This is the second edition of our Tax Update for the Shipping & Offshore sector for 2021. We are keen to keep you updated on national and international developments, diverse case law, bills and practical experience that are topical and relevant for the sector, so that you know what is going on.
That time does not stand still is evident from this edition, which is once again well-filled, with attention being paid to, for example, the revised tonnage decree in the Netherlands, case law and the OECD Pillar 1 and Pillar 2 initiatives, which in their current form provide for a global minimum effective tax rate of 15%. The latter development in particular is a groundbreaking change of (or an addition to) the tax system as we know it.
An exception will be included for international maritime shipping, as referred to in the context of the OECD Model Convention (Article 8 OECD). The question is, of course, what that exception will actually look like. Because many shipping companies carry on multiple activities which serve international maritime shipping, it will be interesting to see how the OECD definition is transposed into the exemption. After all, the OECD Commentary contains many examples in this respect.
On the other hand, no explicit exception has been included for the offshore industry (and the vessels used there). The question is what impact Pillar 2 will have in this sector; it may be very diverse. After all, there will be companies that partly make use of a tonnage regime but do not fall under a 15% ETR while others do. Another question is whether the leasing / chartering of ships can take advantage of the substance carve-out. And, does that then apply to offshore and international maritime shipping or are there specific withholding tax exemptions under the STTR relating to charter payments? In short: a very topical issue with a huge impact, which is rapidly evolving with a lot of unanswered questions, about which we are keen to keep you up-to-date in the run-up to the proposed entry into force in 2023.
Meijburg & Co, July 2021
OECD/G20 Inclusive Framework Agreement on BEPS 2.0
On July 1, 2021, in an historic agreement, 130 countries approved a statement providing a framework for reform of the international tax rules. These countries are members of the OECD/G20 Inclusive Framework on BEPS (“IF”), comprising 139 countries. The statement sets forth the key terms for an agreement on a two-pillar approach to reforms and calls for a comprehensive agreement by the time the G20 Finance Ministers and Central Bank Governors meeting is held in October 2021, with changes coming into effect in 2023. Pillar One of the agreement is a significant departure from the standard international tax rules of the last 100 years, which largely require a physical presence in a country before that country has a right to tax.
Pillar Two, on which we focus for the shipping and offshore business considering the scope of Pillar One, secures an unprecedented agreement on a global minimum level of taxation, in effect stipulating a floor for tax competition among jurisdictions. In the Report on the Pillar Two Blueprint it was already noted in relation to international shipping that:
- The relevant tax rules under Pillar Two (GloBE) are designed to apply to all operating businesses GloBE rules will only apply to MNEs with revenues exceeding the EUR 750 million threshold. The exclusion of any specific sector could raise additional BEPS risks and fairness issues among different business sectors and jurisdictions. This could undermine the effectiveness of the GloBE rules. However, the unique features of the international shipping industry will require further work on whether, and to what extent, the GloBE rules should apply to this industry.
- The international shipping industry is subject to special tax rules. The capital intensive nature, the level of profitability and long economic life cycle of international shipping has led a number of jurisdictions to introduce alternative or supplementary tax regimes for this industry. Taxes, such as tonnage taxes, may result in less volatile outcomes for shipping and provide a more stable basis for long term investment. The widespread availability of these alternative tax regimes means that international shipping often operates outside the scope of corporate income tax. Including international shipping within the scope of the GloBE rules would therefore raise policy questions in light of the policy choices of these jurisdictions.
- Additionally, if international shipping were to be included within the scope of Pillar Two, questions have been raised regarding the implications of this, noting that the revenue effect may be limited given the design includes an unlimited loss carry-forward, a formulaic substance-based carve-out and tonnage taxes would constitute covered taxes. Finally, the typical operating model of an international shipping firm is such that most shipping income is sourced from third parties or other group members that are subject to low or alternative taxation regimes. This operational structure may render the undertaxed payments rule an ineffective back-stop to the income inclusion rule meaning that applying the GloBE rules could lead to competitive distortions and unstable outcomes.
