Tax efficiency in shipping financeMatthew Hodkin Partner | TaxLondon

Norton Rose Fulbright LLP24 June 2015

Introduction

1. The importance of tax structuring

• The policy approach to the taxation of shipping

• Key tax planning considerations

2. Recent developments in international taxation

• International Tax Structuring: Still Desirable?

• G20 / OECD / EC: Work in Progress

Setting the scene – the importance of tax structuring

Setting the scene – the importance of tax structuringThe policy approach to the taxation of shipping

Tax authorities have tools• Transfer pricing rules can affect the tax payable on intra-group arrangements

• Withholding taxes are a tool used to restrict outflow of profit

Shipping is the original mobile industry • Easy to locate ownership/financing in other jurisdictions through SPVs

• Crew are mobile as well and can be employed via agencies offshore

• BUT much activity can and does remain onshore

Tax authorities also operate to incentivise• Introduction of tonnage tax regimes

• Greek Law 89/67

• UK finance leasing rules for “bona fide British shipping”

If it moves, tax it. If it keeps moving, regulate it. And if it stops moving,

subsidize it.

Setting the scene – the importance of tax structuringKey tax planning considerations

Withholding taxes• Tend not to affect shipping as it does other industries because owners/operators are

typically in jurisdictions without withholding

• Mobile industry unlike extractive industries

Transfer pricing • Taxes can be minimised under existing principles by reducing the risk being taken by the

onshore entity

• Beware of the risk of bringing offshore entities onshore

• BUT much activity can and does remain onshore

Permanent establishments• Not generally a concern where trading

• However offshore exploration activity may be different

• Double taxation treaties often helpful to shipping

Changes to international taxation

Changes to international tax arenaInternational tax structuring: Still desirable?

Press coverage

• “Double Irish”• “Dutch sandwich”• Tax has become a reputational issue as well as a fiscal issue

International response

• Base erosion and profit shifting (BEPS)• Increasing use of PR by tax authorities• Domestic measures (eg UK diverted profits tax)• Building on doctrines of beneficial ownership (Indofoods)

Never make anything simple and efficient when a way can be found to

make it complex and wonderful.

Changes to international tax arenaG20 / OECD / EC: Work in Progress

• BEPS - Action plans being developed by OECD• Action 1 – tax challenges of digital economy• Action 2 – neutralise effect of hybrids• Action 3 – strengthen CFC rules• Action 4 – limit base erosion by interest deductions and other finance payments• Action 5 – transparency and substance• Action 6 – prevent treaty abuse• Action 7 – artificial avoidance of permanent establishments• Action 8, 9, 10 – transfer pricing to align with value creation (intangibles, risks

and capital, other high-risk transactions)• Action 11 – data collection• Action 12 – disclosure of aggressive tax planning• Action 13 – re-examine transfer pricing• Action 14 – efficient dispute resolution• Action 15 – multilateral instrumentsDifferent relevance to different types of transaction

”

Changes to international tax arenaG20 / OECD / EC: Work in Progress

Tax structuring tools under scrutiny:

• Base erosion, including transfer pricing• Hybrid loans and entities• Treaty shopping, including permanent establishments• Transparency

Impact on domestic tax authorities:

• UK – diverted profits tax

Diverted profits tax

New UK tax

• Aims to tax avoided permanent establishments• Also taxing entities lacking economic substance• Double taxation treaties may not apply (but is this right?)• Questions as to compatibility with EU law

Changes to international tax arena - conclusion

• Tax planning still necessary to avoid traps

• However, need to beware aggressive tax avoidance

• Governments beginning to introduce rules separately

• Tension between taxing human capital and risk capital

• Also tension between incentivising an industry and discouraging investment

DisclaimerNorton Rose Fulbright US LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP and Norton Rose Fulbright South Africa Inc are separate legal entities and all of them are members of Norton Rose Fulbright Verein, a Swiss verein. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients.

References to ‘Norton Rose Fulbright’, ‘the law firm’ and ‘legal practice’ are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together ‘Norton Rose Fulbright entity/entities’). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity.

The purpose of this communication is to provide general information of a legal nature. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.