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Shipping and Aviation Tax Planning

By Lowtax Editorial
03 October, 2013

Belonging to two of the world’s most international-facing industries, shipping and aviation companies must navigate a sea of complex tax rules, often in several jurisdictions at once, and this is a task made all the more challenging by frequent changes in national tax rules. In this feature, we round up some key developments, both good and bad, that have the potential to impact on shipping and aviation tax planning.


China: Shipping and Aviation To Benefit From Shanghai Free Trade Zone; VAT Clarification Sought

Last month, China's State Council issued the general plan for the country's first pilot free-trade zone (FTZ) in Shanghai, launched on September 29, that will ease restrictions on renminbi convertibility, financial and insurance services, trade and investment.

Given the port and airport location of the FTZ, there are policies to abolish the capital requirements for single aircraft or single vessel company subsidiaries set up by financial leasing companies (FLCs); to relax the existing limits on foreign investment shareholdings in joint venture international shipping companies; and to allow for wholly foreign-owned international ship management companies.

There is already a tax exemption on business income and revenues arising from international shipping, transporting, warehousing, and shipping insurance for companies registered in the FTZ port areas, and FLCs will now also benefit from preferential tax rates on the import of planes with a net weight of above 25 tonnes.

The plan also offers further tax incentives for investment and trade. While zero customs duties and import taxes will continue to apply to goods transferring between the FTZ and overseas destinations, and with domestic merchandise entering the FTZ being regarded as having been exported, with exporters enjoying an immediate tax rebate, tax exemptions are also to be granted to companies registered in the zone on their imports of machines and productive equipment.

However, there appears to be much confusion in the logistics industry about the scope of China’s value-added tax (VAT) system, which was expanded nationwide on August 1, 2013 following local trials.

In a letter to the US Department of State, Bruce Carlton, the President and Chief Executive Officer of the United States National Industrial Transportation League has called for assistance in obtaining clarifications from authorities in China regarding the application and scope of the new VAT regime.

While the new VAT is not supposed to be aimed at the movement of international freight, there is uncertainty with regard to its application and resulting impacts, especially on freight moving between China and the US.

"In general there appears to be widespread confusion over the application of the new VAT enacted by China, as well as its implementation by service providers,” Carlton wrote. “This is clearly generating considerable market uncertainty for shippers not only in the region but here in the US as well."

South Africa: New Shipping Tax Regime Drafted

The draft Taxation Laws Amendment Bill, 2013, released by the South African Revenue Service on July 14, 2013, proposes the introduction of an internationally-competitive tax regime for ship operators that register vessels under the South African ensign.

The regime, proposed to be effective from January 1, 2014, would provide a number of tax concessions to resident companies that have registered at least one vessel that is flagged in South Africa under the Ship Registration Act 1998, which are designed for the international transportation of passengers or goods for reward.

The regime will include exemptions from income tax, capital gains tax and dividends tax, as well as cross-border withholding tax on interest. Shipping companies will be afforded the added flexibility of using any functional currency for day to day operations.

Under the existing tax regime, international shipping transport conducted by South African companies is largely subject to a corporate income tax rate of 28 percent, and the only incentives for international shipping are some depreciation allowances for capital investment in shipping transport.

In view of international trends, such as the increasing use of tonnage taxes and other special tax regimes, the South African Government now considers the domestic tax system for shipping “wholly uncompetitive.”

It is expected that the new shipping tax regime will become law when the draft 2013 tax bill is enacted later this year.

United States: Harbour Maintenance Tax To Go?

In August 2013, a bill was unveiled that proposes to repeal the existing Harbor Maintenance Tax (HMT) and the imposition, in its stead, of a new fee that would also be levied on goods imported by road and rail from Canada and Mexico.

The HMT is a federal tax imposed on the value of the goods being shipped through US ports, and its revenue is placed in a trust fund, which is supposed to be used for maintenance dredging of federal navigational channels. More than USD1.6bn in revenue was collected in 2012, and the surplus in the HMT Trust Fund has grown to more than USD7bn.

The HMT is not, however, assessed on importers who route cargo through non-US ports and afterwards move their goods into US markets by land, and the bill to be introduced by two Democrat Washington Senators, Patty Murray and Maria Cantwell, will set out to "level the playing field for American ports competing for cargo."

The "Maritime Goods Movement Act for the 21st Century" would repeal the HMT and replace it with a Maritime Goods Movement User Fee, which is designed to "ensure that shippers cannot avoid the MGMUF by using ports in Canada and Mexico."

