Tax Update Shipping & Offshore - October 2023
Dear reader,
A new update from the Shipping & Offshore team covering various worldwide updates from a tax perspective within this industry.
To put it mildly, in the tax landscape of companies operating in the maritime, shipping and offshore industry a lot is happening. For example, Pillar 2, BEFIT as well as CBAM and ETS (special item will follow). Further we still see, and not all is shared in this update, court cases in various jurisdictions (for example in Nigeria and Ukraine) on the scope of the international shipping exemption. We simply hope it is not a harbinger for discussions on the Pillar 2 rules (shipping exemption as well as the SBIE for mobile assets).
In short, all (tax) hands on deck!
Please reach out if you have any questions/remarks.
Ernst-Jan Bioch
Content
1. BEFIT
2. Pillar 2
3. Netherlands
4. United Kingdom
5. Germany
6. USA
7. Denmark
8. Malaysia
9. Australia
10. Nigeria
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1. European Commission publishes proposal for a directive to introduce a common corporate tax framework (BEFIT)
Shipping income covered by a tonnage tax regime is carved out from the BEFIT tax base. For income that is not carved out, the aggregated BEFIT tax base must be calculated (and therefore effectively allowing for cross-border loss compensation). If the aggregated BEFIT tax base is negative, the loss is carried forward indefinitely in time. If the BEFIT tax base is positive, the profit is allocated to the various jurisdictions where the BEFIT group members are located. Exceptions are made for profits from extractive activities (allocated to place of extraction), profits from shipping not covered by a tonnage tax regime and air transport (allocated to the State where the company is located).
2. Pillar 2 Administrative guidance published released: substance based carve-out for tangible assets
The administrative guidance on the Global Anti-Base Erosion Model Rules (Pillar II) was published after approval on 13 July. Please see the link. The published document provides guidance on, among others, the substance-based carve-out. In this guidance the concerns related to the requirement that the tangible assets must be located in the jurisdiction of the constituent entity are expressed. This has led to a new modification of the rules. This modification unfortunately regarding the Substance Based Income Exclusion (SBIE) does not address the concerns that are typically relevant for shipping and offshore companies (that are not eligible to full application of shipping exemption) as the exemption basically only applies if an asset is used in the jurisdiction where the owner is based. The OECD noted that: Further consideration will be given to a simplified allocation mechanism with respect to industries with a substantial portion of their employees and assets located outside of the jurisdiction for a substantial portion of the Fiscal Year.
3. The Netherlands
Knowledge Group positions on the Dutch tonnage tax regime
As of March 30, 2023, the Dutch Tax Authorities (“DTA”) will publish the so-called Knowledge Groups (“KGs”) positions. These publications should make clear what the position is of the DTA in respect of the tax issues submitted to the KGs. The purpose behind the publication is the wish of the DTA to create more transparency via the publications of KGs positions. The questions and answers are made public via this dedicated website.
During 2023 a number of publications have been issued on tonnage tax topics:
- What is considered to be sea (does this include certain bays, inlets and coastal waters etc.) for the purpose of the Dutch tonnage tax regime? Especially relevant of various offshore vessels (dredgers). See here (in Dutch only).
- Whether or it is relevant that a ship has a certificate of registry (zeebrief) in order to qualify as a seagoing ship for the purpose of the Dutch tonnage tax regime. See here (in Dutch only).
- Whether transport from a Dutch port to a foreign port that only takes a limited part by sea is transport in international traffic by sea as referred to in the Dutch tonnage tax rules. See here (in Dutch only).
- Specific rules in respect of entering the Dutch tonnage tax regime in combination with the rules regarding forming a Dutch fiscal unity / tax group. See here (in Dutch only).
Amendments to Dutch tax ruling practice announced by the Dutch government
On 6 July 2023, the Dutch State Secretary of Finance published a letter in which he announces the implementation of new measures to update the Dutch tax ruling practice. The Dutch State Secretary of Finance announced that he wants to publish the updated Dutch tax ruling practice at the beginning of October 2023. See here (only in Dutch). Interesting aspect for the shipping and offshore business is that provided that the requested advance certainty relates to third-party transactions when applying the tonnage tax regime, the condition that no rulings are concluded for direct transactions with states and jurisdictions listed in the Dutch blacklist of low-taxed jurisdictions and non-cooperative jurisdictions does not apply.
