Is it Time to Relook at Ocean Carriers’ Tax Contributions?

In June, President Joe Biden spoke by phone to several traders and farmers highlighting the impact of rising shipping costs and how they were affecting businesses. Biden went on to castigate shipping companies for hiking prices and promised to take an action, aimed at reducing the cost of inflation. 

Biden was only the latest in a growing number of critics citing the staggering profits of the large shipping companies over the past two years. With companies such as Maersk reporting the largest profit ever in 2021 for any Danish company the focus on profits has continued. While most of the focus was on how the companies were making staggering profits as long-term contracts and spot freight rates jumped to exorbitant levels, some commentators started to focus on the taxes paid by the shipping companies.

For a long time, shipping companies have enjoyed favorable tax terms. The carriers are taxed based on their tonnage, referred to as tonnage tax, which is different from the normal corporate tax system.

Thus, in most instances, many shipping carriers pay no corporate income tax. But even in situations where the corporate is charged, it is still way below that of other sectors. For example, the average corporate income tax of bulk carriers is 6 percent and just 3 percent for the tanker sector, which if contrasted with the 27 percent charged to freight forwarders appears outrageous.

However, since the pandemic began, the shipping industry has become lucrative. The ocean carriers are now moving massive volumes of cargo while at the same time posting eye-watering profits. Estimates for 2021 set the profits for the industry anywhere between a low of $110 billion to $150 billion or even $200 billion.

As a result, the discourse to reappraise the carriers’ tax regime is growing. Taking note of the matter, Sea-Intelligence in its weekly report said the present tonnage tax system creates a risk for big shipping players.

“The problem for the carriers right now is that the disparity between their present profits and their low tax rates has become extreme,” wrote the analysts at Sea-Intelligence. “Add into the mix that the carriers are politically seen as being 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.”

With Maersk posting a profit of $8.6 billion and Hapag Lloyd $4.4 billion for Q2 2022, Sea-Intelligence goes further to predict that the political headwind against the carriers is poised to increase.

In the case of Maersk, they are going to pay $164 million in taxes for the second quarter of 2022. This is a rate of 1.8 percent. Hapag Lloyd is going to pay $20.9 million, meaning an effective tax rate of 0.5 percent.

Confronted by a sagging economy and soaring inflation rates, some French politicians were the first to take on the issue proposing a 25 percent windfall tax on the “super profits” earned by the domestic carrier CMA CGM, along with other French giants including TotalEnergies and Engie. According to the lawmakers, the windfall tax money would have helped to fund measures aimed at protecting consumers’ purchasing power.

CMA CGM’s CEO Rodolphe Saade argued with the politicians saying they needed to look at the company’s competition and the financial disadvantage they would be placed under with the windfall tax. In the end, CMA CGM and Total, both agreed to reduce prices for French customers to avoid the tax.

Globally politicians in the developed world have pushed for the first global minimum tax on multinational corporations. While some analysts agree that there is a need for a global minimum corporate tax, especially applicable to the big ocean carriers, some caution that a wrong political answer to the tax question could have a devastating outcome. 

Unlike other industries, ocean carriers’ business model is quite volatile and depends on a range of factors spread across the world. Further, there is global pressure on the shipping industry to invest large sums to address emissions and achieve decarbonization of a sector that many considered one of the most difficult to decarbonize. There are already reports showing the shipping market may start to contract in 2023, meaning the revenues might fall before a consensus on the tax issue is reached.