by Richard Stephens, Partner, Watson Farley Williams LLP
Posted on: 30 October 2020
Since the last financial crisis, the global tax landscape has undergone incredible reform. Shipping, as an industry, has largely remained at the edges, or even on the outside, of these reforms.
Whilst it is perhaps an exaggeration to say that shipping is approaching a crossroads in relation to the industry’s tax position, various local and global tax initiatives, together with an increased social awareness of tax and tax planning, mean that aspects of the industry’s approach to taxation may need to change.
Since its inception as a global industry, shipping in international traffic has largely been taxed only in the home state of the ship-operating company. With the use of offshore centres, and flags of convenience, that “home state” taxation was also, in many cases, avoided. In order to retain, and with hopes of growing, its “onshore” shipping industry, many EU states adopted “tonnage tax” regimes in what was effectively EU-approved tax competition with traditional offshore centres, as well as with shipping tax incentives in Singapore and Hong Kong.
As media coverage of corporate tax planning by multi-national firms combined with an economic need to generate greater tax revenues, politicians became increasingly willing to treat tax as a global issue. Countries, directly and through organisations such as the OECD and the G20, became willing to dictate to other nations how their tax systems should operate. That dramatic change from tax as a national issue, to a globally policed concept, led in part to an ambitious global anti-tax avoidance project commonly known as “BEPS”.
“BEPS” is an OECD led project, aimed at counteracting certain tax avoidance techniques by the introduction of globally adopted anti-avoidance measures. The BEPS project was extremely ambitious but the political and social will to clamp down on perceived tax avoidance saw the project overcome some hugely difficult technical and practical obstacles.
Shipping has not proved to be hugely impacted by BEPS measures. The “economic substance” rules introduced in the Marshall Islands, Bermuda and other traditional “offshore” shipping centres have had an impact on a number of shipping groups, and as application of those rules develops, we may see further changes. More broadly, we are starting to see commercial counterparties, investors and financiers show a greater interest in the tax affairs of others and an “unacceptable” tax structure may prevent access to certain contracts or funding.
Having met with success from BEPS, the OECD is currently working on an even more ambitious initiative to redesign the global tax landscape and readdress where large multi-national companies pay tax and even bring in a concept of a global minimum tax rate. You may read reference to “BEPs 2.0” and talk of “Pillars 1 and 2” and “GloBE” – all part of the same initiative.
It remains to be seen whether shipping will be granted an industry exemption from these new proposals (and even whether there is still the global will and enough cooperation between nations to push through such dramatic global tax reforms). Shipping has good arguments as to why it is not an industry in need of additional tax avoidance measures but the tax policymakers at the OECD understandably have concerns over perceived fairness and where the line should be drawn if one industry is given a blanket exemption from supposedly global tax measures. If the measures are taken forward, and shipping does not secure an actual or effective exemption, then it seems likely shipping will need to face up to tax reform. There is likely to be a further push to “onshore” shipping businesses and it will be interesting to see whether the EU-approved tax competition that gave rise to onshore tonnage tax regimes survives BEPS 2.0 untouched. If it does, the UK may find itself in competition with other European nations and with Singapore to attract those businesses looking to move onshore.
This article was authored by Richard Stephens, Partner, Watson Farley Williams LLP as a follow-up to the GLOBAL TAX REFORM IN THE CONTEXT OF COMMERCIAL SHIPPING STRUCTURES webinar hosted by Maritime London on October 23, 2020 as part of the Posidonia Web Forums Week.