Following the statement of July 1, 2021 it is now certain that for international shipping (as in the context of Article 8 OECD Model Tax Convention) an exemption will be included, in addition to the EUR 750 million threshold. We refer to the following KPMG link for more background on the recently concluded historic agreement and other carve-outs and simplifications.
Germany: modification of aid scheme to support maritime transport sector
The European Commission has approved, under EU State aid rules, the modification of an aid scheme to support the maritime transport sector in Germany. Under the existing scheme, which was last approved by the Commission under EU State aid rules in May 2016, shipping companies employing seafarers on board eligible merchant vessels can benefit from a reduction of wage taxes for their seafarers.
Germany notified the Commission of the following modifications to the existing scheme:
- the prolongation of the scheme until May 31, 2027;
- an increase in the overall budget of approximately EUR 70 million per year (previously EUR 25 million per year); and
- the extension of the scheme from only German-flagged vessels to all eligible vessels flying the flag of any European Economic Area (EEA) country provided they are registered in a German shipping register.
With respect to the latter, following discussions with the Commission, the German authorities committed to further opening up the scheme and also extending it to eligible vessels registered in other EU/EEA shipping registers. The Commission found that the scheme, as modified, also in light of the additional commitment by Germany, is in line with internal market rules as it will ensure that there is no discrimination between vessels based on the shipping registry in the EU/EEA country where they are registered. See link.
Hong Kong: tax treaty developments
Hong Kong has now concluded 45 tax treaties, including double taxation agreements with Serbia (which entered into force in 2020) and Georgia (subject to ratification in Hong Kong as of the date of this publication);
- Georgia's withholding tax rates on interest and royalties will normally be capped at 5% for Hong Kong residents; and
- Georgian-sourced profits from international shipping transport realized by Hong Kong residents will not be taxed in Georgia.
- Serbia's withholding tax rates on dividends, interest and royalties will normally be capped for Hong Kong-resident companies at 5% or 10% (depending on the percentage of shareholdings), 10% (for interest), and 5% or 10% (depending on the nature of royalties) respectively; and
- Serbian-sourced profits from international shipping transport realized by Hong Kong residents will not be taxed in Serbia.
Italy: changes to VAT treatment of ocean-going vessels and related components services
There are changes to the value added tax (VAT) treatment of ocean-going vessels and related ancillary services. Shipowners or operators will not be able to buy or lease VAT-free vessels unless they submit a zero-rating application to the Italian tax authorities.
The director of the Italian tax authorities issued an implementing Decree (no. 0151377, June 15, 2021), that contains a form that must be used to declare:
- that more than 70% of the distance sailed was on the high seas (with an attestation required in order to benefit from the zero-rated purchase of the vessel or related services);
- the percentage of use of pleasure boats in the territory of the EU under business-to-consumer (B2C) long-term chartering or leasing contracts (the form can be used to declare the estimated use or the actual use)
Read this report, prepared by our KPMG colleagues in Italy, for more details.
Maritime Shipping Decree updated
The Decree on profit from maritime shipping and maritime shipping partnerships of June 26, 2013 has recently been updated. The updates include a section on the commencement year of the tonnage regime for start-up businesses, a description of the practical allocation formula used by the Dutch tax authorities for determining the qualifying operating time for dredgers and a description of the ‘asset/crew split’ that is used in practice for the profit split at cable and pipeline laying companies, among others. Lastly, the Decree addresses the overlap between the tonnage regime and the investment credit.
Advocate General Niessen issues Opinions on international traffic (pipeline laying vessels and construction stage)
While we had already concluded that the OECD definition of international traffic in the context of Pillar 2 will increase in importance, this was also under discussion in two cases in which Advocate General Niessen recently issued Opinions:
- Transport: Advocate General Niessen issued an Opinion in this case, where in dispute was whether the employment of the taxpayer was exercised on board a ship operated in international traffic as referred to in Article 15(3) of the Netherlands‑Switzerland tax treaty. In line with the judgment rendered by The Hague Court of Appeals, the Advocate General concluded that the laying of pipelines was the primary activity of the ship. The transport of persons or goods before, after or during the performance of the laying of pipelines is ancillary to this. Such transport therefore does not qualify as the (commercial) transport of persons or goods (no international traffic).
