8.1. Explanation of the income tax expense for the year and the applicable tax rate

The income tax expense for 2017 amounted to EUR 71 million (2016: EUR 233 million), a figure which:

• Does not include the income tax expense relating to the companies accounted for using the equity method (see Notes 2.7 and 3.5), since, in accordance with accounting legislation, their results are presented net of the related tax effect.
• Includes income tax benefit amounting to EUR 17 million relating to prior years’ income tax, mainly as a result of the reduction in the US tax rate from 35% to 21% (EUR 31 million) and other regularizations (EUR -14 million).

Excluding the result of these companies accounted for using the equity method (profit after tax of EUR 251 million), permanent differences (EUR -32 million), results arising from consolidation with no tax impact ((EUR 4 million) and taking into consideration the income tax expense incurred in 2017 (EUR 88 million), the resulting effective income tax rate is 25%, as evidenced in the table below.

This effective tax rate is in line with the rates applicable in the main countries in which Ferrovial has a presence.

Following is an explanation of the various items that must be adjusted in order to calculate the effective tax rate:

• Permanent differences. This item relates to period expenses or income which, pursuant to the tax legislation applicable in each of the countries, are not deductible (expenses) or taxable (income) in the year, and are not expected to be deductible or taxable in future years. The cumulative balance in this connection is an expense of EUR 32 million. The detail of the most significant of these adjustments is as follows:
  • Gains on the sale of the Portuguese toll roads (EUR 46 million), which are exempt from taxation.
  • Losses on specific construction and services projects performed outside Spain that do not give rise to a tax asset (EUR -86 million).
  • Recovery for tax purposes, pursuant to Royal Decree 3/2016, of the impairment losses on investments, which increase the taxable profit by EUR 14 million. The recovery is made within five years, with last year application in 2020.
• Results arising from consolidation with no tax impact. This item relates to results derived from accounting consolidation criteria which do not have any tax implications. The cumulative balance in this connection is income of EUR 4 million. The detail of the most significant of these adjustments is as follows:
  • Losses of infrastructure project companies in the US in which other companies have ownership interests and which are fully consolidated. The tax asset is recognised solely at Ferrovial’s percentage of ownership as these companies are taxed under the pass-through tax rules; the shareholders of these companies are the taxpayers, at the percentage of ownership that they hold therein. The adjustment in this connection amounts to EUR -15 million and relates to the tax asset allocable to the other shareholders.
  • Impairment of EUR -29 million of the goodwill of the Autema toll road, with no tax impact (see Note 2.5).
  • Gain arising from the revaluation of the ownership interest in the Portuguese toll roads (EUR 45 million), which under current legislation is not subject to taxation.

The following table includes the detail of the calculation of the effective tax rate for 2016.

2.8.2 Detail of the current and deferred tax expense and the tax paid in the year

The breakdown of the income tax expense for 2017 and 2016, differentiating between current tax, deferred tax and changes in estimates of prior years’ taxes, is as follows:

The amount of income tax paid in the year was EUR 142 million, as shown in the note on cash flows (see Note 5.3).

2.8.3. Changes in deferred tax assets and liabilities

The detail of the changes in the deferred tax assets and deferred tax liabilities in 2017 is as follows:

The changes in the deferred tax assets and liabilities include most notably the impact recognised as a result of the early application of IFRS 15, Revenue from contracts with customers (see Note 1.3.1-a), totalling EUR 60 million (net of deferred assets and liabilities).

The deferred tax assets and liabilities recognised at 31 December 2017 arose mainly from:

a) Tax assets

These relate to tax assets which have not yet been deducted by the Group companies. This item does not include all the existing tax assets, but rather only those that, based on the Group’s projections, are expected to be able to be used before they expire. The balance recognised totalled EUR 353 million, of which EUR 298 million related to recognised tax losses and the remainder to unused double taxation, reinvestment and other tax credits totalling EUR 228 million at 31 December 2017 (2016: EUR 207 million), of which EUR 55 million have been recognised.

The detail of the total tax loss carryforwards, distinguishing between the maximum tax asset and the tax asset recognised based on the projected recoverability thereof, is as follows:

Spanish consolidated tax group:

The tax loss carryforwards of the consolidated tax group in Spain at 2017 year-end totalled EUR 190 million. For the purpose of ascertaining the recoverability of these assets, a model was designed that takes into account the changes introduced by Royal Decree 3/2016 and uses the Group companies’ latest available earnings projections. Based on this model, the Group will recover all the tax loss carryforwards, since profits will be generated on a recurring basis in the projected period, as well as the tax credits already recognised (EUR 41 million), and, accordingly, they have been retained in the consolidated statement of financial position.

US consolidated tax group:

At 31 December 2017, the balance of tax loss carryforwards of the consolidated tax group in the US totalled EUR 82 million, of which EUR 17 million had been recognised in prior years. In a similar fashion to the consolidated tax group in Spain, a model was designed that uses the latest available earnings projections of the US consolidated tax group companies. In line with the approach adopted in previous years, it was decided to not to recognise the full amount of the tax assets since profit is not expected to be reported until 2024 and the projections could vary significantly depending on the new infrastructure projects that may be awarded.