The bill was introduced into the Senate by Murray on September 17, 2013. However, those hoping for closure of the HMT ‘loophole’ will be disappointed to learn that govtrack, the website which details and tracks legislation in the US Congress for the benefit of the public, gives the bill a 0 percent chance of getting out of committee stage and a 0 percent chance of being enacted.

Spain: Ship Finance Tax Planning Scheme Faces Axe; Port Fees To Be Cut

After an in-depth investigation, the European Commission has concluded that a Spanish scheme for the purchase of ships involving leasing and financing through tax relief is partly incompatible with European Union (EU) rules on state aid.

Under this scheme, a maritime transport company can purchase a ship through a complex contractual and financial structure (rather than directly from a shipyard) involving an economic interest grouping, an investment vehicle held by investors wishing to reduce their basic taxable amount.

In practice, the economic interest grouping acts on behalf of the maritime transport company purchasing the ship, acquires it on a financial leasing basis and pays it off in the three to five years after work starts on its construction. The economic interest grouping then benefits from taxation exclusively on the basis of tonnage, and hands the ship over to the transport company without paying capital gains tax. The maritime transport company acquires the ship with a reduction ranging from 20 percent to 30 percent on the purchase price charged by the shipyard.

This reduction is awarded by the economic interest grouping, not by the state, so the Commission has taken the view that it does not constitute state aid to the maritime transport company. The Spanish Government will therefore not have to seek recovery of these tax breaks. Nevertheless, the Commission investigation found that the scheme had bestowed an unfair competitive advantage on the members of the economic interest groupings set up for these operations.

The Commission reiterated that its decision does not call into question the Spanish tonnage tax scheme for maritime companies, as approved in 2002. Spanish shipyards will continue to benefit from aid granted under schemes approved by the Commission, such as aid for innovation, regional shipbuilding aid and export credits, the Commission clarified.

On a cheerier note for the shipping sector however, Spain's Minister for Public Works Ana Pastor has announced plans to reduce, by 5 percent, the fees charged for the use of port infrastructure by vessels, passengers and freight. This measure is to be accompanied by an 8.5 percent reduction in port property occupation tax.

Unveiling details of the plans during a speech at Menéndez Pelayo International University on the Spanish port system on September 2, 2013, Pastor explained that the measure will provide significant tax relief to businesses estimated at between EUR45m (USD59.5m) and EUR50m.

Isle of Man: Ship Registry Endorsed

There have been no recent changes to the Isle of Man’s tax rules as they apply to shipping companies, but the recent announcement that the Isle of Man Ship Registry had registered its largest ship to date is worthy of note as it underlines the jurisdiction’s attractiveness in terms of tax.

At over 360 meters long and 48.2 meters wide, the ‘Hanjin Blue Ocean' was the last of nine 13,000 Twenty-foot Equivalent Unit (TEU) container vessels to register as a group in the Isle of Man. Each ship boasts a gross registered tonnage (GRT) of 141,000, collectively adding a healthy 1.26 million GRT to the Isle of Man’s growing register, which passed the 15 million GRT milestone at the start of this year.

"This has been a very important project for the Ship Registry,” commented Dick Welsh, Director of the Isle of Man Ship Registry. “Registering nine prestigious ships not only adds significant tonnage to the Ship Register, but also enhances the reputation of the Isle of Man as a leading location for ship financing and registration.”

The Manx Shipping Registry is among the world's fastest growing, with double-digit growth seen in tonnage terms in both 2010 and 2011, rising from 12m in 2010 to the current level of 15m.

The Isle of Man passed the Merchant Shipping (Registration) Act 1984 in order to encourage registration of ships on the island. There is a zero-tax regime for ship management companies based on the Isle of Man.

Greece: Battles Against the Tide

There has been much speculation about how the Greek crisis will impact on the country’s shipping industry, which remains one of the world’s largest, and a vital component of the nation’s economy. The Government has repeatedly reassured that it will not seek higher taxes from the hitherto lightly-taxed shipping sector, fearful that one of the country’s most successful industries would relocate en masse to more friendly tax shores. Yet there was something inevitable about the announcement in July 2013 that several hundred shipping companies will pay an additional amount of tax on top of their annual tonnage tax payments.

Following the signing of a voluntary agreement that will see 441 shipping companies make extra revenue payments over a three-year period via the Tonnage Tax on cargo, Greece's Prime Minister Antonis Samaras praised the “patriotism” of Greece’s shipowners.

