Ship taxes are biggest expenses of a ship owner during ship operation. Ship owners, operators, managers and seafarers are all potentially liable for federal, state and income taxes. Provisions and spare parts sold to the ship are potentially subject to a sales tax. If a ship owner wants to sell his ship at the sale and purchase market, sale of the ship itself may be taxed.
There are special federal tax provisions applicable to U.S.-flag ship owners and American ship owners of non-U.S.-flag ships. Two most important measures dealing with such federal taxation were both enacted in the American Jobs Creation Act of 2004 relating to a tonnage tax and an exemption for foreign-source income.
Ship Tonnage Tax
Generally, ship owners who are registered in open registries pay no income tax. On the other hand, ship owners in national registries like U.S.-flag ship owners in United States are at a competitive economic disadvantage. In 2004 in order to redress this imbalance, United States Congress enacted ship tonnage tax to encourage U.S.-flag ship ownership. United States Congress adopted a tonnage tax modeled on the tonnage tax regimes maintained by other countries. Tonnage tax is a fixed tax per ship which is paid regardless of whether the ship earns income or not. Hence, fixed ship tonnage tax does not vary with the ship’s income. Fixed ship tonnage tax is payable even if the ship is making loss. American ship owners might significantly reduce tax burden by electing to have fixed tonnage tax applied to its U.S.-flag ships.
Fixed ship tonnage tax is substantially less than what would be paid in federal income tax for ships earnings. Ship tonnage tax does not apply to all ship related income. Ship tonnage tax contains a formula for its application. Ship tonnage tax includes all (100%) core qualifying activities (activities in operating qualifying ships in United States foreign trade and excluding domestic trade) and income derived from such activities is only taxed for federal purposes via the tonnage tax. Ship tonnage tax includes (20%) qualifying secondary activities (provision of container or cargo-related facilities or services). There is no clear distinction between core and secondary activities.
Shipping related services which do not fall within the first two categories can only be covered by shipping tonnage tax, if it does not exceed 0.1% of the ship owner’s gross income from its core qualifying activities.
Categorization of Shipping Income
The United States IRS (Internal Revenue Service) has focused on the returns of ship owners and operators electing the tonnage tax making inquiries as to the classification of earnings among the categories:
- core qualifying activities
- qualifying secondary activities
- qualifying third activities (not exceed 0.1% of the ship owner’s gross income from its core qualifying activities)
Ship owners or operators electing Tonnage Tax treatment should take care in categorizing earnings based on the tax law’s definitions and be prepared to defend such categorization.
Qualifying ship owner or operator may elect to operate under the tonnage tax by filing a statement with IRS (Internal Revenue Service) prior to the filing of an annual tax return indicating that it has chosen to apply the tonnage tax for that tax year and subsequent tax years. Qualifying ship owner or operator means:
- Corporation which operates one or more U.S.-flag ships
- U.S.-flag ships are over 6,000 DWT (Deadweight Tons) used exclusively in the United States foreign trade
- Owns or bareboat charters U.S.-flag ships
When a ship owner or operator makes selects to pay ship Tonnage Tax, ship owner or operator is able revoke that selection. Nevertheless, ship owner or operator who revokes ship Tonnage Tax selection cannot go back into the tonnage tax system for 5 years. Ship tonnage tax is only available to corporations. Partnership or limited liability company (LLC) ship owner cannot take advantage of ship tonnage tax
Ship Tax Provisions for United States Resident Owners of Foreign-Flag Ships:
United States Congress enacted in American Jobs Creation Act 2004 a change to Subpart F of the IRC (Internal Revenue Code) benefiting United States resident owners of foreign-flag ships. In conformance to Subpart F, United States parent company of a foreign-controlled subsidiary must include certain income of the subsidiary on its tax return even if the foreign source income was not distributed to the parent company. American Jobs Creation Act 2004 change reinstated the law as it existed prior to 1975 which provided that foreign shipping income is not taxed. Subpart F is a part of United States Internal Revenue Code covering controlled foreign corporations. A controlled foreign corporation is a non-U.S. corporation controlled by United States residents. Subpart F requires United States companies with at least a 10% or greater interest in a controlled foreign corporation to include currently in income for United States federal tax purposes certain income of that foreign corporation without regard to whether the income is distributed to the United States company.
Before 1975, foreign shipping income earned by United States corporations through foreign subsidiaries was not subject to United States federal taxation. Foreign Shipping Income Exclusion was provided to the extent income was reinvested in shipping operations. In 1986, Foreign Shipping Income Exclusion was repealed. Repealing Foreign Shipping Income Exclusion has contributed significantly to the decline in United States based companies owning foreign-flag ships.