- Completion of construction of ship: In dispute in this case was whether the employment of the taxpayer in 2015 was exercised on board a ship operated in international traffic as referred to in Article 15(3) of the Netherlands-Switzerland tax treaty. The ship in this case (once again a pipeline laying vessel) was brought from Korea to Rotterdam in 2014 where its construction was completed. The ship was first brought into service in 2016. All the days the taxpayer worked in 2015 were worked in the Netherlands and they did not perform any activities in Switzerland. The District Court in The Hague ruled that in 2015 the ship had not been operated for the transport of persons or goods in international traffic. The taxpayer’s argument that the ship was designed to be operated in international traffic and in later years was also operated as such, did not alter this. The Advocate General reached another conclusion.
For the purposes of the tax on insurance premiums, registration in the shipping register is essential
In a case before the Court of Justice of the European Union (CJEU) the key question was where are collected maritime insurance premiums subject to insurance premium tax? This depends on the Member State of registration. The CJEU ruled that decisive for the interpretation of this term is in which country the vessel is registered in an official register for the purposes of proof of ownership. According to the CJEU, this is no different if a vessel (temporarily) sails under the flag of another country. The country in this case was Germany.
Taxpayer qualifies as ship manager for the purposes of the tonnage regime, despite the outsourcing of crew management activities
An actual assessment showing that a ship manager does indeed qualify for the application of the tonnage regime, despite the outsourcing of some of the crew management activities.
- Treaty with Cyprus: The Netherlands has concluded a tax treaty with Cyprus. Cyprus has already ratified the treaty. The entry into force of the treaty is thus mainly dependent on the legislative process in the Netherlands. If the Netherlands completes the legislative process before December 1 this year, the treaty will apply as of January 1, 2022. See link.
- Treaty with Russia: Russia has unilaterally terminated the bilateral tax treaty with the Netherlands. The termination by Russia means that the application of the treaty will end as of January 1, 2022. See link.
Norway: renewal of temporary amendments to aid scheme
The EFTA Surveillance Authority (ESA) has approved a renewal of the temporary amendments to the Norwegian aid scheme that grants tax and social security contribution refunds for certain shipping companies. The scheme is available for shipping companies employing Norwegian seafarers or seafarers of the European Economic Area (EEA) on Norwegian flagged vessels.
The refunds were either limited to NOK 36,000 or 26% of paid taxes and social security contributions (depending on the category of seafarer) per term.
The notified renewal of the temporary amendments is a response to the outbreak of COVID‑19 and its consequences for Norwegian shipping and the employment of EEA seafarers. The outbreak of COVID-19 has had a negative impact on Norwegian shipping, both operationally and financially, and has led to a reduction in demand for, among other things, offshore shipping services and passenger transport. As the COVID-19 pandemic continues, with its negative impact on the shipping sector, a renewal of the temporary amendments is justified.
South Africa: Interpretation Note on withholding tax on interest
The South African Revenue Service (SARS) has published an Interpretation Note on withholding tax on interest. The Note provides guidance on the interpretation and application of specific sections of the Income Tax Act 1962 relating to withholding tax on interest. Any interest paid to a foreign person by an international shipping company in respect of debt used to fund the acquisition, construction or improvements of a South African ship used for international shipping is exempt from withholding tax on interest.
- European Commission proposes to authorize the Netherlands and Denmark to apply reduced rate to electricity provided to vessels berthed in ports.
- KPMG has published a report that provides insight into the journey to sustainability in the maritime environment, the current suggestion for alternative fuels for ships, the regulations in place and the relevance of incorporating EGS in the shipping business model. See link.
- Brazil, a country where many shipping and offshore activities take place (among others by Dutch companies), has announced a game-changing tax reform proposal.