The measure will apply to 90 percent of ships flying the Greek flag, and to 65 percent of Greek-owned ships flying foreign flags. It is hoped that between EUR75m and EUR140m will be generated each year.


Channel Islands: Joint Aircraft Registry Plans Bite The Dust

The governments of the Channel Islands, Jersey and Guernsey, have confirmed they have abandoned plans for a joint aircraft registry after being unable to meet the "separate operational and commercial interest of both islands."

Confirming the decision to part ways, agreed during meetings in September, statements from both islands said that it had become apparent over recent months – after a great deal of effort and having taken independent expert legal opinion – that a single Registry "could not meet the separate operational and commercial interests of both islands and it was therefore decided that each jurisdiction would move ahead with separate plans."

Previous statements from Jersey suggest that island's goods and services tax (GST) regime was the most significant obstacle to an agreement. Guernsey does not levy GST or an equivalent sales tax.

Jersey's Economic Development Minister, Senator Alan Maclean said that the islands' discussions had been focused on the unique selling point the Registry would offer in tax terms. He reported that the islands had been considering the model employed by the Isle of Man, enabling aircraft to be managed through a corporate ownership structure registered for value-added tax purposes, opening up the possibility for purchasers of aircraft to reclaim VAT.

Guernsey announced in May 2012 that it had entered into a new partnership agreement with SGI Aviation to operate the registry, which was earmarked to launch at the end of this year.

It is believed that the two jurisdictions will now pursue the idea of opening separate aircraft registries.

Bahamas: Tax Warning Issued

The cash-strapped Government of The Bahamas has been warned that new and increased taxes on the jurisdiction’s private aviation sector will result in a loss for the country's tourism industry of USD16-USD20m in revenue.

As of July 1 the government of the Bahamas has levied a USD50 customs tax on small private planes. In addition, the departure tax applied to aircraft pilots and crew, which rose from USD15 to USD20 per head in the last few years, has now been lifted to USD25 per head under the government's 2013-2014 Budget.

Jim Parker, president of Caribbean Flying Adventures.com, a leading pilot's guide in the region, expects that there will be a 10 percent drop in the number of private aircraft coming to the Bahamas as a result of the new tax rates.

The new taxes are part of a series of revenue measures the Government is putting in place to close a widening gap in its budget and reduce its debt, with the territory already having suffered several credit ratings downgrades.

Caribbean: Rails Against Foreign Aviation Taxes

Indeed, the taxation of air travel is a major issue in Caribbean region at present, with the tourist industry there – the lifeblood of most of these small island economies – said to be suffering at the hands of aviation taxes imposed by foreign governments.

In September 2013, the Tourism and International Transport Minister of St Kitts and Nevis, Richard Skerritt, warned the International Civil Aviation Organization (ICAO) that proposed aviation tax increases could affect the cost of air travel between the Caribbean and the regions proposing the tax hikes.

Speaking at the ICAO Plenary Session on September 25, Skerritt said that the US government has proposed increasing five aviation taxes and imposing a new USD5.5bn departure tax.

Skerritt also noted that the UK's Air Passenger Duty (APD) is now the highest flight tax in the world after it was raised earlier this year. "The consequence for us in the Caribbean is that the APD banding levels now makes it harder than ever for us to compete for UK tourists when they can travel closer to home for much less," he said.

He also argued that the inclusion of aviation in the European Union emissions trading system "will not be effective in reducing carbon emissions, but will simply lead to increased air fares."

There are few signs that any of the foreign governments mentioned by Skerritt plan to reverse these taxes.

Kenya: Aviation Sector Wins Tax Reprieve

It appears that Kenya Airways has been successful in brokering a last-minute amendment to the Kenyan Government’s new VAT bill, which would have subjected aircraft and helicopter purchases and lease arrangements to VAT.

Kenya Airways Chief Financial Officer, Alex Mbugua had warned that the introduction of VAT on aircraft purchases and leases would boost the company's tax bill by KES8.3bn (USD95m) this financial year, enough to tip the struggling airline into insolvency.

However, in August 2013, Kenyan Airways managed to persuade the parliamentary committee on finance, planning and trade to reinstate zero-rating of goods used in aircraft operations, and goods leased or imported or purchased for use by an approved ground handler or caterer.