According to American Jobs Creation Act of 2004, Subpart F repealed the application of the IRC (Internal Revenue Code) to that Foreign Base Company Shipping Income. Foreign Base Company Shipping Income means income derived from the use (hire or lease) of any ship in foreign trade or performance of services directly related to the use of any such ship, or from the sale, exchange, or other disposition. Foreign shipping-related income might still be encompassed by other categories of Foreign Base Company Shipping Income that were not repealed by the American Jobs Creation Act of 2004, such as foreign personal holding company income or other forms of passive income such as dividends or interest.
The United States IRS (Internal Revenue Service) has issued guidance on where chartering income of a ship is not counted as foreign personal holding company income. Primary factor is that the income must be derived from the active conduct of a trade or business.
What is Ship Tonnage Tax?
Ship Tonnage Tax is a form of taxation imposed by some countries on shipping companies, based on the net tonnage (a measure of the size or cargo capacity) of their vessels, rather than on their actual profits or income. The aim is to simplify the tax structure for shipping companies and make the administration of tax easier for both the tax authorities and the companies.
The tax is calculated based on the “net tonnage” of a ship, which is a measure of its cargo carrying capacity, rather than its weight. The specific rates and calculation methods can vary by country and may include other factors, such as the age of the ship or the type of cargo it carries.
One advantage of the tonnage tax system is that it provides a predictable and stable tax liability for shipping companies, which can help them in their financial planning. It also eliminates the need for complex calculations of income and expenses that are often required under income-based tax systems.
Some countries offer a tonnage tax regime as an alternative to standard corporate tax rules. Shipping companies in these countries can often choose whether to be taxed under the normal corporate tax system or the tonnage tax system. The tonnage tax system can be attractive to shipping companies because of its simplicity and predictability, but it may not always be the most financially beneficial option, depending on the company’s specific circumstances.
However, it’s worth noting that tonnage tax systems can be controversial. Critics argue that they can lead to tax avoidance or can disadvantage certain types of shipping companies. Therefore, the implementation of such systems often involves a careful balance between supporting the shipping industry and ensuring fair and adequate tax revenues.
Currently, countries such as the UK, Germany, and the Netherlands have tonnage tax systems in place. For the most current information, please refer to the latest resources or consult with a tax professional.
Apart from the general concept, there are more specific aspects and implications to consider regarding the Ship Tonnage Tax.
Criteria for Eligibility: Not all shipping companies or vessels may be eligible for the tonnage tax regime. The eligibility criteria can vary by country but typically include factors such as the type of shipping activities the company engages in, the types and sizes of vessels it operates, and the flag state of the vessels.
Opting In and Out: In some jurisdictions, once a company opts for the tonnage tax system, it is required to remain in it for a minimum period of time (e.g., 10 years in the UK). This prevents companies from switching back and forth between tax systems to optimize their tax liabilities.
International Operations: Tonnage tax regimes are typically designed to be compatible with international tax laws and agreements, to avoid double taxation or tax evasion. However, shipping companies operating in multiple countries need to be aware of the tax laws in each jurisdiction and how they interact.
Environmental Considerations: Some tonnage tax regimes may provide additional incentives or penalties based on environmental factors. For example, ships that are more environmentally friendly or that comply with certain environmental standards may be eligible for lower tonnage tax rates.
Economic Impact: By providing a more predictable and potentially lower tax liability for shipping companies, tonnage tax regimes can help to support the maritime industry and promote economic growth. They can also make a country more attractive as a base for shipping operations, encouraging more companies to register their vessels there.
Regulation and Oversight: Tonnage tax systems require effective regulation and oversight to ensure that they are not abused. This includes verifying the net tonnage of vessels, ensuring that companies meet the eligibility criteria, and monitoring compliance with any conditions or obligations associated with the tonnage tax regime.
While the Ship Tonnage Tax system offers several advantages for shipping companies and can be a powerful tool for countries to support their maritime industry, it also has complex implications that require careful management. As always, companies should seek professional tax advice to understand the potential impact of tonnage tax on their operations.
How can a company exercise the option for shipping tonnage tax scheme?
The exact procedure for a shipping company to opt into a tonnage tax scheme will depend on the laws and regulations of the specific country in which the company is based or where its vessels are registered. However, the general process often involves the following steps:
- Eligibility Assessment: The first step is to determine whether the company and its vessels are eligible for the tonnage tax scheme. This will typically involve a review of the company’s shipping activities, the types and sizes of vessels it operates, and other relevant factors. The specific eligibility criteria will depend on the laws of the country in question.