Australian consolidated tax group:

Following the acquisition of Broadspectrum, Ferrovial established a consolidated tax group with all of its Australian companies. The tax losses recognised relate mainly to historical losses incurred by Broadspectrum (EUR 63 million) and the Construction Division (EUR 10 million). As in the foregoing cases, a projections model was prepared in which it is concluded that the group will generate taxable profits on a systematic basis in the coming years. On the basis of this conclusion, a decision was made to continue to recognise the tax losses.

UK:

The new UK tax regime came into effect on 1 April 2017 and gave rise to new regulations with an impact on the UK consolidated tax group. The main changes relate to the limitation of the use of tax loss carryforwards; the possibility of using them to offset 100% of taxable profit of up to GBP 5 million and 50% of the remaining amount of taxable profit, with no time limit and irrespective of whether the losses were generated before or after the entry into force of the reform. Also, tax loss carryforwards can be used by any company in the consolidated tax group. Under the new regime, in 2017 tax losses totalling EUR 8 million were recognised in the UK.

b) Assets and liabilities arising from timing differences between the accounting and tax income and expense recognition methods

This item relates to the tax impact resulting from the fact that the timing of recognition of certain expenses or depreciation and amortisation charges is different for accounting and tax purposes.

The recognition of a tax asset in this connection means that certain expenses have been recognised for accounting purposes before their recognition for tax purposes and, therefore, the Company will recover these expenses for tax purposes in future years. Conversely, a liability in this connection represents an expense that is recognised for tax purposes before its recognition for accounting purposes.

The deferred tax assets include most notably:

• Provisions recognised for accounting purposes which do not have a tax effect until they are materialised (EUR 200 million).
• Deferred tax assets of EUR 132 million arising as a result of differences between the tax and accounting methods used to recognise income, mainly in the Construction Division.
• Differences relating to borrowing costs at concession operators in Spain, which for tax purposes are recognised as an asset and subsequently amortised whereas for accounting purposes they are expensed currently (EUR 84 million).
• Accelerated depreciation and amortisation for accounting purposes (EUR 44 million).

Within liabilities, the balance is related mainly to:

• Differences between tax and accounting criteria in relation to the recognition of provisions (EUR 353 million).
• Deferred tax liabilities of EUR 40 million arising as a result of differences between the tax and accounting methods used to recognise income in conformity with IFRIC 12, mainly in the Toll Road Division.

c) Deferred taxes arising from valuation adjustments

This reflects the cumulative tax impact resulting from valuation adjustments recognised in reserves. This impact appears as an asset or liability since there is generally no direct tax effect until this amount in reserves is transferred to profit or loss.

The asset balance relates to accumulated losses in reserves that will have a tax impact when they are recognised in profit or loss. Conversely, the liability balance relates to gains not yet recognised for tax purposes. Noteworthy are the deferred tax asset and liability relating to financial derivatives amounting to EUR 101 million and EUR 81 million, respectively.

d) Deferred taxes relating to goodwill

These correspond to deferred tax liabilities relating to the tax credit for goodwill amounting to EUR 223 million, which mainly include those related to the amortisation of the of Amey and Swissport goodwill, as discussed in Note 6.5.1.b.

The detail of the changes in the deferred tax assets and deferred tax liabilities in 2016 is as follows:

2.8.4. Years open to tax audit

With respect to Ferrovial S.A. and its consolidated tax group, on 19 July 2017 the Large Taxpayers Central Office of the State Tax Agency announced the commencement of a tax audit of Ferrovial S.A., Ferrovial Agroman and Ferrovial Servicios S.A. in relation to the following taxes:

• Income tax for 2012 to 2014.
• VAT for tax periods from June 2013 to December 2015.
• Tax withholdings and pre-payments relating to salary income for tax periods from June 2013 to December 2015.
• Non-resident income tax withholdings for tax periods from June 2013 to December 2015.

The tax audit is currently at the documentation submission stage. The criteria that the tax authorities might adopt in relation to the years open for review could give rise to contingent tax liabilities which cannot be objectively quantified. It is considered that any possible material tax contingencies were adequately provisioned at year-end.

2.8.5. Tax regime applicable to Ferrovial S.A.

Ferrovial, S.A. has filed consolidated tax returns since 2002. The companies composing the consolidated tax group together with Ferrovial, S.A. in 2017 are shown in Appendix II. Also, in 2014 the Company opted to be taxed under the tax regime provided for in Articles 107 and 108 of Spanish Income Tax Law 27/2014, of 27 November. Since the application of that tax regime affects the taxation of possible dividends or gains obtained by the Company’s shareholders, attached as Appendix I to these consolidated financial statements is a note describing the tax treatment applicable to the shareholders, together with information on the taxable profits obtained by Ferrovial, S.A. that the shareholders should be aware of for the purpose of applying that regime.

2.8.6. Change in the tax legislation in the US

In December 2017 the US administration approved a change in the tax regime involving new adjustments with an impact on the US consolidated tax group. The most far-reaching impacts, inter alia, are the change in the income tax rate from 35% to 21%, the use of tax loss carryforwards of up to 80% without any time limit and the limitation on the deductibility of finance costs to 30% of EBITDA (2018-2021) or EBIT (from 2022).

From the accounting standpoint these changes had a positive impact on the deferred taxes recognised in the consolidated statement of financial position and the consolidated statement of profit or loss of EUR 31 million, and did not affect cash flow.

From a business standpoint, this reform would give rise to lower tax payments in the future on Ferrovial’s infrastructure projects in the US, and the timing effect that the other two measures discussed might have would not offset the positive impact of the reduction in the tax rate.