OECD - BIMCO Bulletin


REGULATION September 2020 New OECD tax proposals could cost the shipping industry millions By Anne Kappel and Lars Kjaer of the World Shipping Council staff Extensive activities are taking place at The Organisation for Economic Cooperation and Development (OECD) that could substantially increase the income tax burden on the global shipping industry. Currently, two tax proposals that were originally aimed at highly digitalised companies, could be expanded to include the shipping industry, according to the World Shipping Council. The OECD proposals have the potential to impose hundreds of millions, if not billions, of dollars of new taxes on the international liner shipping industry As a follow-up to the pioneering 2015 OECD anti-tax avoidance base erosion and profit shifting (BEPS) actions, the OECD and the G20 established an Inclusive Framework on BEPS, bringing together the tax authorities of more than 100 countries. Originally aimed at highly digitalised companies, such as those operating online search engines or social media platforms, the proposals under this initiative have been substantially expanded to potentially cover virtually all businesses, including shipping. John Butler, President and CEO of the World Shipping Council (WSC), the trade association of the international liner shipping industry, says: The OECD proposals have the potential to impose hundreds of millions, if not billions, of dollars of new taxes on the international liner shipping industry and possibly other areas of shipping. WSC is therefore closely following the initiative and has submitted numerous comments to the OECD to try to ensure a favourable outcome of the discussions. Two different proposals that could ultimately have the same outcome Two OECD proposals are being considered. The first Pillar One would assign taxing rights to every country in the world in which a company has customers. In January 2020, the OECD Secretariat recommended limiting the potential application of Pillar One to businesses that generate revenues from individual consumers, thereby potentially excluding cargo shipping. The OECD Secretariat went a step further and recommended that international shipping (and airlines) be completely carved out of Pillar One because of the longstanding international practice of taxation of shipping and airlines by the residence country only. However, the second OECD proposal Pillar Two is more problematic. It is intended to ensure a minimum level of tax on profits of a multinational group of companies. The primary Pillar Two proposal would impose a shareholder level tax on a parent company of a multinational group in respect to a foreign subsidiarys profits if the subsidiary is not subject to a (currently unspecified) rate of tax (a topup tax). For example, a European parent company with ships under a European tonnage tax regime,1 has subsidiaries in Singapore and the United States that operate vessels under the Singapore shipping tax incentive system (which embodies both exemption and tonnage tax) and the US tonnage tax, respectively. Under the Pillar Two proposal, the European headquarters country generally would be required to tax the Singapore and US subsidiaries profits, even though the parents ships themselves are subject to lower taxes in profitable years under the European tonnage tax. In the same example, if the European country did not impose a top-up tax on the Singaporean and US subsidiaries profits, then a separate Pillar Two proposal would either (1) deny tax deductions for payments to the Singapore and US subsidiaries or (2) impose withholding or other taxes on the Singapore and US subsidiaries shipping income. This could result in taxation wherever in the world the subsidiaries have customers, in a manner similar to Pillar One. The Pillar Two proposals would also incentivise parent shipping companies to pull ships out of foreign subsidiaries, potentially undermining specialised shipping tax regimes in the subsidiaries countries. The OECD and the European Union have previously, and repeatedly, approved of specialised shipping tax regimes, which have been enacted by many countries to encourage the development of national maritime sectors and related industries. Policy decisions expected in the autumn The WSC, along with the Cruise Lines International Association (CLIA), the European Community Shipowners Associations (ECSA), and the International Chamber of Shipping (ICS), has been engaging with the OECD Secretariat over the past year, recommending that international shipping be carved out from both Pillars One and Two. The Pillar Two proposals would also incentivise parent shipping companies to pull ships out of foreign subsidiaries WSCs external tax counsel, shipping tax expert Kenneth Klein of Mayer Brown LLP in Washington, DC, says: Shipping companies are not exploiting high-value intangibles in tax havens, they invest billions of dollars in ships and other equipment each year and have huge expenses, generating operating losses as frequently, if not more often, as operating profits in most shipping sectors. In loss years or low margin years, shipping companies tax burden from tonnage taxes and freight taxes can be extremely high. To subject shipping companies to tax under Pillar Two (or Pillar One) in the occasional years of higher profits would seriously and inappropriately undermine the efforts of numerous European, Asian, and other countries to promote their maritime sectors through OECD and EU-approved special shipping tax regimes, Klein says Photo (top): iStock / Filograph The OECD Secretariat and the Inclusive Framework countries are continuing to work on the proposals through the pandemic. They intend to make policy decisions on the scope and details of the two Pillars by October 2020. WSC will continue to follow these potentially very important developments for the liner shipping industry closely. 1 About the World Shipping Council The World Shipping Council (WSC) is an industry trade group representing the international liner shipping industry, which offers regularly scheduled service on fixed schedules. The WSC has offices in Singapore and Brussels and is headquartered in Washington DC. Under a tonnage tax regime, actual revenues and expenses are not taken into account and the shipping company is taxed on a hypothetical (or notional) amount of net income, based on the ships tonnage. Thus, the ship could make or lose millions of dollars in a year, but be subject to the same fixed amount of tax. Connect with BIMCO Facebook Twitter Linkedin YouTube