Tax Update Shipping & Offshore - February 2024
Dear reader,
A new update from the Shipping & Offshore team covering various worldwide updates from a tax perspective within this industry. More lengthy articles compared to what we typically share, this considering the importance of specifically two aspects we like to point out this time; Pillar 2 and EU ETS.
A number of the developments we share with you are to a large extend a direct consequence of the new Pillar 2 rules or the EU Minimum Tax Directive. We see in practice various shipping companies restructuring as a direct consequence of Pillar 2. This in order to meet for example the relevant shipping exemption, strategic and commercial management are key in this respect. Further we can inform you that the discussion regarding the SBIE for mobile assets is still going on at OECD level. Especially relevant for the offshore industry operating assets worldwide.
Further we are assisting companies with the relevant EU ETS rules, but experience that typically the consequences for corporate tax (tonnage tax) or transfer pricing are not sufficiently considered. We have explained once more the EU ETS rules for your convenience.
Finally some other relevant updates which are relevant to the industry.
Please reach out if you have any questions/remarks.
Ernst-Jan Bioch
Content
1. Related to Pillar Two
2. Update shipping EU ETS
3. Other
-------------------------------------------------------------------------------------------------------------------
1. Related to Pillar Two
1.1 General Court dismisses EU Minimum Tax Directive challenge
On December 15, 2023, the General Court dismissed an action (case T-143/23) brought against Council Directive (EU) 2022/2523 (EU Minimum Tax Directive or the Directive). The challenge was based on Article 263 of the Treaty on the Functioning of the EU (TFEU) and dealt principally with the interaction between the provisions of the Directive on the exclusion of income from shipping activities and Member States’ tonnage tax regimes authorized under State aid rules.
Article 17 of the EU Minimum tax Directive introduces an exclusion for international shipping income and qualified ancillary international shipping income, provided that the entity demonstrates that the strategic or commercial management of all ships concerned is effectively carried on from within the jurisdiction where it is located.
The plaintiff is a Dutch multinational company carrying out geotechnical services and ship management activities that is subject to corporate income tax in the Netherlands under the Dutch tonnage tax regime. The challenge before the General Court relates to the requirement for a specific location of strategic or commercial management as per Article 17 of the Directive, and the absence of transitional measures for taxpayers who invested based on EU-approved tonnage tax schemes. The applicant held that – in the absence of transitional of grandfathering rules for benefits granted under existing schemes, the application of the EU Minimum Tax Directive will offset the benefits of the tonnage tax regime and will therefore alter the rights it acquired prior to the adoption of the Directive. For previous coverage, please refer to E-News Issue 177.
The Court recalled that, under Article 263 TFEU, individuals and legal entities are allowed to institute proceedings for annulment of the following three types of acts: i) acts addressed directly to that person, ii) acts which are of direct and individual concern to them, and iii) regulatory acts of direct concern which do not entail implementing measures. The Court then noted that, as the EU Minimum Tax Directive is addressed to the Member States (and not to companies) and is not a regulatory but a legislative act, it could only be challenged by the applicant based on point ii) above. Under settled case-law, the two criteria – i.e., direct and individual concern, are distinct and cumulative.
Focusing on the second criterion, the Court reiterated the case-law with regards to cases when a person (individual or legal entity) could be considered individually concerned by a measure not addressed to them. Specifically, this occurs when the person is impacted due to specific attributes which are peculiar to them or factual circumstances which differentiate them from all other persons and thereby making them distinct in a similar manner to the person addressed by the measure. In the Court’s view, this is not the case of the applicant, since Article 17 of the EU Minimum Tax Directive applies to all economic operators that satisfy certain objective conditions and, in particular, those carrying out an activity in the maritime sector, irrespective of the EU Member State in which those operators are established and of tax scheme they benefit from (general corporate income tax or authorized tonnage tax).
The Court also reiterated its case-law based on which, where a measure affects a group of persons who were identified or identifiable when that measure was adopted by reason of criteria specific to the members of the group, those persons might be individually concerned by that measure inasmuch as they form part of a limited class of persons. This would particularly be the case when the measure alters rights acquired by those persons before the measure was adopted.
