Tax Update Shipping & Offshore - June 2020
Dear reader,
Welcome to the second Shipping & Offshore Update for 2020, in which we inform you about developments around the world that could be relevant for companies throughout the entire industry.
Developments in the shipping & offshore industry in general
During the past few months, since the last update in February, the Covid-19 pandemic has taken hold around the world and affected all of us in one way or another. However, tax developments relevant to the shipping and offshore industry did not stop and that is the focus of this update.
Looking at the various developments, we see an expansion of beneficial regimes for the operation or ownership of maritime assets around the world (EU tonnage-tax based or other) and, at the same time, a continuation of the increase of substance requirements in various countries. In view of this, in combination with, for example, the further rollout of CFC rules in the EU following ATAD, we expect international operating companies to consider the strategic location of their ownership of maritime assets versus the increase of substance. We expect this to continue throughout 2020 despite the difficult COVID19 circumstances that have severely affected the industry.
Digital taxation and shipping?
For the international shipping transport industry, it is important to monitor the developments regarding the taxation of digital technology in 2020. On January 31, 2020 the OECD published the following statement.
A total of 137 countries and jurisdictions (i.e. the ‘Inclusive Framework’) of the OECD/G20 have committed to continue working together on the development of a consensus-based long-term solution by the end of 2020. An important step will be the next meeting in early July, at which it is intended to reach agreement on the key policy features of the solution that would form the basis for a political agreement.
Pillar 1
Pillar 1 aims to expand the taxing rights of market/user jurisdictions. Based on a formulaic approach, new taxing rights may be created for such market/user jurisdictions, thereby diverging from the arm’s length principle. To be able to exert these new taxing rights, a new nexus rule will be created based on a significant and sustained engagement with market/user jurisdictions, instead of reference to physical presence (for example, a permanent establishment/branch).
As such, this new nexus rule will directly have an impact on the application of the OECD and UN Model Tax Conventions. These proposals do not only impact businesses that provide automated and standardized digital services. They may also impact all other consumer-facing businesses that generate revenue from the sale of goods and services commonly sold to individuals. As such, the scope of the Pillar 1 is intended to be much broader than the typical tech companies.
In the aforementioned statement it is stated that:
“The effect of nearly all bilateral tax treaties is to assign exclusive taxing rights over the profits of an enterprise from the operation of ships and aircraft in international traffic to the state of residence of the enterprise. This long-standing practice has its own rationale, and it is therefore considered inappropriate to include airline and shipping businesses in the scope of the new taxing right.”
Hence, shipping in international business is carved out of Pillar 1.
Pillar 2
Through Pillar 2, the OECD predominantly seeks to ensure a minimum level of taxation by developing rules that provide jurisdictions with a right to ‘tax back’ where other jurisdictions have not exercised their primary taxing rights, or if payment is otherwise subject to low levels of effective taxation. The OECD admits that significant work still needs to be undertaken in this regard and we are closely monitoring whether the international shipping business is also carved out for Pillar 2, which would be in line with Pillar 1 and the globally accepted principles in tax treaties (Art. 8 OECD Model Tax Convention, taxation of international shipping income in the State of Residence).
We will keep you informed about the developments in the industry throughout 2020!
Ernst-Jan Bioch
Meijburg & Co, Rotterdam the Netherlands June 5, 2020
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Croatia: tonnage tax expansion and extension
The European Union Official Gazette published on May 15 included the European Commission (EC) Decision on State Aid Case No. SA. 55577, approving an expansion of the Croatian tonnage tax regime to commercial yachts, and an extension of the application period.
Under the expanded Croatian tonnage tax regime:
1) commercial yachts involved in international navigation are now eligible vessels;
2) a tonnage tax reduction of 20 percent for yachts up to five years old applies in order to incentivize the registration and use of more efficient and environmentally-friendly vessels; and
3) non-core activities are excluded from the regime if they account for more than 50 percent of a ship’s total tonnage-taxed income.
The regime entered into force on February 28, 2019, and applies to tax periods beginning on or after January 1, 2021. The regime expires on December 31, 2024.
Cyprus: tonnage tax regime
On December 16, 2019, the European Commission approved under EU State aid rules, among others, the prolongation of a tonnage tax and seafarer scheme in Cyprus. The non-confidential version of the decision with more details has been published by the EC.
