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HANSA 03-2017

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Finanzierung | Financing

Finanzierung | Financing U.S. taxes supporting shipping investment Taxation of U.S. shipping companies is bifurcated. The huge number of vessels trading domestically are treated much like other industrial equipment. Much of the attention is on U.S. owned vessels trading internationally; these offer unique wrinkles, with tax policies reflecting decades of history. By Barry Parker The vast majority of U.S. flagged vessels trade domestically along the coast or on rivers and are subject to ownership and citizenship restrictions of the Jones Act, a set of long-standing cabotage rules. The 1950’s and 1960’s were glory days for shipping fleets controlled from the U.S. but trading all over the world. Prior to 1975 and 1986 changes in the rules, the U.S. tax regime had allowed entities based in the States to keep earnings from shipping offshore provided that they intended to reinvest the profits in shipping assets, with the practical effect of deferring taxes indefinitely for large industrial companies. The elimination of the deferrals in 1986 coincided with depressed shipping markets; many shipping offces closed up. Oil companies then jettisoned tonnage in the wake of the Oil Pollution Act of 1990. But the tide reversed … slightly. In 2004, the ability to defer taxes was reinstated as part of the »Jobs Act«, which led to at least one mega-deal; the purchase by Overseas Shipholding Group (OSG, a large U.S. based owner) of Stelmar Shipping, a specialist in the worldwide refined products trade. At the time, OSG suggested that the reinstated deferrals were a major impetus for the deal. Lawyer James C. Kofer, a Partner at Seward & Kissel LLP explained the tax situation for companies operating in the States. In a monograph written for New York Maritime (NYMAR), he explained: »The federal government provides a statutory exemption from U.S. federal income tax for certain foreign corporations engaged in the international operation of ships.« First, the company must satisfy a test regarding its country of organization; he writes that, to clear this first hurdle: »… a foreign corporation must be organized in a jurisdiction which provides a reciprocal exemption from tax on shipping income to U.S. corporations (including the Marshall Islands, Liberia and Panama).« Mr. Kofer explained further that companies then need to fit into one of three categories, writing: »There are three ownership tests that can be satisfied to qualify for the exemption: (1) the »publicly-traded test,« (2) the »50% ownership test« and (3) the »CFC test.« The first bucket is clear – several dozen shipping companies with U.S. offces are listed on stock exchanges. The second category is defined as: »… if more than 50% of the value of its stock is owned by one or more tax residents of a qualified foreign country«. Companies will qualify, under the third category, referring to Controlled Foreign Corporations, if »… more than 50% of the vote or value of its stock is owned by one or more 10% U.S. voting shareholders … and more than 50% of the value of its stock is owned by U.S. individual taxpayers, U.S. corporations or certain U.S. trusts.« He adds: »In addition, a foreign corporation which is resident in a jurisdiction that has an income tax treaty with the United States may also qualify for an exemption under that treaty.« Tax rules, and their interplay with the fine print of credit agreements, are highly complex. OSG, mentioned above, arranged a 1.7 bn $ loan with a bank syndicate. The company was subsequently forced to voluntarily declare bankruptcy, in late 2012, because of the confusion surrounding its tax liabilities on foreign flag vessels. U.S. based owners are always sensitive to comparisons with other high tax countries. The »Jobs Act« of 2004, which brought back the tax deferrals, also provided owners of U.S. flagged vessels of greater than 6,000 dwt engaged in the international trades with the option of paying an »alternative tonnage tax« (enacted the following year). According to 26 HANSA International Maritime Journal – 154. Jahrgang – 2017 – Nr. 3

Finanzierung | Financing lawyers Blank Rome, writing at the time it was enacted, »The alternative tonnage tax is essentially a flat tax based on vessel tonnage and the number of days the vessel was operated in the international trades.« The lawyers add that: »trades between the U.S. and its possessions, such as Puerto Rico and Guam, are considered international trade, and vessels operating in these trades qualify of the alternative tonnage tax.« Industry sources suggest that carriers in the U.S. mainland to Puerto Rico trades have adopted the tonnage tax, which can be applied instead of a corporate income tax, for eligible vessels. Another aspect of U.S. taxation is the Capital Construction Funds (CCF), crafted in the 1970s to encourage renewals of the U.S. merchant shipping fleet. In the CCF, eligible companies can defer taxes on deposits made into funds that will support newbuilds in foreign, Great Lakes, short-sea, or noncontiguous domestic trades (Alaska and Hawaii). H. Clayton Cook, of Cook Maritime Finance, a one-time counsel to the Maritime Administration, told HANSA: »MA- HANSA series on global maritime hubs RAD has made a significant change in its CCF rules that for the first time will allow Ro/Pax services to be treated as qualified.« The purely domestic side of the maritime business sees tax treatment similar to that of other owners of all manner of industrial equipment. One of the largest domestic market participants, and leading mover of petroleum and refined products in U.S. maritime trades, is Kirby Corp, with a large fleet on the inland waterways, as well as a fleet of coastwise tank barges and tugs. Kirby’s 2015 Annual report also illustrates another aspect of U.S. taxation – where government policies to encourage new investment in targeted industries provide incentives encouraging investment through accelerated depreciation (where taxable income is lower than reported book income, creating timing differences pushing tax payments out into the future). Kirby’s report says: »Deferred income taxes as of December 31, 2015 increased 12% compared with December 31, 2014. The increase was primarily due to the 2015 deferred tax provision of $ 62,755,000, the result of bonus tax depreciation on qualifying expenditures due to the Protecting Americans from Tax Hikes Act (PATH) of 2015. PATH continued the bonus tax percentage of 50% for qualifying expenditures placed in service in 2015 through 2017, but then phases down to 40% in 2018 and 30% in 2019.« Kirby Corp., and other users of the inland river system, also pay »User Taxes« to fund infrastructure upkeep, collected through purchases of fuel. Going forward, maritime companies in both domestic and foreign trades will be impacted by a major alterations in the rules for lease accounting in the U.S. (mirroring international changes). The changes, detailed by the Financial Accounting Standards Board in their document »ASU No. 2016-02, Leases (Topic 842)«, are to be implemented in 2019–2020. Starting at that time, lease deals of more than one year duration (presently characterized as »operating leases« in most cases and therefore not shown on balance sheets) will need to be capitalized and shown on company balance sheets. In a late 2016 filing by International Seaways (the international flag component split out of OSG, reorganized in late 2016), the company says: »Management expects that the Company could recognize increases in reported amounts for property, plant and equipment and related lease liabilities upon adoption of the new standard.« Where public companies like International Seaways are scrutinized by investors, various ratios and calculations will need to be re-calibrated; for example, the »Enterprise Value« (»EV«), a measure of company capitalization widely used by securities analysts looking at listed shipping companies, will be revised to include leases with durations of one year or more. Tax planners will be very busy in 2017. Infrastructure issues may also be infused into U.S. tax matters under the new Administration in Washington, D.C. Tax credits may be implemented to encourage capital investments in U.S. infrastructure (HANSA 01/2017). These changes could be applicable to maritime facilities (most likely shoreside investments in terminals) rather than the vessels themselves. Nevertheless, where shipping businesses own landside assets as well as vessels, such credits (which are permanent, unlike the temporary deferrals from accelerated or »bonus« depreciation) may enter into their tax planning. M HANSA International Maritime Journal – 154. Jahrgang – 2017 – Nr. 3 27

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