GLOBAL TAX REFORM RULES TO BE IMPLEMENTED IN 2023
As it is known, multinational companies establish companies in countries with suitable tax regimes to gain tax advantage and manage their activities from there and gain a great competitive advantage over their competitors. Likewise, the first examples of maritime shipping companies go back much earlier (Reasons Leading to Favorable Flag Registries-Harun Şişmanyazıcı), the real application of which was found in Panama at the beginning of the 20th century and became widespread later on, Easy Flag, Free Banner, Favorable Flag, Second Registry ( Under the ship registry registration systems called International Ship Registry, among other issues, they gain significant tax advantages with the application of ton tax.
According to the ITF (International Transport Forum), maritime shipping companies pay an average of 7% taxes globally. Whereas, companies on a global scale or members of all industries pay an average of 24% corporate tax. The tax paid by maritime shipping companies operating ships under the Favorable Flag under the tonnage tax regime is also below the above-mentioned general average. The effective average income tax paid by 41 maritime shipping companies registered in the New York Stock Exchange in the period of 2010-2019 was around 2%. (However, in this period, apart from the relative improvements in the second half of 2013 and in 2017, we should also ignore the fact that the markets have been very bad especially in the bulk dry cargo market since 2011 and many well-established maritime shipping companies went bankrupt.)
It should also be noted that under the tonnage tax system, maritime shipping companies pay taxes directly according to the unit tax scale that decreases as the tonnage per net or gross ton of the ship increases, or by applying an appropriate corporate tax rate according to the base determined in this way. However, this tax is a lump sum tax and does not change according to the profit or loss of the company. The tax is not paid on income, but on assets as well as tonnage.
The "Global Tax Reform" or plan for multinational companies led by the OECD is not due to the tonnage tax system that maritime shipping companies are subject to, but with large multinational companies in other fields of activity, especially e-commerce and electronics and informatics. is relevant.
While preparing the aforementioned new global tax plan, the OECD aimed to eliminate the unfair competition created by the difference between the tax practices of the countries, but also thought to provide a solution to the increasing public debts and budget deficits of the countries, among others. With this new plan, companies will pay an additional USD 100 billion (USD 150 billion in some sources) annually on a global scale from 2023.
What is Global Tax Reform?
So what is this new tax reform that was created under the leadership of the OECD and accepted by 137 of 140 countries?
In this new reform, multinational companies are required to be subject to at least 15% corporate tax. (OECD's initial thought was between 10-15%, 12.5%, but with the initiative of BIDEN, it was increased to 15%.) As it is known, these companies only pay taxes in the countries where they have their headquarters, and in these tax haven countries where they carry out their activities, the tax rates are very high. is low. Even within the EU, it is 12.5% in Ireland, 9% in Hungary and 10% in Bulgaria.
The tax system to be applied is two-column, the first column; For a multinational company to be considered in this context, its global revenue should exceed 20 billion EUR and its profitability should exceed 10%. These are approximately the world's largest, profitable, risk-free, stable, and 100 companies with blue chip stocks in the stock market.
25% of the "residual profit" of the companies whose profitability exceeds 10% will be shared among the market countries according to the revenue-based distribution key, and it will be subject to taxation in these countries.
This is called “Amount A” / “Amount A”. Market countries mean the countries where goods or services are used or consumed. The number of companies in this group is 100 as stated above.
The second column is;
It regulates that multinational companies with annual revenue exceeding EUR 750 million are subject to the global minimum corporate tax (“Minimum Tax”). Compared to the First Pillar, the number of companies covered by the second pillar is expected to be much higher. Therefore, companies that ensure low taxation of their profits by making tax planning will be taxed at least 15% of their profits. It is expected that the work on this subject will be completed within this year and this reform, which we have briefly mentioned here, will be put into practice in 2023. In this tax plan, the part that concerns maritime shipping companies is the second column, which also includes multinational maritime shipping companies with high annual revenues (over 750 million EUR).
However, the issue that should concern the maritime community is whether this new application will be applied to maritime shipping companies operating ships under the flag of convenience. Although there was no definite information on this subject until a few months ago, the trend was not to implement it. Although it is stated in some sources that it would not be appropriate to make an exception in this regard, the pioneering countries of this study were not in favor of applying it to maritime transport, and they argued that the tonnage tax application here has existed in the maritime transport market for 100 years, based on a need and a necessity. 72% of the global merchant fleet is subject to an advantageous and low tonnage tax regime. In developed western countries, this rate rises above 80%. In other words, there is no unfair competition in maritime transport, and almost all maritime transport companies engaged in international transport are subject to the same favorable tax system. This is ultimately reflected to the end service users.