However, the Court took the view that the plaintiff was not able to prove that it was part of a limited class of persons affected by the Directive. The General Court emphasized that the applicant did not bring any evidence on the identity of the persons that benefit from the Dutch tonnage tax scheme and are therefore capable of being affected by Directive. Moreover, the Court held that benefits of the tonnage tax scheme are not a required right specific to the applicant or to a limited class of persons. Instead, other taxpayers could benefit from similar schemes in other Member States or could start benefiting from the scheme after the Directive was adopted.
The Court thus concluded that the applicant was not individually concerned by the EU Minimum Tax Directive, without further need to analyze the direct concern. The taxpayer has the right to appeal the General Court’s ruling before the CJEU.
Thanks to our specialist from the KPMG EU Tax Centre.
1.2 Canada, ensuring a fair tax system for international shipping activities
Canada is seeking public comments on various legislative proposals, including green investment tax credits, measures that would deny tax deductions for non-compliant short-term rentals, and various other proposals aimed at ensuring a fair tax system, according to a News Release issued by the Department of Finance Canada last week.
However the Canadian government is also releasing draft legislation and regulations for previously announced tax measures such as international shipping! These rules are released to support Canadian shipping companies in remaining incorporated in Canada by exempting the international shipping income of Canadian resident companies from the Income Tax Act. This measure will come into force on or after December 31, 2023.
International shipping activities
Income from international shipping activities is generally not subject to corporate income tax. Canada's tax system reflects this international norm in two ways. First, income from international shipping is not taxed if it is earned by a non-resident whose country extends a similar exemption to Canadian companies. Second, Canada provides an exemption to shipping companies that are managed from Canada, provided they are incorporated in a foreign jurisdiction with a reciprocal exemption (among other conditions). These latter companies are deemed to be non-residents of Canada for income tax purposes.
In recognition that international shipping often operates outside the scope of corporate income tax more generally, the framework for a 15-per-cent global minimum tax (i.e., Pillar Two of the two-pillar multilaterally agreed solution for international tax reform) generally excludes international shipping income from the imposition of top-up tax under Pillar Two when certain requirements are met. A key requirement of that exclusion is that the "strategic or commercial management" of a multinational group's international shipping operations must be located in the same jurisdiction where its income is booked. Budget 2023 proposed to implement the Pillar Two rules in Canada effective for fiscal years that begin on or after December 31, 2023, and the government released draft legislative proposals to implement the new Global Minimum Tax Act in August of this year, including the exclusion for international shipping income from Pillar Two in line with the internationally agreed framework.
Shipping companies managed from Canada that have structured their operations to align with the design of Canada's current international shipping exemption generally book their international shipping income in the foreign jurisdiction where they are incorporated (that is, where they are deemed to be resident). As a result, they may not qualify for the exclusion from Pillar Two, which would require such companies to book their income where their management is located.
To ensure consistency with international tax norms, as well as greater consistency between the international shipping provisions of the Income Tax Act and the proposed new Global Minimum Tax Act, it is proposed to make the exemption for international shipping income in the Income Tax Act generally available to Canadian resident companies. This would allow shipping companies with management in Canada to continue their operations in line with both the Pillar Two international shipping exclusion and the exemption in the Income Tax Act. This measure would also effectively remove the incentive that the current tax rules create for shipping companies with management in Canada to incorporate and carry on certain international shipping activities in foreign jurisdictions.
This measure would apply to taxation years that begin on or after December 31, 2023.
2. Update shipping EU ETS
The maritime industry in scope of EU ETS per 2024
Per 2024 the maritime industry is in scope of the EU Emissions Trading System (ETS). The EU ETS, which is a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively, has been in place since 2005 and works on the 'cap and trade' principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by the operators covered by the system. The cap is reduced over time so that total emissions fall. Within the cap, operators buy or receive emissions allowances, which they can trade with one another as needed. The limit on the total number of allowances available ensures that they have a value. The price signal incentivizes emission reductions and promotes investment in innovative, low-carbon technologies, whilst trading brings flexibility that ensures emissions are cut where it costs least to do so. The price of an EU ETS allowance was in 2017 around EUR 5 per ton, but today the price has increased to approximately EUR 65 per ton.
