This is the first Tax Update for the Shipping & Offshore sector for 2022. A bit later than usual because the focus in the first half of the year has been on developments surrounding Pillar 2 and the maritime sector (see for example Pillar Two – impact on the maritime industry | Meijburg & Co Tax & Legal).
It is worth noting that the OECD has now published its technical commentary. Although an exemption has been included for international seagoing vessels, it is far from certain that the maritime sector will not be affected once the rules take effect. The rules will, without a doubt, result in a heavier administrative burden, not to mention the fact that the substance requirements are out of step with what is customary under, for example, tonnage regimes, while offshore vessels and dredgers do not actually fall under the exemption, etc. In short, more than enough reason to raise these flaws.
In this update we once again inform you about recent tax developments in the maritime sector, addressing matters such as 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.
There are, for example, proposals to tax “additional” profits as a result of high fuel prices (UK and Romania), but also proposals (Norway) to expand the right to tax on the continental shelf to activities other than oil and gas (e.g. renewables or the storage of CO2, etc.). The first proposals have already been presented and will be discussed in the next update.
As a result of Fit for 55, many countries are busy creating more attractive maritime tax regimes for green vessels, for example by reducing the tonnage rate (Singapore, Cyprus). We believe that the effects of this will be minimal because the tonnage rate is already very low. It remains to be seen whether countries are able to introduce appropriate tax measures that will actually stimulate green initiatives.
In short, there is more than enough going on in the tax area.
Meijburg & Co, May 2022
Fit for 55
The EU ambition for the emission trading system (ETS) is to include 100% of emissions from ocean transport routes within Europe from 2024; extra-EU routes would be covered 50% from 2024-2026 and 100% from 2027 onwards under the proposals. Overall, free allowances would be phased out from 2026 and gone by 2030, five years earlier than proposed previously.
On 14 July 2021, the European Commission published its plans for the "Fit for 55" package to reduce greenhouse gas emissions in all sectors, including shipping, by 55% by 2030 compared to 1990. The ambitions of the Fit for 55 package for the maritime sector require rapid greening and enable shipowners to invest in clean ships. Part of the proposed legislation is to amend the European Union (EU) ETS in order to include shipping emissions. Some relevant aspects of the initial proposed EU ETS rules:
Shipping company: In respect of the proposed rules a ‘shipping company’ means the shipowner or any other organization 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.
Offshore vessels: Offshore vessels, such as dredgers or other type of workships (cable or pipe laying vessels etc.) are not covered by the proposed rules. It is however expected that in the future also these offshore vessels will be covered by EU / Maritime ETS.
Compliance: The EU ETS will apply to ships calling at EU ports, regardless of the flag that they fly, or where the owner of that ship is incorporated. Member States will be responsible for administering the scheme for shipping companies incorporated in that jurisdiction. For shipping companies caught under the EU ETS which are not incorporated in a Member State, administration of the scheme will be the responsibility of the Member State that the Non-EU Shipping Company visits most frequently in a two-year period, or the first port a Non-EU Shipping Company visits if it has not made any voyages within the EU in the previous two years.
Changes to the proposal
Various adjustments have been proposed and resulted in a draft report. The draft report includes several ambitious amendments to emissions trading for the maritime sector – the Maritime ETS, for example:
- Full reporting on emissions to commence in 2025
- 100% of non-EU emissions from ships calling at EU ports to be caught if the International Maritime Organization (IMO) fails to introduce a similar global measure by 2028
- ‘Time charterers’ now expressly included in the definition of ‘shipping company’
- ETS responsibility and payment of final price to fall on the commercial operator who may not always be the shipping company
- Operation of the ship’ is now also expressly defined for the purposes of the contractual allocation clause
During the 6 – 9 June 2022 EU Parliamentary plenary session, a heated disagreement on the proposed revised Emissions Trading System (ETS) report resulted in a 53% majority vote rejection of the report. The reformed ETS was, however, not rejected in its entirety - MEPs voted to refer the text back to the EU committee for revision. The reports on the Social Climate Fund (SCF) and Carbon Border Adjustment Mechanism (CBAM) proposals were also sent back to the committee, as member of the EU Parliament agreed that the three files were too interlinked to be voted upon separately.
On 22 June 2022, the proposals with revised amendments were once again brought before the entire EU Parliament. In what may be considered a landmark decision, all three Committee Reports were adopted and will now be taken to the EU Member States for further negotiation.
