Tax Update Shipping & Offshore - May 2023

May 23, 2023

Dear reader,

A new update from the Shipping & Offshore team covering various worldwide updates from a tax perspective within this industry. Please reach out if you have any questions/remarks.

Ernst-Jan Bioch

Meijburg & Co, May 2023

Content

1. Australia
2. Denmark
3. UK
4. Europe
5. New Zealand

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1. Australia

The Australian Government has proposed significant changes to the PRRT regime following the finalisation of Treasury’s Review of Gas Transfer Pricing (GTP) Arrangements. The most immediate aspect of the proposals is a significant acceleration of the time at which PRRT is payable in respect of LNG projects. The Federal Government announced on 7 May 2023, a number of proposed changes to the Petroleum Resource Rent Tax (PRRT). The proposals represent the culmination of a process that commenced in November 2016 with the independent review by Mr Michael Callaghan AM PSM (the ‘Callaghan Review’) of the design and operation of the PRRT regime and concluded with Treasury issuing its final report to the Treasurer on its review of the GTP arrangements in May 2023. Via this link you can get access to the full article of KPMG Australia.

2. Denmark: expansion of the Danish exclusive economic zone (webinar!)

Join the Danish tax team for the webinar and gain insights on the proposed bill to expand the Danish Exclusive Economic Zone

Date: Thursday, 1 June 2023

Time: 10.00 - 11.00 CEST

Location: Microsoft Teams

Background

The bill put forward by the Danish government proposes to expand the area in which foreign companies will be subject to Danish limited tax liability. Activities conducted outside the 12 nautical miles zone, but within the Danish Exclusive Economic Zone could also be subject to Danish taxation. The bill will come into effect as of 1 July 2023. The rules are expected to have a material impact on foreign companies and its employees operating outside the 12 nautical miles zone.

See this link for the program and to sign up: Expansion of the Danish Exclusive Economic Zone - KPMG Denmark.

3. United Kingdom: provides another opportunity to use tonnage tax regime

In the update of last April we referred to Budget: Additional flexibility in UK tonnage tax regime - KPMG United Kingdom as the Spring Budget announcements included some significant changes to the UK tonnage tax regime. For example regarding an ‘election window’ which will be opened for the 18-month period 1 June 2023 to 30 November 2024. In that period, qualifying shipping companies will be able to elect into UK tonnage tax despite having previously been within the regime and left it.

The regulations are now available and provide indeed for a new opportunity for qualifying companies to make a tonnage tax election between 1 June 2023 and 30 November 2024. HMRC guidance on the tonnage tax regime can be found in its Tonnage Tax Manual.

4. Europe

Dutch company brings action for annulment of minimum taxation directive

On 15 March 2023, a Dutch company brought an action to the General Court against the Council of the European Union in the case of VF v. Council (Case T-143/23).

The applicant claims that the Court should:

annul the [Minimum Taxation Directive (2022/2523)], in so far as

Article 17 excludes from its scope income from a shipping activity covered by Member States' tonnage tax regime authorized under State aid rules, other than 'international shipping income' and 'qualified ancillary international shipping income';
Article 17 applies only if 'the constituent entity demonstrates that the strategic or commercial management of all ships concerned is effectively carried on from within the jurisdiction where the constituent entity is located';
the Directive does not lay down transitional measures for taxpayers that made substantial investments relying on a national tonnage tax regime;
order the Council of the European Union to pay the costs of this procedure."

With five pleas in law, the applicant alleged:

"that the Directive infringes the general principle of equal treatment of comparable enterprises."
"that the Directive infringes the general principle of proportionality because its effects exceed what is necessary to achieve its purpose."
"that the application of the Directive rules to purely domestic situations infringes the principle of proportionality."
"the infringement of the principle of protection of legitimate expectations and legal certainty."
"an infringement of Articles 115 and 107 TFEU".

It would be very helpful if the term international shipping can be interpreted wider and in line with the (tonnage tax) practice of the Member States compared to the current wording of the Directive. This is especially relevant for companies operating all types of offshore, dredging or towage vessels.

EU ETS system for maritime sector

The Carbon Border Adjustment Mechanism (CBAM), the Revision of EU ETS including for aviation and maritime, the new ETS II for Road transport and buildings and the Social Climate Fund, have been adopted and published in the Official Journal of the EU. As a result, the scope of the EU ETS system is extended to the maritime sector as per 2024. As a result, CO2 emissions of vessels with a gross tonnage exceeding 5,000 ton calling at an EU port will be covered by the EU ETS system. For every ton of CO2 emission, covered operators have to surrender an emission allowance (these can be purchased/acquired, but the total number of allowances is capped). This is regardless of the flag they fly. The extension will include 100% of emissions from intra-EU/EEA voyages, as well as 50% of the emissions from voyages starting or ending outside of the EU/EEA, and all emissions that occur when ships are at berth in EU/EEA ports. Specific transition rules apply, based on which the allowances need to cover the operator’s emissions for 40% in 2024, 70% in 2025 and 100% as of 2026.