- Application: If the company is eligible, it can apply to the relevant tax authority to opt into the tonnage tax scheme. The application will usually need to include detailed information about the company and its vessels, and may need to be accompanied by supporting documentation.
- Approval: The tax authority will review the application and decide whether to approve the company’s request to opt into the tonnage tax scheme. The time taken for this process can vary.
- Compliance: Once approved, the company will need to comply with the rules and requirements of the tonnage tax scheme. This can include maintaining accurate records of the net tonnage of its vessels, meeting any conditions or obligations associated with the scheme, and submitting regular reports or returns to the tax authority.
- Review and Renewal: The company’s eligibility for the tonnage tax scheme may be subject to periodic review, and the company may need to apply for renewal after a certain period.
It’s important for companies to obtain professional tax advice before deciding to opt into a tonnage tax scheme. While these schemes can offer benefits, they may also come with obligations and potential risks that need to be carefully considered. Moreover, the specific procedures and requirements can vary widely between different jurisdictions, so understanding the local laws and regulations is crucial.
How ship tonnage tax in calculated in different countries?
The tonnage tax calculation varies from one country to another, and it’s typically calculated based on the net tonnage of the vessel. Here are a few examples of how some countries calculate the tonnage tax:
- United Kingdom: In the UK, the tonnage tax is calculated on a sliding scale based on the net tonnage of each qualifying ship in a company’s fleet. The daily profit for each ship is calculated using the net tonnage and the corresponding rate (e.g., £0.60 per 100 net tons for the first 1,000 net tons, £0.45 for the next 9,000 net tons, and so on). The company’s total profits from its shipping activities are then calculated by adding up the daily profits from each ship for the financial year.
- Netherlands: In the Netherlands, the tonnage tax is also calculated based on a sliding scale. The scale rate decreases as the net tonnage of the vessel increases (e.g., €0.46 per day for the first 1,000 net tons, €0.41 for the next 1,000 net tons, and so on).
- Germany: Germany uses a similar sliding scale system to calculate tonnage tax, with rates that decrease as the net tonnage of the vessel increases.
- Greece: Greece’s tonnage tax regime applies to Greek and foreign vessels under Greek management. It is based on the ship’s net tonnage and type, with different rates applied depending on these factors.
In all cases, the company’s total tonnage tax for the year is calculated by adding up the tax for each of its vessels.
Please note that these are simplified descriptions and the actual calculations can be more complex, involving additional factors such as the age and type of the vessel, the type of cargo it carries, and any applicable exemptions or reductions. The rates may also be updated periodically by the respective tax authorities.
Since the details can vary widely between countries and can change over time, it’s important for shipping companies to obtain accurate, up-to-date advice from a tax professional or legal advisor who is familiar with the specific laws and regulations of the countries in which they operate.
How ship tonnage tax in calculated in Singapore?
Singapore has a unique tax framework for shipping companies known as the Maritime Sector Incentive (MSI) that was launched by the Maritime and Port Authority of Singapore. As part of the MSI, the Approved International Shipping Enterprise (AIS) award and the Maritime Leasing (ML) award provide tax incentives for qualifying shipping companies and for leasing of qualifying ships, sea containers and intermodal equipment.
Under the AIS award, qualifying shipping income is exempt from tax. This award is for a period of 5 or 10 years at the discretion of the Singapore government. There is no specific tonnage tax as such, but rather the profits from qualifying shipping activities are exempt from tax.
Similarly, under the ML award, qualifying leasing income derived by a lessor from the leasing of a qualifying ship is exempt from tax. The ML award is for a period of 5 or 10 years.
However, companies have to meet several qualifying conditions to be eligible for these incentives. For instance, they must be able to make significant economic contributions to Singapore, have a good track record, and demonstrate a strong commitment to the growth of their maritime business and capabilities in Singapore. For the most current and detailed information, please refer to the latest resources from the Maritime and Port Authority of Singapore or consult with a tax professional in Singapore.
How ship tonnage tax in calculated in Greece?
Greece calculates its ship tonnage tax based on the net tonnage of the ship, with different rates applied depending on the type and size of the ship.
The rates are set by the Greek government and can be updated periodically. The tax is typically paid annually, although the specific payment schedule can vary.
Here’s a simplified example of how the calculation might work:
- Determine the net tonnage of the ship. This is a measure of the ship’s cargo capacity, not its weight.
- Apply the rate corresponding to the net tonnage of the ship. For example, for a ship with a net tonnage of 10,000, the rate might be €1 per net ton per year. This would result in a tonnage tax of €10,000 per year for that ship.
