Billions of Shipping Profits Face Hardly Any Taxes

Billions of Shipping Profits Face Hardly Any Taxes: Chris Bryant
Chris Bryant Feb. 15, 2022 https://news.bloombergtax.com/daily-tax-report/billions-of-shipping-prof...

Container-shipping companies have found lots of ways to spend their enormous pandemic profits. They’re lifting staff pay, making acquisitions and returning heaps of cash to shareholders.

One person who won’t benefit much is you, the taxpayer. Based on their recent financial filings, I calculate big European container lines AP Moller-Maersk A/S, CMA CGM SA and Hapag-Lloyd AG owe just 1% or 2% of their bumper shipping profits in taxes.

This jarring outcome is due to the shipping industry’s highly unusual taxation arrangements: The companies pay a fixed amount based on the tonnage of their vessels, rather than a percentage of their earnings. More than 20 European countries have a tonnage tax system, as does Japan; Singapore and Hong Kong also provide generous tax incentives to shipping.

Already on the defensive over the world’s broken supply chains, shipping companies have so far faced remarkably little scrutiny of their taxes.

Last week a former U.K. business minister called for a windfall taxon container-shipping profits, echoing similar demands for a special levy on oil companies such as BP Plc.

Of course, there’s a risk that one-off taxes are passed onto customers via even higher freight rates. I’d be happy if shipping companies were just taxed at a normal rate.

Instead, the industry successfully lobbied the Organization for Economic Cooperation and Development to be excluded from last year’s global deal to set a 15% minimum tax rate for multinational businesses.

According to its latest accounts, Maersk owed just $138 million of tonnage and freight taxes on $17.6 billion of international shipping profits in 2021, or an effective tax rate of less than 1%. (Maersk’s group tax ratelast year was 3.7%, but this mostly reflects higher taxes on land-based activities).

I calculate German rival Hapag-Lloyd and France’s CMA CGM had effective tax rates of 1% and 2% respectively, in the first nine months of the year on combined pretax profits of around $17 billion.

As the container lines buy their way into shipping-adjacent sectors, their barely taxed trans-ocean profits risk distorting competition; logistics incumbents pay far higher taxes and so don’t have as much spare cash.

Though the opportunity for comprehensive tax reform may have passed, tonnage taxes should be redesigned so they offer greater benefits to the public. Carbon taxes are another way to force the industry to pay its fair share. In the meantime, these companies need to show they’re spending financial windfalls responsibly.

Rather ironically, the industry won an exemption from the 15% minimum rate, in part, by emphasizing its historically low profit margins. Yet some shipping lines made more money in 2021 than in the past couple of decades combined.

The world’s container-shipping lines likely earned $190 billion in operating profit in 2021, according maritime research firm Drewry. With port congestion continuing, this year’s profits could be even larger.

Politicians aren’t done doing the industry favors. Land-locked Switzerland, home of Mediterranean Shipping Company S.A, the world’s largest container-shipping line, is expected to introduce a tonnage tax. (MSC is private and doesn’t publish information about its profits or taxes). Meanwhile, Britain recently made its tax system even more favorable to the shipping companies to underscore the supposed benefits of Brexit.

In fairness, taxing shipping is complicated because vessels operate in international waters and call at multiple ports. A tonnage levy offers simplicity and predictability. Without such favorable treatment, more vessels would likely be registered in low-tax offshore jurisdictions under so-called “flags of convenience.” One should remember too that some shipping companies pay higher taxes but are subsidized in other ways.

Tonnage taxes are due even when the liners make losses, which happened frequently in the past decade; hence carriers paid more in those years than they otherwise would. Shipping is capital-intensive but tonnage taxes provide no relief for those investments. And in some cases, tax benefits are tied to domestic economic activity and job creation.

But if tonnage taxes weren’t so hugely advantageous, shipping companies wouldn’t still be lobbying for them. Israel-based Zim Integrated Shipping Services Ltd., the world’s tenth-largest container line by capacity, has asked local authorities to switch to a tonnage system. Currently, it faces the same 23% tax rate as other Israeli businesses. It’s bold to demand tax cuts after earning massive windfall profits. But can you really blame the U.S.-listed group for asking, considering how rivals are treated?

Even after the current acute port congestion eases, freight costs could remain elevated compared to historic levels: Desperate customers now place more value on reliable service and are agreeing to longer contracts. Mergers and alliances may mean the industry is more adept at curtailing overcapacity. If the industry is more profitable than it was in the past, that’s all the more reason to tax it fairly.

An easy first step is to redesign tonnage taxes so they better promote decarbonization as, for example, Portugal does. Shipping should also be included in carbon markets, as the EU is proposing, so it pays for polluting.

In the meantime, shipping companies can avoid any threat of windfall taxes by demonstrating they’re responsible stewards of lightly taxed wealth: Besides hiking dividends and share buybacks, Maersk has ordered a dozen ships that run on cleaner methanol, called for a global tax on shipping fueland aims to becoming carbon-neutral by 2040, for example.

Is that enough? It’s a taxing question.