The ETS already operates in all EU countries plus Iceland, Liechtenstein and Norway and already limits emissions from around 10,000 installations in the energy sector and (heavy) manufacturing industry, as well as aircraft operators operating between these countries. To ensure that the maritime transport sector contributes to the EU’s increased climate ambition, the sector will be included in the EU ETS through a phased-in approach, with the following rules per 1 January 2024:
- Shipping companies will have to surrender allowances that cover:
- 40% of their emissions in 2024;
- 70% of their emissions in 2025; and
- 100% of their emissions in 2026.
- The scope includes cargo and passenger vessels of or above 5000 gross tonnage (GT), per 2027 offshore vessels of or above 5000 GT will be added.
- Cargo and passenger vessel of or above 5000 GT, offshore vessels of or above 5000 GT and general cargo vessels and offshore vessels between 400–5000 gross tonnage, regardless of the flag they fly, will be included in the monitoring, reporting and verification (MRV) regulation from 2025, and their inclusion in EU ETS will be reviewed in 2026/2027.
- 100% of all inter-EU voyages and 50% of all international trips to and from EU ports (extra-EU voyages) are covered. As such, all emissions (100%) from ships calling at an EU port for voyages within the EU (intra-EU) as well as 50% of the emissions from voyages starting or ending outside of the EU (extra-EU voyages), and all emissions that occur when ships are at berth in EU ports are covered.
The EU ETS legislation will be carried out by an administering authority of the member states. For shipping companies, it is important to know who their administering authority is, as they will need to fulfil their ETS obligations with them. In February 2024 the European Commission will publish a list of shipping companies and their attribution to the administering authority in a Member State. A shipping company that is registered in an EU/EEA Member State must report to the administering authority in the Member State in which the shipping company is registered. If the shipping company is not registered in an EU Member State, the shipping company must report to the administering authority in the Member State with most significant estimated number of port calls from voyages performed by that shipping company in the last four monitoring years.
The inclusion of maritime transport in the ETS is accompanied with changes in the existing maritime MRV framework. An important change in the process of submitting monitoring plans (MP), is that it will be mandatory to use, for each ship, the electronic template in THETIS MRV to draft, maintain and submit the MP.
Operators in the EU ETS must surrender annually the number of allowances corresponding to their emissions in the preceding year. For each tonne of emissions for which no allowance is surrendered in due time (non-compliance), there could be a penalty of EUR 100 per ton. This is in addition to the cost of surrendering the allowances due.
The way forward for shipping companies
The first step that shipping companies should take is to determine whether they fall within the scope of the EU ETS, and whether they are responsible for compliance with the EU ETS. The responsible organization for compliance is the “shipping company”, which is defined in the ETS directive as:
“the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention, set out in Annex I to Regulation (EC) No 336/2006 of the European Parliament and of the Council.”
In the context of ETS, this means that the entity responsible for compliance in respect of the emissions of a given ship can be either the shipowner or the ISM company of that ship.
Further steps are:
- From the first quarter in 2024, shipping companies should self-register (or check their existing registration) in THETIS-MRV. And adjust the monitoring plans (MP) according to the new MRV rules, have it verified, and submit their verified MP to the administrative authority by 31 march 2024 in THETIS-MRV.
- In February 2024 the EU publishes a list of shipping companies with their attribution to the administering authority of a Member State.
- Shipping companies should apply for a Maritime Operator Holding Account in the EU ETS registry. Next to the compliance account it is also possible to open a trading account. Please take also into account tax consequences like, tonnage tax, transfer pricing in relation to carbon trading.
- Shipping companies must submit their first verified emissions reports (on a ship and company level) by 31 March 2025, and annually by this date thereafter.