Nigeria: Private Aircraft Taxed

It remains to be seen whether another African Government will be persuaded to reverse a tax on the aviation sector after the Nigerian Government, through the Nigerian Civil Aviation Authority, slapped a luxury tax on the non-scheduled flights of private jet owners and operators in Nigeria.

A tax of USD4,000 is to be levied on the owners and operators of foreign-registered private jets for every flight departure within Nigeria, while Nigerian-registered private jets have to pay USD3,000. The tax has to be paid before each departure.

The controversial measure is being challenged by airline operators in the Federal High Court however, on the grounds that it is illegal and unenforceable.

India: VAT Policy Criticised

Indian states meanwhile have been encouraged to lower the rate of VAT they levy on aviation turbine fuel (ATF) to four percent to prop up the nation's debt-saddled airlines.

Addressing representatives from several states at a September 2013 gathering to discuss the future of India's aviation sector, Civil Aviation Minister Ajit Singh pointed out that ATF constitutes nearly half of an airline's operating cost. Due to the imposition of provincial VAT, at rates as high as 30 percent, fuel is considerably more expensive than in other territories, damaging Indian airlines' competitiveness, he said.

He suggested that the revenue impact of lowering VAT on ATF would be negligible, and challenged the treatment of the aviation sector as a cash cow, with air travel long considered by policy makers to be the preserve of the wealthy.

This is a long-standing issue in India however. State Governments generally tend to guard their revenue bases doggedly in the face of pressure from central Government, and there is no indication that a quick fix is around the corner.

France: Tax Barrage Extends To Aviation

There must be few taxpayers who have been left untouched by the dramatic increase in the French tax burden over the past couple of years. The aviation industry hasn’t come in for particularly special treatment yet, but it hasn’t escaped the attentions of the Government altogether, and the tax imposed on airline tickets is due to rise by 12.7 percent in 2014, to increase financial aid for development. The decision was taken during the course of a recent meeting in Paris of the inter-ministerial committee for international cooperation and development.

Dubbed the "Chirac tax," the levy was introduced in France in 2006 by former French President Jacques Chirac. The charge has not been revised since it entered into force. Levied at a rate of EUR1 (USD1.32) on single intra-European flights in economy class (EUR10 for business class), up to a rate of EUR40 on international business flights, the tax helps to finance the fight against AIDS, tuberculosis, and malaria in developing countries.

The French civil aviation industry and the National Federation of Commercial Aviation have fiercely criticized the charge from the outset, insisting that the fee distorts competition, in particular as regards commercial flights, given that the levy is only applied in France.

The engineering and technicians union of Air France has warned that the country's tax imposed on airline tickets will cost Air France-KLM in excess of EUR70m (USD92.4m) next year, if the Government goes ahead with plans to increase the controversial levy.

Last year, the tax cost Air France-KLM in the region of EUR65m, of which Air France contributed EUR59m and KLM paid EUR6m. This figure represented one-third of the total EUR185.3m collected last year from the tax, from all airline companies departing from France.

Urging the Government to abandon its tax hike plans, the union lamented the fact that the levy is only imposed on air transport, not only violating the principle of equality before taxation, but also excluding the airline's major competitors from the scope of the fee.

Philippines: Scraps Aviation Tax

While many governments are adding to the aviation industry’s tax burden, the Philippines at least has bucked the trend with President Benigno S. Aquino signing into law a bill in March 2013 removing the 3 percent common carrier’s tax (CCT) on foreign airlines operating in the Philippines.

The Government has been under pressure for some time from the airline, tourism and foreign trade sectors to abolish the CCT, which has been levied on all revenues, passengers, cargoes and excess baggage leaving the Philippines. International airlines will also be exempt from VAT when carrying passengers.

The taxes have caused a total withdrawal of foreign airlines, one by one, from providing direct flights to Manila. Air France-KLM dropped the only remaining direct flight from Manila to Amsterdam in March last year, due to the high taxes it paid for loading passengers in the Philippines.

A statement by the Presidential spokesperson Edwin Lacierda said that the removal of the tax came “on the heels” of the International Civil Aviation Organization’s lifting of the Significant Safety Concerns imposed on the country in 2008, in recognition of Philippine efforts to comply with international aviation safety standards.


With many Governments still deep in the red, few industries and economic sectors are safe from the risk of higher taxation, and this is a state of affairs that is likely to persist for the foreseeable future. On the other hand, healthy competition has developed between low-tax jurisdictions for the business of shipping companies and aircraft owners and the corporate services they require, and this is a trend that is also expected to continue.


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