Freight taxes. Many countries, especially those with developing economies, tend to impose taxes on income (that is, freight) from carriage of goods by sea, generally on export cargoes but, in-some cases, also on import cargo.
In some cases, time charter and bareboat hire is also considered to be taxable income. Shipowners can be the hardest hit, especially those who are not resident in those countries. Shipowners should be aware of this expense when the ship is being fixed on voyage charters where the loading place is in a place imposing freight taxes. Sometimes the agency fees contain a component that turns out to be freight taxes but the owner had little or no warning of such taxes before fixing the ship. There are also some countries that impose taxes on the shipowner despite the ship being on a time charter. The argument they use is that the time Charterer could be inaccessible to that country’s taxation system. This is yet another area where BIMCO comes to the assistance of its shipowner members. BIMCO publishes a very useful handbook named “Freight Taxes” which is revised annually as the taxation situations change from country to country. Shipowners can improve the accuracy of their voyage estimations by using this volume. It contains concise and up-to-date information on countries that impose taxation on foreign ships using their ports.
If a ship is chartered on a voyage charter, the owner can allow for freight taxes (if he knows about these) on his freight rate or insist on a suitable charterparty clause that establishes the responsibility for payment of taxation. A problem can arise when a ship is on time charter. The ship is in the port where a tax is imposed but the time Charterer may be far away. The owner has little control over the ports to which the ship is ordered by the Charterer. The ship can be arrested-through no real fault of the shipowner- if the tax is not paid by charterers’ agents (assuming the charterparty contains a clause making the Charterer responsible for the payment of such taxation and the agents are supposed to pay these taxes on behalf of the Charterer.) Arrest of the ship can possibly cause it to be considered off hire and lengthy disputes will arise.
Some countries have a system exempting non-resident shipowners from taxation if there is in force for those countries a bilateral agreement with other countries to prevent the shipowner from being taxed in both countries (double taxation avoidance agreements). The exemptions procedures are quite complicated; they can depend on the place of domicile of the ultimate beneficiary of the freight.
Because the tax system of different countries can change quite suddenly, as far as the shipowner is concerned, a general clause in the charterparty may reduce the potential for future dispute. Such a clause can be: “Freight and cargo taxes to be on Charterer’s account. Other taxes to be for Owner’s account.”
BIMCO recommends a umber of clauses; any of which can be inserted in a time charterparty to protect the shipowner. For example:
“All taxes and dues on the Vessel and/or cargo and on charter hire and freight arising out of cargoes carried or ports visited under this Charterparty shall be for the Charterer’s account.” (BIMCHEMTIME Charterparty.)
In a time charter, such a clause may not hold much influence with port authorities because of the inaccessibility of the time Charterer, so the owner may have to pay initially and claim indemnity from the charterer.
For voyage charters, an extract from a BIMCO-recommended clause is:
“. . . dues and other charges levied against the Vessel shall be paid by the Owners, and dues and other charges levied against the cargo shall be paid by Charterers. Without prejudice to the foregoing, . . . the Vessel will be free of any wharfage, dock dues, quay dues, … or other taxes, assessment or charges calculated on the basis of the quantity of the cargo loaded or discharged and free also of . . . taxes on freight and any unusual taxes, assessment or government charges in force at the date of this Charterparty or becoming effective prior to its completion, either on the vessel or on the freight, or whether ox not measured by the quantity or volume of the cargo.”
The manner in which freight (and other) taxes are assessed by governments is generally based on some percentage of total freight income being considered as profit and a specified tax is imposed on the profit. Fox instance, if a country considers 5 per cent of a shipowner’s freight (or hire) income is profit to the owner, and a profits tax of 30 per cent is imposed, the result will be a tax of 1.5 per cent on freight.
A few examples are given below of the manner in which changes in the system of freight taxes take place.
In Indonesia, between 1984 and 1987, outward freight tax was assessed at 1.25 per cent of total freight (25 per cent of 5 per cent “profit”). In 1987, the Indonesian taxation authority advised the shipping community that the 1.25 per cent tax was merely an “advance”. The final tax could vary between 0.75 per cent, 1.25 per cent and 1.75 per cent, depending on the actual freight. An export freight tax of 2.4% would be collected on the gross freight when the ship was loaded, 1.25 per cent paid to the government as an advance, and the remainder kept in a separate account for final settlement at the end of the Indonesian tax year. Any balance at the end would be remitted to the shipowner.
In 1988, in Guatemala, the “Merchant Marine Tax” imposed on imports was cancelled but the freight tax imposed on export and import cargoes became 5.1 per cent whereas there had been no “freight tax” on import cargo.
Also in 1988, in Australia, the freight tax was reduced to 1.95 per cent of gross freight and, in New Zealand, to 1.65 per cent after changes in the national taxation rates in those countries. In Australia, if foreign ships carried coastal cargoes, as opposed to import or export cargoes, the gross freight was taxed despite the ship’s being flagged in a country or owned by an owner in a country that had a non-taxation agreement with Australia.