- If the company operates multiple ships, repeat this process for each ship and add up the results to get the total tonnage tax for the company.
It’s important to note that these are very simplified steps and the actual calculation can be more complex, involving additional factors such as the age and type of the ship, the type of cargo it carries, and any applicable exemptions or reductions.
The Greek tonnage tax system also includes specific rules for ships under Greek flag and ships under a foreign flag but managed by a Greek shipping company. These rules can affect the calculation of the tonnage tax and the tax obligations of the shipping company.
As always, companies should seek professional tax advice to understand the potential impact of tonnage tax on their operations. For the most current and detailed information, please consult with a tax professional or refer to the latest resources from the Greek tax authorities.
How ship tonnage tax in calculated in UK?
The United Kingdom has a tonnage tax regime which is a special tax regime for shipping companies, providing an alternative to corporation tax on profits from shipping activities. Instead of being based on the actual profit, it’s based on the net tonnage (size/capacity) of the ship operated by the company.
Currently, the UK tonnage tax is calculated on a daily basis using a scale rate that decreases as the net tonnage of the vessel increases. The calculation is performed for each qualifying ship in a company’s fleet. Here is a simplified example:
- For the first 1,000 net tons, the rate is £0.60 per 100 net tons per day.
- For the next 9,000 net tons, the rate is £0.45 per 100 net tons per day.
- For the next 15,000 net tons, the rate is £0.30 per 100 net tons per day.
- For the remainder, the rate is £0.15 per 100 net tons per day.
To calculate the tonnage tax for a ship, you would apply these rates to the net tonnage of the ship and then add up the results. For example, for a ship with a net tonnage of 11,000 tons, the tonnage tax would be calculated as follows:
- For the first 1,000 net tons: 1,000 * £0.60/100 = £6 per day
- For the next 9,000 net tons: 9,000 * £0.45/100 = £40.5 per day
- For the remaining 1,000 net tons: 1,000 * £0.30/100 = £3 per day
So the total tonnage tax for this ship would be £6 + £40.5 + £3 = £49.5 per day.
To calculate the total tonnage tax for the company, you would repeat this process for each qualifying ship in the company’s fleet and then add up the results.
These rates and calculations are subject to change, so always check the current rules with the UK’s HM Revenue and Customs (HMRC) or consult with a tax professional.
This scheme applies only to ‘qualifying ships’ which are seagoing and of 100 tons or more gross tonnage. There are also certain types of ships that are excluded from the scheme, for example, fishing vessels and pleasure craft. There are also rules around strategic and commercial management of the vessels being done in the UK.
Please note that once a company opts into the tonnage tax regime, it’s generally required to remain within it for a minimum of 10 years, so it’s important for companies to carefully consider their decision.
Some additional context related to ship tonnage tax.
Flagging and Registration: The ship’s flag state can affect the calculation of the tonnage tax. Different countries may have different tax rates, and some countries may offer preferential tax treatment to ships that fly their flag. Therefore, the choice of flag state can have significant tax implications for a shipping company.
Tax Treaties: Countries often have tax treaties with each other to avoid double taxation. These treaties can affect the calculation of tonnage tax for shipping companies that operate in multiple jurisdictions. For example, if a company’s ship is taxed in its flag state and also in a port state, a tax treaty between those two countries might provide a credit or exemption to avoid double taxation.
Exemptions and Reductions: Some countries offer exemptions or reductions in tonnage tax for certain types of vessels or shipping activities. For example, vessels that are used for research or training purposes might be exempt from tonnage tax, or vessels that meet certain environmental standards might be eligible for a tax reduction. These incentives can significantly affect the calculation of the tonnage tax.
Audit and Compliance: Shipping companies that opt into a tonnage tax regime are typically subject to audit and compliance checks by the tax authorities. This is to ensure that they are accurately reporting their net tonnage and correctly calculating their tonnage tax. If discrepancies are found, the company could face penalties or be required to pay additional tax.
Economic Factors: The tonnage tax can also be influenced by economic factors. For example, during periods of economic downturn, some countries might offer temporary reductions in tonnage tax to support the shipping industry. On the other hand, if a country is looking to increase its tax revenues, it might decide to raise its tonnage tax rates.
Calculating the tonnage tax for a shipping company can be a complex process that requires a thorough understanding of the relevant laws and regulations, as well as the specific characteristics and activities of the company and its vessels. Therefore, it’s highly recommended that companies seek professional tax advice when considering opting into a tonnage tax regime.