- Commencing in 2025, shipping companies have until 30 September to surrender ETS allowances.
As noted please be aware that it may also impact the corporate tax position depending for example on whether the company will apply tonnage tax or not, is merely being complaint or also a trader, a shipowner, charter or manager etc. For more information about the impact of the EU ETS on your company, don't hesitate to get in touch with one of our experts betjes.merijn@kpmg.com / deJager.Nicole@kpmg.com or your KPMG shipping contact.
3. Other
3.1 Dutch social security rules
Recently, new policy of the Dutch Social Insurance Bank (SIB) has been published (see here in Dutch on page 215):
Policy
- Article 11(4) Regulation (EC) No 883/2004 lays down as a general rule that activities carried out on board a seagoing vessel are to be regarded as being carried out in the Member State whose flag the ship flies. This means that the person working on board a vessel flying the flag of a Member State is subject to the legislation of that Member State. However, if this worker is paid by a company or a person established in the Member State where the worker resides, the legislation of the country of residence applies.
Work normally carried out on board a seagoing vessel
- The SIB assumes that there are "activities that normally take place on board a seagoing vessel" if these activities normally take place on a ship at sea and not on a seagoing vessel in a port. The SIB bases this interpretation partly on the text of Regulation (EC) No 883/2004 in other languages. It does not refer to work on board a seagoing vessel, but to work on board a ship at sea. The SIB assumes that work normally takes place at sea if the work at sea takes up at least half of the total working time.
It is unknown whether foreign social security authorities follow this view.
3.2. New Dutch ministerial Decree regarding VAT zero rating of supplies of goods / services
The new rules enter into effect on April 1, 2024. Our team is working on a memo that will be shared in English shortly. Changes in excise and customs regulations (such as the introduction of the Union Customs Code), EU Court of Justice decisions and the implementation of the Horizontal Excise Duty Directive amongst others force the decision to be adjusted. Clarifications have been made regarding the statements to be made by customers when exporting pleasure craft under their own keel within or outside of the EU. Further the principles of the Dutch evidence regulations for intra-Community transport have been clarified and the model collection statement has been adjusted accordingly. Send an email to Zijlstra.Paul@kpmg.com if you like to receive the relevant memo or have specific questions regarding pleasure crafts in this respect.
3.3 Denmark: Latest update on renewable energy news
KPMG Acor Tax (Denmark), is passionate about tax but also about the development within the renewable energy sector and the great opportunities that goes with it.
They share the latest updates from the Danish Energy Agency which might be of interest for the offshore industry:
Carbon capturing storage tenders
The Danish Energy Agency has recently closed their market dialogue regarding a coming CCS tender. The Danish Energy Agency is still receiving input, but cannot guarantee that these will be taken into consideration in the further process.
The first of two tenders is scheduled by the Danish Energy Agency to open in June 2024 and the second tender is scheduled to open in June 2025. The tenders are of a size of DKK 10.5 billion and DKK 16.3 billion, respectively, and funding will be paid over a 15-year period. The expected result is annual capture and storage of 0.9 and 1.4 million tonnes CO2, respectively.
See the links to the material below:
Offshore windfarm tenders
On 18 January 2024, the Danish Energy Agency presented new draft tender materials for 6 GW offshore wind and invites for a follow-up market dialogue on the coming tenders. The Danish Energy Agency welcomes written comments until 8 February 2024.
In addition, the Danish Energy Agency informed that the final procurement materials are expected to be published during spring 2024. The expected deadline for the submission of tenders for the wind farms North Sea I will be in December 2024 and the expected deadline for submission of tenders for Hesselø, Kattegat and Kriegers Flak II is in February 2025 which we understand is a slight delay compared to previous announcements.
Link to the news:
KPMG Acor can assist with tax structuring considerations in respect of the coming tenders, including review of the published agreements (Investment Agreements, Shareholder Agreement, Concession Agreement etc.).
Feel free to reach out to Thomas.Iversen@kpmg.com and steffen.jensen@Kpmg.com if you want an informal dialogue on the matters above.
*******