Germany: temporary decrease in German VAT rate
The German parliament recently decided that the German VAT rate will be decreased for the period July 1, 2020 through December 31, 2020. More specifically, the standard rate will be reduced from 19% to 16% and the reduced rate will be reduced from 7% to 5%. This could be of relevance for companies carrying out activities in Germany which are VAT taxable in Germany, in terms of charging the correct VAT rate but also in terms of adding tax codes in their ERP system. Also, if costs with German VAT are incurred which cannot be recovered (e.g. for local cafeteria expenses), the lower VAT rate may result in less costs for entities.
Greece: circular tonnage tax
On March 11, 2020, the Public Revenue Authority published circular Ε.2029 (in Greek only) providing detailed clarification of, for example, the reduction and exemptions from tonnage tax (in Greece only on the A category).
On April 22, 2020, the Public Revenue Authority published circular E.2054 (in Greek only) clarifying the assessment of tonnage tax of “category B” ships bearing a Greek or an EU/EEA flag (e.g. professional leisure boats, sailing boats bearing an EU/EEA flag, passenger and car-carrier ferries).
Hong Kong: proposed New Tax Regime for Ship Leasing in Hong Kong
On January 17, 2020, the Hong Kong SAR Government gazetted the Inland Revenue (Amendment) (Ship Leasing Concessions) Bill 2020, which formally introduces a concessionary tax regime for certain ship leasing activities. The bill is subject to approval by the Legislative Council and is expected to apply to income earned from April 1, 2020. The main features of the proposed regime are:
- Income from ship leasing and managing a ship leasing business carried on from Hong Kong SAR will be deemed taxable. For ship leasing, the taxable amount will include interest received under a funding or finance lease;
- The taxable income for qualifying lessors from operating leases will be calculated as 20% of the gross rentals (including sums payable under residual value guarantee) less deductible expenses, excluding tax depreciation;
- The taxable income for qualifying lessors from funding leases will be calculated as gross finance income (i.e. interest) under the lease less deductible expenses;
- The tax rate on the profits of “qualifying ship lessors” will be 0%; and
- The tax rate on the profits of “qualifying ship leasing managers” conducting “qualifying ship leasing management activities” will be 0% where services are provided to an associate and 8.25% (i.e. half the normal tax rate) where those services are provided to a non-associate.
Luxembourg: circular issued on CFC rules
On March 4, 2020, the Luxembourg tax authorities issued a circular on Controlled Foreign Company (CFC) rules that were incorporated into Luxembourg tax law during the transposition of the EU Anti-Avoidance Directive 2016/1164 (ATAD), which cover companies as well as branches. The CFC rules are applicable to financial years starting on or after January 1, 2019 and the circular introduces the following transfer pricing obligations:
– to prepare transfer pricing documentation, on an annual basis, a functional analysis covering any relationships with the foreign by CFC covered entities or branches.
– The net income inclusion is limited to the revenue generated by the assets and risks located in the CFC, but controlled by the significant people functions located at the Luxembourg taxpayer. The net income inclusion has to be determined based on the transfer pricing rules referred to in the law.
Nigeria: Nigerian oil and gas industry update
See our interesting update from our Nigerian colleagues via this link. This edition of the Nigerian Oil and Gas Industry Update provides information on some of the recent developments in the industry during the first quarter of 2020, how they are impacting the industry and the Government’s response to these issues.
Norway: proposal for temporary tax incentives for petroleum companies
In Prp. 113 L (2019-2020) dated May 12, 2020, the Norwegian Government proposed certain temporary changes to the Petroleum Tax Act with the aim to keep the activity both for the oil companies and for the oil service industry.
United Arab Emirates: UAE Ministry of Finance publishes relevant activities guide on Economic Substance Regulations
On April 16, 2020, the UAE Ministry of Finance published a Relevant Activities Guide (“the guide”) for the purpose of the UAE economic substance regulations (ESR) on its website. The guide provides directions for assessing whether an entity carries on a relevant activity for ESR purposes, and also provides clarification on the identified relevant activities and their associated core income generating activities (CIGAs). Part of the clarification covers shipping items such as:
- The chartering of ships on a bareboat basis does not fall within the scope of a shipping business because the entity which charters the ship does not operate the ship.
- Travel agencies and international shipping agencies will not be treated as carrying on a shipping business merely on the basis of selling tickets to passengers for international travel by ship. Entities that arrange for their own or other businesses’ goods to be transported overseas by sea are also not considered engaged in a shipping business, unless they themselves operate the relevant ships.
