Taxpayers are missing out on the windfall of pandemic shipping profits
This conflicting result is due to very unusual tax arrangements in the shipping industry: companies pay a fixed amount based on the tonnage of their vessels, rather than a percentage of their revenues. More than 20 European countries have a tonnage tax system, as does Japan; Singapore and Hong Kong also offer generous shipping tax incentives.
Already on the defensive in the face of broken global supply chains, shipping lines have so far faced remarkably weak scrutiny of their taxes.
Last week, a former UK business secretary called for a windfall tax on container shipping profits, echoing similar calls for a special tax on oil companies such as BP Plc.
Of course, there is a risk that one-time taxes will be passed on to customers via even higher freight rates. I would be happy if shipping companies were just taxed at a normal rate.
Instead, the industry successfully lobbied the Organization for Economic Co-operation and Development to be excluded from last year’s global agreement to set a minimum tax rate of 15 % for multinational companies. (2)
According to its latest accounts, Maersk only owed $138 million in tonnage and freight taxes on $17.6 billion in international shipping profits in 2021, an effective tax rate of less than 1%. (Maersk Group’s tax rate last year was 3.7%, but this mainly reflects higher taxes on land-based activities).
I calculate that German rival Hapag-Lloyd and French CMA CGM had effective tax rates of 1% and 2% respectively, in the first nine months of the year on combined pre-tax profits of around 17 billion of dollars.
As container companies buy their way into adjacent shipping sectors, their barely taxed transoceanic profits risk distorting competition; logistics holders pay much higher taxes and therefore don’t have as much cash in reserve.
Although the opportunity for comprehensive tax reform has passed, tonnage taxes should be redesigned to provide greater benefits to the public. Carbon taxes are another way to force industry to pay its fair share. In the meantime, these companies must show that they are spending the financial gains responsibly.
Rather ironically, the industry obtained an exemption from the 15% minimum rate, in part, by emphasizing its historically low profit margins. Still, some shipping companies made more money in 2021 than in the past two decades combined.
Global container shipping lines likely made $190 billion in operating profits in 2021, according to shipping research firm Drewry. With continued port congestion, this year’s earnings could be even greater.
Politicians are not done doing favors for the industry. Landlocked Switzerland, home of Mediterranean Shipping Company SA, the world’s largest container shipping company, is set to introduce a tonnage tax. (MSC is private and does not publish earnings or tax information). Meanwhile, Britain recently made its tax system even more shipping-friendly to underscore the supposed benefits of Brexit.
In fairness, taxing shipping is complicated because ships operate in international waters and call at multiple ports. A tonnage levy offers simplicity and predictability. Without such favorable treatment, more ships would likely be registered in low-tax offshore jurisdictions under so-called “flags of convenience”. It should also be borne in mind that some shipping companies pay higher taxes but are subsidized in other ways.
Tonnage taxes are due even when ocean liners make losses, which has happened frequently over the past decade; carriers therefore paid more in those years than they would otherwise(3). And in some cases, the tax benefits are tied to national economic activity and job creation.
But if tonnage taxes weren’t so good, shipping companies wouldn’t push for them anymore. Israel’s Zim Integrated Shipping Services Ltd., the world’s tenth-largest container line by capacity, has asked local authorities to switch to a tonnage system.(1) Currently, it faces the same rate of 23% taxation than other Israeli companies. It is audacious to demand tax cuts after making huge windfall profits. But can you really blame the US-listed group for asking, given how their rivals are treated?
Even after the current acute port congestion subsides, freight costs could remain high compared to historic levels: desperate customers now place more importance on reliable service and accept longer contracts. Mergers and alliances can mean that the industry is better able to reduce 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 that they better support decarbonisation, as for example Portugal is doing. Maritime transport should also be included in carbon markets, as proposed by the EU, in order to pay to pollute.
In the meantime, shipping companies can avoid any threat of windfall taxes by demonstrating that they are responsible stewards of lightly taxed wealth: in addition to increasing dividends and stock buybacks, Maersk has ordered a dozen ships running on cleaner methanol, called for a global tax on shipping fuel and aims to become carbon neutral by 2040, for example.
Is it sufficient? This is a trying question.
More from Bloomberg Opinion:
• Supply chain booms may also be here to stay: Fickling & Trivedi
• Bonuses work best when they’re surprisingly big: Sarah Green Carmichael
• Shipping industry gets involved — for now: Chris Bryant
(1) This agreement ensures at least that certain ancillary logistics services can no longer be included in the tonnage tax
(2) This study found that the effective tax rate for container shipping was 19% between 2005 and 2019. However, this high figure likely reflects the inclusion of non-tax-exempt logistics services, as well as losses that I mentioned. The effective tax rate for the entire maritime sector was approximately 7%.
(3) See also this interview with the CFO of Zim.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.