Tax contributions from liner billionaires questioned

Tax contributions from liner billionaires questioned
Sam Chambers August 15, 2022 https://splash247.com/tax-contributions-from-liner-billionaires-questioned/

The issue of liner shipping and taxation is once again in the news during a record Q2 earnings season for global carriers.

This month has seen Maersk post profits of $8.6bn and Hapag-Lloyd report a EUR8.7bn ($8.94bn) profit amid a host of spectacular results that are seeing some politicians question whether carriers ought to be contributing more to state coffers.

The latest weekly report from Sea-Intelligence suggested carriers will face an “increased political headwind” in the coming months as strong earnings that make tech giants envious continue to roll in.

According to Sea-Intelligence, Maersk will pay $164m in taxes in the second quarter, a tax rate of 1.8%. Hapag-Lloyd, which now vies with Volkswagen as Germany’s most profitable company, will pay EUR20.8m, meaning an effective tax rate of 0.5%.

“The problem for the carriers right now is that the disparity between their present profits and their low tax rates becomes quite extreme,” Sea-Intelligence stated on existing tonnage tax arrangements, continuing: “Add into the mix, that the carriers are politically seen as being a part of driving inflation – even though not to the degree, that some might believe. Add on top of that the very real emotional impact, that in the middle of a continuing supply chain crisis, the providers of exceedingly unreliable services, are seen to profit like never before.”

Politicians have come out and attacked liner profits a great deal of late – with US president Joe Biden even going as far as saying he’d like to take a “pop” at the global carriers earlier this summer.

“The disparity between profits and taxes in the current climate is simply too large to justify politically,” Sea-Intelligence stated, adding the caveat that any tonnage tax changes will have their own ripple effects and politicians might not like what they get.

Billionaire Rodolphe Saadé came out fighting last month, determined to steer politicians in Paris away from pummelling his company with a windfall tax to help households battle soaring inflation.

A growing number of French politicians have been calling for a steep 25% windfall tax on some local transport and energy companies, including Saadé’s CMA CGM containerline and TotalEnergies.

Speaking at the French Senate on July 20, Saadé said: “We are putting money on the table and it’s not only charity. We are helping consumers. What I want is that we stop looking at CMA CGM and we start looking at my competitors.”

Liner shipping is on course to smash last year’s record profits by as much as 73%, according to new forecasts from John McCown-led Blue Alpha Capital, citing the soaring contract rates secured by carriers in 2022 and the ongoing port congestion issues.

Net income this year will likely reach $256bn based on the 11 carriers monitored by Blue Alpha Capital, a figure Bloomberg has pointed out is roughly equivalent to the gross domestic product of Portugal.

Weighing into tax the issue today, Olaf Merk, shipping expert at the OECD-affiliated think tank International Transport Forum (ITF), said he found little justification why shipping companies should pay less taxes than other sectors.

“The argument for the tonnage tax is that it provides predictability, which could be helpful when profits from shipping are highly volatile. But that does not mean that tax revenues from shipping should be so much lower,” Merk told Splash.

Merk argued that it is conceptually possible for countries to agree amongst each other on a minimum effective tax rate for shipping companies, similar to the recent global agreement on a global minimum corporate tax rate. Tonnage tax regimes could also have a minimum effective tax rate, Merk suggested.

Commenting on the thorny issue, Lars Jensen, the CEO of container shipping consultancy Vespucci Maritime, told Splash: “How much tax carriers should pay is a political question and does not as such have an objective answer.”

Carriers compete in a global market where the playing field is not level, Jensen pointed out. A variety of government subsidies tend to skew the market. As well as tonnage tax, there is also direct government subsidies, cabotage regulations, different flag state requirements and access to favourable loans.

“It can seem tempting to increase or abolish the tonnage tax, but that also carries the risk that carriers might shift sizeable parts of their business to other jurisdictions. Or if they don’t then they might be weakened substantially versus competitors who do,” Jensen warned.

It is also worth bearing in mind that an analysis performed by McKinsey before the pandemic showed that the liner industry as a whole lost some $100bn over a 20-year period.

Jensen argued today that liner profits are set to slide back towards normality, hence before any potential changes in tax legislation are passed through a parliament it is likely that the market has come closer to normal, and any politician dreaming of a massive cash infusion will become “quite disappointed”.

Just how long this elevated freight rate environment persists then becomes important in the overall tax discussion.

Looking at the China Containerized Freight Index (CCFI) developments and learning from the largest rate declines in history, Sea-Intelligence has forecast that a rate reversal back to pre-pandemic levels is unlikely to take place in 2023.

“Spot rates have clearly begun to decline, however, historically, the contract rate market is less volatile and hence dampens the effect,” Sea-Intelligence suggested, going on to predict that the market would not revert to anything like pre-pandemic levels until 2024, and even then that “new normal” could be a market where rate levels are consistently higher than pre-pandemic, a point of view shared by Parash Jain, HSBC’s global head of shipping and ports research.

“Going forward, we argue that after years of consolidation and formation of mega shipping alliances, the shipping lines have learnt the capacity discipline and while there might still be volatility in freight rates, the rock-bottom level of freight rates seen in the past decade might no longer persist in the future,” Jain told Splash last week.