South Africa’s tonnage tax gains momentum

By Nina Keyser, Webber Wentzel Bowens

In February 2005 the South African Minister of Finance announced in his annual budget speech that South Africa would be introducing a new tonnage tax in the 2006 tax year.

The reason for the introduction of a tonnage tax is that more than 90 per cent of South Africa’s exports and imports are conducted via international shipping routes. As there is currently only one vessel registered on the South African Ships Register, foreign registered vessels render these services almost exclusively. One of the reasons for this phenomenon is that ship owners are likely to register vessels in the most favourable tax jurisdiction. The South African tax regime as it pertains to ship owners is regarded as unfavourable compared to that in force in other countries.

A working committee, consisting of representatives from the National Treasury, the Departments of Labour, Justice, Transport, the SA Maritime Safety Association, The Maritime Law Association and the Association of Ships Agents and Brokers of Southern Africa, was appointed to consider tax and other issues affecting the development of the South African Ships Register.

One year later, a National Treasury spokesperson announced in the press that the committee realised that it will need more time to thrash out various issues and that it was not ready to publish its draft tonnage tax legislation for comment yet. It appears that the committee is taking more than the South African tax regime into consideration. It is taking a broader view of the maritime industry and issues such as mortgage ranking of lending institutions, work permits for foreign crews, exchange controls and possible amendments to the Merchant Shipping and Admiralty Jurisdiction Regulation Acts are also being considered.

The delay in publication of draft legislation therefore does not appear to be the result of the Treasury dragging its feet, but rather an indication that the committee is taking a holistic view of the maritime industry and is serious about creating an internationally competitive operating environment for ship owners.

Generally tonnage tax is based on the following principles:

The government fixes a notional income per day per net registered tons of the ship;
The notional income per day is multiplied by the number of days that the ship was operational;
The ship owner’s taxable income is then deemed to be the aggregate notional income from all of its qualifying ships;
The deemed taxable income is then multiplied by the prevailing income tax rate for companies.

The ship owner is therefore taxed according to the size of its ships and not according to its business profits.

The benefit of tonnage tax is that it is likely to lead to a lower effective tax rate for ship owners. Under a tonnage tax system, ship owners know exactly how much tax they will pay in any particular tax year because the tax itself is based on a fixed tax rate. Given the relative simplicity of a tonnage tax system as opposed to the prevailing income tax system, it is anticipated that the effort and cost required to complete an annual tax return will be reduced.

On the other hand, if a ship owner has a bad year and suffers a loss, it will still be liable to pay tax if it is taxed under a tonnage tax system.

There are many tonnage tax issues that the working committee will have to consider before publishing its draft legislation. The first question is whether this will be an optional tax regime for ship owners or not. If, for example, a ship owner is operating at a loss, it will be disastrous for it to be forced into a tax regime where it has to pay tax even if it has no profit.

The next question is whether ship owners who do elect to be taxed under a tonnage tax regime will be locked in their election or not. In India, for example, ship owners may elect to be subjected to tonnage tax or not. If they do opt for tonnage tax, they are locked into this choice for a period of ten years. If the ship owner opts out, it is debarred from re-entry for a period of ten years. In the United States there is no lock-in period, but there is a five-year exclusion period if the ship owner leaves the tonnage tax system prematurely.

It is not yet clear whether the working committee is considering conditions to the tonnage tax system or not. These conditions could possibly include an obligation to train crew members; or to create certain reserves; or to report on compliance with international security, safety and environmental standards and on-board working conditions.

The working committee has the benefit of being able to consider the tonnage tax systems of other countries that have already implemented their regimes and is therefore in a position to create a highly competitive system. The danger that lurks in waiting too long to implement the system in South Africa is that ship owners may already have been locked in to the tonnage system of other countries.

References

1. SARS (2005) Budget Tax Proposals 2005/6, www.sars.gov.za.

2. India Infoline (2005) Welcome Tonnage Tax, www.indiainfoline.com

3. HMRC TTM01200 Introduction to Tonnage Tax, www.hmrc.gov.uk

4. Business Report (2006) Tonnage Tax shapes up to woo ships to SA register, www.busrep.co.za

5. Tax Policy Chief Directorate, National Treasury (2005) A Tonnage Tax Regime for South Africa in support of the domestic shipping industry – Proposed Implementation Steps.

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