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Taxes may be about to change the rules of the game in the global shipping industry

The taxation issues of multinational corporations have not been able to reach agreement at the global level, which has led to a series of tax chaos. To this end, the Organization for Economic Cooperation and Development (OECD) is preparing a tax reform plan involving US$100 billion.

It is reported that the Organization for Economic Cooperation and Development recently released an internationally coordinated blueprint for minimum tax rates for multinational enterprises, with the goal of reaching a global agreement on this in 2021.

It is not yet certain whether an agreement will cover the global shipping industry. However, if this is the case, the plan will affect the long-term preferential tax treatment, and this treatment has already become one of the financial foundations of the maritime business and covers the entire international freight sector.

The proposal to impose a minimum tax is to solve the problem of tax avoidance. Because some multinational companies will use some countries as tax havens to reduce their tax rates, while their business is carried out in another country, this practice is called tax base erosion (tax base erosion refers to the establishment of special tax relief items, thereby increasing Certain tax preferential treatment for taxpayers, which in turn brings about a reduction in the tax base) and profit transfer. The OECD estimates that this approach will cost countries 100 billion to 240 billion U.S. dollars in revenue, which is equivalent to 4% to 10% of global corporate tax revenue.

The OECD’s plan is to eliminate tax incentives and enable tax authorities where multinational companies are headquartered to collect taxes to make up for the taxes they evade through tax havens. This will essentially create the lowest tax rate in the world.

Whether the global minimum tax is also applicable to the shipping industry, the current proposal has not yet been determined, and there is still room for it.

Lobbyists in the shipping industry have been lobbying for the spin-off, and they have succeeded at least to some extent because some countries support their claims. However, some countries oppose special exceptions.

Imposing the world's lowest tax on shipping will reverse decades of tax avoidance in the industry. Governments of various countries allow shipowners to register ships in tax avoidance countries, which is also the default for tax avoidance. Then, they tried to recover the lost revenue by imposing a tonnage tax on ships (also known as "ton tax". Customs levies taxes based on the net tonnage of ships when foreign ships enter and leave their ports). These measures usually impose The company is very advantageous.

Therefore, many shipping companies do not need to pay corporate income tax. On average, the actual corporate income tax rate for bulk cargo transportation is 6%, the oil tanker industry is 3%, and the cruise company is 0%.

This is much lower than the average income tax rate for companies in other sectors of the transportation industry. For example, the average tax rate for freight forwarders is 27%.

If the minimum tax rate reaches 12.5% ​​of income, the shipping industry alone will increase taxes by $2.5 billion annually. Most of these additional taxes may flow to countries in Europe and Asia.

Taxes may be about to change the rules of the game in the global shipping industry

Increased taxes will increase the cost of the entire maritime supply chain. However, since shipping costs account for only a small part of the total value of most goods imports, the impact on the commercial sector using seaborne trade may be small, but the impact on the entire freight may be large.

Shipping companies are also active in other parts of the freight chain: operating port terminals, owning trucking companies, and acting as freight forwarders. The regulation of various countries promotes this vertical integration.

The 2019 International Transport Forum report on maritime subsidies pointed out that the European Commission has approved the tonnage tax plans of several member states, allowing shipping companies to include the revenues of their terminals, freight forwarders and even truck transportation businesses in the tonnage tax category.

In other words, the non-shipping activities of these companies can benefit from the very favorable tonnage tax scheme.

Recent research shows that the effective tax rate for port terminal operators belonging to large shipping groups is 14%, while the effective tax rate for independent non-integrated terminal operators is 21%. The market share of terminal operators belonging to shipping groups has doubled in the past ten years and is currently about 40%.

The implementation of the lowest global tax rate on the shipping industry will help resolve this distortion of competition and may prevent the trend of vertical integration of maritime logistics.

Change the shipping system

Currently, most ships are internationally registered, also known as flags of convenience. This convenience is for shipowners because they do not have official taxes, and there are no labor or transparency-related requirements.

However, this structure is problematic for the implementation of global shipping regulations, because the implementation process relies to a large extent on the supervision of a few countries, because these countries are favorable registration locations. The largest flag states are Panama, Marshall Islands and Liberia. These flag states have a lot of influence in the International Maritime Organization because they pay most of the dues.

Imposing the lowest global tax on the shipping sector may reduce the importance of these flags of convenience. This can also rebalance the power within the IMO, and only trading nations and shipowners with stronger ability to enforce laws and regulations can exert influence in the international trade organization.