The European Parliament has approved the measures subject to the amendments it proposed, broadly the parliament is asking for a stronger commitment. Now we have to see if the Council (Member States) agree to this or there will be negotiations between them and the Commission. Although the EU Parliament has adopted the amended proposed reports, the texts are not final EU legislation, and may be subject to further amendments based on the outcome of the trialogue between Parliament, the Council and the Commission. The members of the EU Parliament are now ready to start negotiations with EU member states.
Greece: Guidance on controlled foreign corporations
The Greek tax administration released Circular E.2018/2022 which provides detailed guidance, including examples, regarding controlled foreign corporations (CFCs). The guidance specifically addresses the CFC provisions do not apply for companies with substantial economic activity and shipping companies. Read a March 2022 report by the KPMG member firm in Greece.
Switzerland: tonnage tax for maritime activities
On 4 May 2022, the dispatch on the Act governing the Tonnage Tax was adopted by the Swiss Federal Council. These rules provide for the taxation of profits from the operation of qualifying vessels at a flat rate based on the net tonnage. See also some background of our Swiss colleagues.
The Federal Tonnage Tax Act for Seagoing Vessels (Tonnage Tax Act) as adopted by the Swiss Federal Council on May 4, 2022 is available in German, French and Italian;
The message regarding the federal tonnage tax law applicable to seagoing vessels is available in German, French and Italian;
The Report on the results of the consultation concerning the federal tonnage tax law applicable to seagoing vessels is available in German, French and Italian;
Singapore-flag tonnage tax discounts for green vessels
The Maritime & Port Authority of Singapore has set out three tiers of discount on tonnage tax and registration fees dependent on the level of emission reduction of the ship at hand following the targets of the International Maritime Organization. The reductions differ from 100% (for zero-carbon fuel vessels) to 20%.
Oman: VAT guide for oil and gas sector
The tax authority of Oman released a guide concerning value added tax (VAT) treatment for the oil and gas sector and the VAT treatment of transactions involving the oil and gas sector. See more.
Maltese and Global Shipping Perspectives - Mondaq Webinar
Juanita Brockdorff, and Stephan Piazza at KPMG in Malta delivered the webinar Maltese and Global Shipping Perspectives organized by Mondaq. The website can be visited here.
Belgium: various proposed tax matters
The Belgium government has submitted a bill to the parliament on various tax measures. Among others, payments to tax havens by companies benefitting from the Belgium tonnage tax regime will be included in the taxable base if they are not based on real and genuine economic activities!
The bill and the accompanying explanatory memorandum, published on 2 June 2022, are available on the website of the parliament (in Dutch and French).
Italy: Clarification on VAT Rate on Supplies of Seagoing Vessels to Intermediaries
The Italian tax authorities provided a clarification on the application of the VAT zero rate, available here (in Italian only), on transactions made to intermediaries instead of for example a shipowner (in relation to for example bunkering of the vessel).
Italy: text of new treaty with Jamaica
Details of the Italy - Jamaica Income Tax Treaty, which generally applies from 1 January 2022, have become available. Interesting for the shipping and offshore industry is that the term "permanent establishment" in art. 5 of the treaty explicitly includes a drilling rig or ship (used for the exploration or development of natural resources within a Contracting State, but only if such activity continues within that State for a period or periods aggregating more than six (6) months, in any twelve (12) month period.
India: No Goods and Services Tax (GST) payable by Indian importer on reverse charge on ocean freight paid by foreign seller
The Supreme Court confirmed the decision of the Gujarat High Court which held that no tax is payable under IGST Act, 2017 by the Indian importer on reverse charge on ocean freight paid by foreign seller to a foreign shipping line.
The case is: Union of India v. Mohit Minerals Pvt. Ltd. Read a May 2022 report [PDF 471 KB] prepared by the KPMG member firm in India.
Romania: proposed changes to the offshore legislation
Recently amendments have been proposed to the so-called “offshore law” (Official Journal of Romania no. 964 (November 14, 2018), Law no. 256/2018). The proposed rules regulate the framework for offshore and deep onshore investments. The draft covers among others:
- a special tax on supplementary income derived by applying energy prices for holders of oil and natural gas agreements (rates between 15%-70%);
- investments in the upstream sector can be deducted within a limit of 40% (currently 30%) of this additional tax.
Furthermore it includes amendments to the royalty regime and the specific tax regime applicable to exploration, development, exploitation and abandonment activities. See for more info in Romanian language.