The ETS shipping scope will apply to emissions from gross tonnage ships dedicated to transportation of goods or passengers equal to or greater than 5,000 tons. The responsible organization for compliance is the ship owner, or any other organization or person that has assumed the responsibility for the operation of the ship and that has agreed to take over all the duties and responsibilities imposed by the ISM-code (e.g., a party that bareboat charters-in a vessel that it operates will be responsible for compliance). In case of time charters, it seems that the ship owner, and not the charterer, would be the responsible entity. Shipping companies registered within an EU/EEA Member State must report to the administering authority of that Member State. If the shipping company is not registered within an EU/EEA Member State it must report to the administering authority in the Member State with the most significant estimated number of port calls in the last four monitoring years.

Further expansion: offshore and smaller vessels

Other types of shipping activities (e.g. dredging, cable repair etc.) will not be in scope as of 2024. However, offshore vessels, as well as cargo vessels with a gross tonnage between 400 and 5,000 will be included in the monitoring, reporting and verification regulation as from 2025. Their inclusion in the EU ETS will be reviewed in 2026.

For more information, please refer to EUR-Lex - L:2023:130:TOC - EN - EUR-Lex (europa.eu) Please note that the directive must be incorporated in Dutch law before 1 January 2024. Furthermore, explanatory implementing rules have not been published yet (expected at the end of the year). At present, therefore, there is still some uncertainty about the impact of the above in specific cases that will hopefully become clear later this year. We will keep you informed on developments in this regard if pleased.

Belgium: action brought on 20 January 2023 — Feport v Commission

The applicant claims that the Court should:

declare that the Commission has failed to act in Case SA.33828 on the Greek tonnage tax scheme by not opening the formal procedure against Greece, and not taking a clear position under article 23 of the Council Regulation (EU) 2015/1589 of 13 July 2015, laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (TFEU) and 108 TFUE; and
order the Commission to pay for the costs.

Pleas in law and main arguments

In support of the action, the Applicant considers that all conditions of the failure to act pursuant to article 265 TFUE are fulfilled in this case and that this failure entails several breaches of EU Treaties, principles and secondary law. In this respect it puts forward four pleas in law:

First plea in law, alleging that by not opening the formal procedure against Greece the Commission failed to comply with its conclusions on Case SA.33828 — Greek tonnage tax scheme and with its 2003 guidelines on State aid to maritime transport (Maritime Guidelines).
Second plea in law, alleging that the Commission failed to comply with the Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (Procedural Regulation, article 23) and Article 108 TFEU by not opening the formal investigation procedure seven years after the Article 23 decision, and that by refusing to take a clear position in this regard the Commission harmed the rights of interested parties in breach of Procedural Regulation (article 24), Charter of Fundamental rights (article 41 and 47) and EU principles (such as legitimate expectations).
Third plea in law, alleging that the Commission failed to comply with equal treatment principle as protected by EU Charter (Article 20 and 21) and its duty of sincere cooperation (Article 4(3) TUE, by refusing ad vitam eternam to act based on article 107 TFEU against the Greek tonnage tax scheme, while dismantling equivalent State aid schemes to port in other Member States in a limited time frame.
Fourth plea in law alleging that the Commission failed to comply with international tax standards and EU tax law and commitments, regarding minimum taxation rules which will have to be implemented by all Member States as from 1st January 2024 on the basis of the OECD Pillar Two Agreement (December 2021) and of Commission Proposal for a Council Directive on ensuring a global minimum taxation for multinational groups in the Union (December 2021) as agreed by the Ecofin Council in December 2022.

5. New Zealand: extending tax exemption for non-resident offshore oil rig and seismic vessel operators

The Government of New Zealand introduces a 2023/2024 tax amendment bill into Parliament. The Bill proposes extending the existing temporary five-year income tax exemption on the income of non-resident offshore oil rig and seismic vessel operators. The current exemption, which is due to expire on 31 December 2024, would be extended for a further five years until 31 December 2029. The exemption removes the incentive for rigs and seismic vessels to “churn” (ie, to move in and out of New Zealand waters within 183 days to ensure income is not taxable under many of our double tax agreements), an inefficient process that has negative environmental impacts. Extending the exemption for a further five years is in keeping with the Government’s previous announcement that existing operators’ rights would be maintained.

Shipping and offshore