During the negotiations of the new global tax plan, the World Shipping Council, International Chamber of Shipping, European Community Shipowners' Associations and Cruise Lines International Associations opposed the application of this new tax plan to maritime transport by putting forward the necessary arguments and decided to tax the revenues from maritime transport according to the practice where the company is located. and the tax regime should be evaluated in the light of national policies to support national shipping.
The western countries, who defended the tonnage tax and wanted the continuation of the new reform by not being applied to this area, put forward the following arguments.
“The tonnage tax system creates a predictable, consistent and generally low tax expense for shipping companies. If you know the tonnage of a ship, you can calculate the corporate tax bill it will produce quite accurately over a ten-year period.
The "effective tax rate" compares a company's profits for a period to the tax bill it actually paid, so when a tonnage tax paying company is very profitable in any given year, the effective tax rate is likely to be very low. 2007-2008 and for some ship types the second half of 2020 as in 2021.
However, in the 22 years between 2000-2022, how many years have maritime shipping companies achieved the aforementioned high profit? Only 3 years, 2-3 years passed normally. Many long-established maritime shipping companies have sunk and their closed ships have changed hands. In fact, for some years, the ship, which was newly released from the shipyard, was sent to scrap instead of being operated. Despite this loss, companies paid their taxes on tonnage.
From this sentence, how many shipping companies are profitable each year over a ten-year cycle?
In a year when profits are low or losses are high, the corporate tax bill remains the same as in the best years. Therefore, an effective tax rate assessed over a longer period, and especially over one or two turns in shipping cycles, can be much higher. In short, when the issue is looked at in the long term, even if the company loses on the tax paid on income and profit and on tonnage, the tax paid may be more or less the same and the effective tax rate may be higher.
In addition, the tonnage tax system is easier to calculate than the income/profit tax system, and it is a system where tax evasion is impossible. Because in the normal system, it is possible to show low income and high expenses illegally.
Additionally, over a longer period of time, you can combine the impact of losses, depreciation for ship purchasing costs, and tax deductions for the costs of financing and operating ships, and other benefits, when you combine a company operating under mainstream corporate tax rules and in the same country that has the right to levy taxes. The difference in the effective tax rates of a tonnage-taxed company will likely be small.”
These expressions; It was voiced by the authorities of the countries that pioneered the aforementioned tax reform. In summary, despite the global tax reform, the tonnage tax system, which is specific to the maritime transport sector, is supported and stood behind. (Although these statements and valuations are correct, it is also true that maritime shipping companies pay lower taxes compared to other sectors under the flag of convenience.)
However, there were some who criticized the possibility of not applying this new system to maritime transport. Those who approached this issue negatively claimed that if the implementation of the new tax system is abandoned in favor of one sector, other sectors will line up and hinder the widespread implementation of the new system.
Terminal operators and forwarders have declared that they do not understand why shipping companies would have to pay taxes for the same services they provide if they are fully or partially exempt from this new global tax system.
Considering the broad definition of maritime transport service, if maritime transport companies handle their own goods (loads) at the terminals, they will be exempted from these, and thus, vertical integration and some ancillary or supplementary service revenues are also excluded from this system, while revenues of other terminal operators providing the same service will be covered by this new system. will be subject to the tax system. This will create unfair competition.
It is in such an atmosphere that the OECD has recently published technical guidance on the second pillar practices designed to provide a minimum level of taxation of 15% for large multinational enterprises.
Within the scope of column 2 of this guideline, an exception is proposed for maritime transport revenues, or rather profits, derived from international freight and passenger transport.
Within the scope of the Column II proposal, the exclusion of maritime shipping revenues from international shipping within the scope of this new tax system application has been comprehensively addressed for both ship owners and operators.
In this context, incomes of ship owners who provide maritime transportation services, these transportation service providers without a ship owner, and those who provide transportation service by slot charter will be excluded from this tax plan and will not be applied to them. In addition, revenues of disponent or demise owners, contracting carriers, or operating contractors providing international maritime transport services with ships chartered on the basis of time charter or bareboat (provided that the charterer is not a part of the same group) will fall outside the scope of this new global tax reform. Likewise, maritime transport revenues of maritime shipping companies that make pools, joint ventures, strategic alliances and associations will be exempt from this new application.
Profits from the sale of the ship used in international traffic, in other words in transportation, will also be exempted, provided that the ship remains under their ownership for at least one year.