Denmark: New VAT rules regarding transport services
Intended to bring the Danish VAT rules in line with the CJEU case law. The new rules mean that the VAT exemption will only be available to a company (shipping, carriers, and other companies) that directly invoices the sender or recipient of goods for export outside the EU. In other words, the VAT exemption is available when the services are provided directly to the exporter, importer or recipient of the goods. Subcontractors that do not directly invoice the exporting transport buyer will generally have to apply VAT. Here you can find more detailed information
UK: Government announces ‘windfall tax’ on extraordinary oil and gas profits
On 26 May 2022 the Government announced a new tax on the profits of oil and gas companies operating in the UK and the UK Continental Shelf. This ‘windfall tax’ on UK oil and gas profits is announced to partly fund cost-of-living support to UK households. See for more background here.
US: Legislation Disallowing Foreign Tax Credits and Tax Benefits for Companies Operating in Russia
US Senate Finance Committee members introduced legislation disallowing foreign tax credits and other tax benefits for companies operating in Russia. Among others it is proposed that, for identified persons, the exemption from tax for shipping income (section 883) is not available.
New policy statement on insurance premium tax
On 12 May 2022 the new policy statement on insurance premium tax was published. This policy statement contains several amendments, of which the following two points regarding the transport exemption are worth noting.
- “Owner-operated transport” – The new policy statement distinguishes between goods transported by a contracted transport company and the “owner-operated transport” of certain goods. With regard to policies that also cover the risks of “owner-operated transport”, it is therefore a good idea to review the application of the transport exemption.
- Temporary storage – Under the old policy statement, it was already possible for temporary storage to make use of the transport exemption, subject to certain conditions. The new policy statement provides for a maximum three-month period for temporary storage, whereas this was a maximum of one month under the old policy statement. Good news thus. If the storage lasts longer than three months, but it can be convincingly demonstrated that there is an absolutely necessary connection between the storage and the transport, the transport exemption can continue to be applied. The condition that no additional premium is payable for the storage will also continue to apply. In practice we see that the transport exemption is often applied to temporary storage that is included as ‘fringe cover’ under a transport insurance policy, without requiring the payment of an additional premium. Certainly if the temporary storage lasts longer than three months, we recommend looking into whether it can be sufficiently demonstrated that there is an absolutely necessary connection between the storage and the transport.
- Seagoing vessels – The exemption for insuring seagoing vessels has not been amended.
The new policy statement on insurance premium tax applies as of 13 May 2022, but the amendments regarding the transport exemption will not take effect until 1 May 2023. Link
No national flag exception in 2022
The tonnage regime contains several exceptions to the flag requirement. One of these exceptions is the national exception to the flag requirement. The national exception means that ships (ownership, bareboat charter in or ship management) without an EU/EEA flag can be added to the fleet under the tonnage regime of a Dutch taxpayer. The national exception is reviewed each year by ministerial regulation to see whether it should apply. By ministerial regulation it has been decided that the national exception will not apply in 2022 (this in contrast to 2021 when it did apply). link
This does not mean that there are no opportunities to place ships under the tonnage regime under another flag than the EU/EEA flag. However, this will depend on the specific case.
Dutch parliamentary debates on the Pillar 2 initiative on seagoing vessels
During the parliamentary debates, the VVD parliamentary party asked whether the government is aware of the mismatches that exist between the definition of qualifying income from seagoing vessels for the purposes of Pillar 2 and the definitions applying in European tonnage regimes, such as the Dutch tonnage tax regime, and the serious disruption to the level playing field that this can potentially cause.
In its answer the government indicated that it believes that Pillar 2 creates a global level playing field and that the shipping exclusion in Pillar 2 is an unambiguous objective exemption that is in line with the definitions of Article 8 OECD Model Convention. The government therefore does not expect Pillar 2 to be a reason for shipowners to leave the Netherlands. The fact that the definitions in European tonnage regimes, including the Dutch tonnage regime, differ from Article 8 OECD Model Convention does not alter this. pijler-2-beantwoording-schriftelijke-vragen.pdf
Evaluation Dutch tonnage tax regime
At the end of 2019 and early 2020 the Ministry of Finance as well as the Dutch Ministry of Infrastructure and Water management jointly evaluated the Dutch tonnage tax regime (an obligation to which they are committed every 6 years). It has recently been announced that the evaluation report, which is typically the “end-product” of such an evaluation, will (finally) be shared with the Parliament. It is the assumption that this evaluation report concludes that a broader tonnage tax scope is needed in order to maintain an EU (worldwide) level-playing field. Question is whether this will indeed result in the needed amendments to the current Dutch tonnage tax rules. We will keep you posted.