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Should shipping pay corporate tax?

Updated October 15, 2020 (10:00)

By Justin Stares, editor, The Maritime Watch.

Ask a typical shipowner why he or she lumps for a certain flag and the answer is almost always: "It's a question of price and service".

If owners can't reach an administration on a Friday evening or over the weekend, that's a problem. It's a global, non-stop business after all.

Low costs are an obvious incentive. As one lobbyist put it: "It may seem patriotic to fly the flag of the country where one is based rather than a flag of convenience, but if, by opting for the latter, the owner can buy his daughter a condo, then that's what he is going to do."

The term "flag of convenience" carries connotations of "social dumping". Owners are accused of switching registries in order to profit from lower standards.

This is a little disingenuous. The world's biggest flags - which are among those to face these accusations - are all required to uphold minimum, global standards. They can figure among the world's best performers in terms of safety, according to statistics compiled by port state control authorities such as the Paris MoU.

Certain registries impose crewing nationality requirements, but this again can hardly be called a safety issue. There is no real reason why an Italian master, for example, is automatically more competent than one certified in the dozens of non-EU countries whose training systems have been approved by the EU.

While there are dodgy flags out there (such as, perhaps, one or two those used for "end-of-life" vessels headed for breakers' yards) the debate is in reality less about safety, or the environment, and more about taxation.

The global market share of the EU-flagged fleet has been declining by around a percentage point every year in large part because the competition is cheaper. Other factors, such as service levels, cargo reservations rules, and military protection, do play a factor, but following the money is usually a good starting point.

EU administrations already exempt shipping from corporate tax via "tonnage tax" regimes or flat taxes. When profits are high, owners rake it in. When they make losses, they can end up paying taxes anyway.

This worked for a while but turns out to have been insufficient to stem flagging out. The European Community Shipowners' Association has been calling for the European Commission to "align" legislation with competition in the Far East: more tax cuts please!

From a Brussels perspective this can seem an intractable problem. If owners don't get their way, they can up sticks with ease. While the media focuses incessantly on digital giants, few if any industries are as globalised as shipping. Switching flags is relatively easy; your part-time lawyer can represent you in the flag state of your choosing.

Competition drives tax rates down, and the only real way to reverse this trend is a global tax agreement.

Talk of such an agreement in the OECD has therefore alarmed industry. Organisations such as Bimco have warned that blueprints, if enacted, could cost the industry millions or even "billions".

Should shipping pay corporate tax? Reformers rely on the moral argument: why should owners get away with paying less than their fair share? Industry counters with arguments such as the long life-cycle of investments, during which there are frequent lost-making periods (even if, in reality, this varies from sector to sector).

While owners are often tarred with the same tax-dodging brush, some do fly their national flag, and employ local seafarers. Seafarers, as a percentage of total operating costs, are not high (I have heard figures of around 15% though this will depend on ship type). This decision is in some cases the result of political or societal pressure.

Taxation is is a deeply moral issue. I once heard a Catholic priest give a sermon based on the bible’s instruction “Render to Caesar the things that are Caesar’s”. I asked him afterwards if this meant in essence that everyone should pay tax. His reply was “Only if they are fair”.

Philosophical questions aside, for shipping the issue is not whether owners should pay corporate tax, but whether it is possible to design a system in which they are obliged to pay. If a global solution comes with loopholes, they will be exploited.

The only alternative is a protectionist European regime in which ships are legally obliged to fly European flags, hire European crew, and pay European taxes. And there is no desire in Brussels for such a regime.

This is the thirteenth in a series of Maritime Watch editorials. If you want them straight to your email inbox, sign up for the alerts at the top of the homepage.

© EU Official Journal

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