The important condition to be fulfilled in order to benefit from these exemptions; The strategic and commercial management of all ships of the relevant maritime transport company or enterprise that will benefit from this exemption is to be carried out from the registered place of the company. In fact, as it is known, most of the local or offshore national second or international registry and flag of convenience countries have this requirement.
While maritime transport service remains outside the scope of this new global tax regime, under the broad definition of maritime transport, this exception also includes ancillary or supplementary incomes of global maritime transport companies. However, these ancillary revenues shall not exceed 50% of the total current maritime shipping revenues of the entire group. Another important issue in this regard is that this exemption applies only to the revenues of the companies in question from international transportation, and not to internal transportation revenues. Therefore, this exemption offer and technical guide of the OECD are related to international transports.
As it can be understood from here, the new global tax reform will not be applied broadly to international shipping service revenues. In other words, the advantage of the flag of convenience and the tonnage tax system that has been applied in maritime transport for 100 years will continue to be subject to certain conditions.
Of course, the new tax application will be applied to companies with annual income specified in column II for today, companies with low income will be excluded from the scope.
It is not surprising that the OECD, which includes Western and developed countries, and even maritime countries, supports the new tax reform and tries to implement it, while keeping maritime shipping revenues out of the scope of this application and ensuring that the flag of convenience application does not suffer from this new application. However, while doing this, within the scope of control and prevention of illegal income that provides the financial source of black money and terrorism, there is a real link between the flag of the ship and the flag issuer (genuine link), that is, the ship, its personnel, in all respects, under the national laws and international conventions and rules of the flag issuer, It does not compromise on the principle of controlling the owner, operator and exercising jurisdiction over them and determining who the income from the operation of this ship goes to (beneficiary ownership).
What is the Meaning of This New Proposal for Turkey?
I don't think there is a multinational maritime shipping company in Turkey that earns 750 million Euros per year. Those who do are individuals or companies that own the shares of large foreign shipping companies, and their relationship is in the nature of asset management rather than providing maritime shipping services. Their number is also very limited.
Therefore, the new tax reform does not seem to affect Turkish shipowners operating ships under foreign flags. However, 2-3 years ago, 75% of the Turkish-owned fleet was operated under a foreign flag, while today this rate has increased to 83.2%. Including this sentence;
While the potential for new global taxation is huge, it is estimated that almost all of it is out of scope in terms of annual income. But until 2030, that is, after this new application comes into force in 2023, the 750 million Euro limit will gradually decrease in 7-10 years according to my estimation. In such a case, although the annual income of many Turkish shipowners becomes the income required to be included in this application, it will still be a savior that sea shipping incomes are exempted this time, as mentioned above. However, in order to benefit from this exemption, the said Turkish shipowners will no longer be required to manage their ships from Turkey but through the company in the country where their ships are registered. This situation will cause problems, but the degree will not be too much. Because recently, many Turkish shipowners do not only switch to a foreign flag in order to compete under the same conditions with their competitors, but for some reasons they have to manage their ships from countries such as the Netherlands, Malta, Singapore. (Recently, there has been an exit from Singapore for some reasons.) Although this is the case, it is not a good situation for our country to manage the Turkish-owned fleet from another country. On the contrary, encouraging the management of the ships of foreign companies from our country is a policy that will bring foreign currency to our country. In other words, the fact that Turkish shipowners operating ships under a foreign flag and even foreign shipowners operate their ships from our country is an application that will earn foreign currency for our country. Moreover, Turkish shipowners will want to manage their ship from Turkey unless they have to under normal conditions. Because such a management will be more advantageous in all respects than managing from a foreign country.
When we approach the issue from this perspective, the condition imposed for maritime shipping revenues to be excluded from the new global tax application is not an appropriate situation for Turkish shipowners on a macro and micro scale.
These new developments, which we tried to explain above, are what we understand from the information we have compiled from free sources. However, the issue is not entirely clear. There are many details that need to be clarified. Over time, these issues will be discussed and the subject will become clearer.
Finally, the UK Government stated on 14 June 2022 that the second column proposal will be implemented to be valid for the accounting periods starting on 31 December and after. (According to the ITF, the tax paid by the Sea Freight Group in the UK is 1-2%.)
While giant e-commerce companies are engaged in maritime transport to transport their own goods, large container companies have purchased logistics companies and started to provide holistic services with vertical integration and have been in the practice of horizontal integration for a long time. I think the OECD took all these current situations into account when preparing the global tax reform exemption.