4. United Kingdom: Introduces Proposed Amendments to Tonnage Tax Regime
The UK Treasury has proposed substantial changes to the tonnage tax system. The draft legislation aims to allow third-party ship management companies to join the system from April 1, 2024, expanding eligibility to those involved in ship management as well as the operation of a qualifying ship. Additionally, the proposal seeks to increase capital allowances thresholds for ship lessors, with the lower threshold rising from GBP 40 million to GBP 100 million and the upper threshold from GBP 80 million to GBP 200 million. Expenses tied to acquiring ships within this range will qualify for capital allowances, capped at GBP 200 million. These amendments aim to enhance the UK's competitive position in the global tonnage tax landscape, see also Budget: Additional flexibility in UK tonnage tax regime - KPMG UK
They complement existing regulations, providing eligible companies an extended window, between June 1, 2023, and November 30, 2024, to participate in the tonnage tax regime, as outlined in the article "United Kingdom Provides Another Opportunity to Use Tonnage Tax Regime" on May 15, 2023: Tonnage tax elections to include third party ship managers - GOV.UK (www.gov.uk)
5. Germany: New guidance on the German tonnage tax regime
The German tonnage tax regime, introduced in 1999, provides shipping companies with a reduced flat tax rate for profits gained from global operations. In 2002, the German tax authorities issued initial guidelines on interpreting the tonnage tax law, with minor updates in subsequent years. The original guidance has now been replaced by the tax authorities, primarily due to court decisions and legal regulations. However, this guidance does not answer the most important questions related to the German tonnage tax regime. Offshore vessels remain (mostly) ineligible to the tonnage tax application in Germany due to the lack of international transportation. Please see the this link.
6. US Drawback Data – Pitfalls and Leading Practices (trade and customs)
Duty drawback can be a valuable option for companies paying large amounts of duties on imported goods. However, the duty drawback process can be very complex, and there are a variety of common pitfalls to consider when implementing a duty drawback program. KPMG US trade and customs gave a webcast on the challenges and leading practices surrounding duty drawback. This webcast can be replayed here.
During this session, KPMG professionals from the US Trade & Customs practice review some pitfalls and leading practices surrounding duty drawback. The following topics are covered:
- Data complexity
- Import broker and freight forwarder data (FFWD) management
- ACE data Sets
- U.S. Customs and Border Protection (CBP) audit readiness
- Post-entry considerations
7. Denmark: Transfer pricing adjustments on intercompany transactions upheld (Supreme Court decision)
The Danish Supreme Court on 6 September 2023 overturned a decision of the High Court, and upheld the tax authority’s transfer pricing adjustments with respect to intercompany transactions between the taxpayer, an oil and gas company, and two of its subsidiaries.
The case revolved around the question of whether the taxpayer’s preliminary surveys aimed at discovering new oil fields, the performance guarantees extended to the newly established subsidiaries, and the alleged associated know-how required ongoing compensation from the subsidiaries in the form of profit-sharing, royalties, or comparable arrangements.
In addition, the case addressed the issue of whether technical and administrative support could be invoiced to the subsidiaries at cost.
Read a September 2023 report prepared by the KPMG member firm in Denmark
8. Malaysia: Inland Revenue Board Updates Public Ruling on Taxation of Income from Employment On Board a Ship
The Inland Revenue Board (IRB) has recently updated the public ruling (PR) on the taxation of income from employment on board a ship and has clarified, among others, the definition of seagoing ship for the purposes of this PR. The PR also includes details and examples on the tax treatment of income derived by seafarers, a list of documents required to substantiate tax exemption claims and the responsibilities of employers and seafarers.
9. Australia
Updated regulations for shipping exempt income certificate requirements
Training and management requirements for a shipping exempt income notice or certificate to be issued. The Minister for Infrastructure, Transport, Regional Development and Local Government issued updated shipping reform (tax incentives) regulations 2023—repealing and replacing the shipping reform (tax incentives) regulations 2012 which sunset on 1 October 2023—that outline the training and management requirements for a shipping exempt income notice or certificate to be issued to an Australian registered vessel.
An entity with a shipping exempt income certificate may gain access to the income tax exemption provided for under sections 51-100 of the Income Tax Assessment Act 1997.
The updated regulations introduce minor amendments and establish the continuation of the measures in place.
Australia: Consultation on petroleum resource rent tax deductions cap
The Australian Government on 7 May 2023 proposed significant changes to the petroleum resource rent tax (PRRT) regime following its review of gas transfer pricing (GTP) arrangements. The changes will mean the offshore LNG industry pays more tax sooner.
The consultation closed last 15 September 2023. We have no further information yet, but here you can find the draft bill.
10. Nigeria: Shipping activities in Nigeria
On 21 August 2023, Nigeria's Federal Inland Revenue Service (FIRS) issued a Public Notice via X (formerly Twitter), calling on international shipping companies operating in Nigerian territorial waters to regularize their tax position in accordance with Circular No. 2021/14 of 3 June 2021, Taxation of Companies Engaged in Shipping, Air Transport and Cable Undertakings. A grace period is provided until 31 December 2023, after which enforcement action will be taken. See also our previous update here.
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