consisting of some typical tonnage tax attributes. However, there are “checks and
balances” or control measures to ensure that tax avoidance is not unduly or inadvertently encouraged.
52
Eligibility for tonnage tax treatment is also restricted to management companies
located within the UK only and engaged in commercial or strategic management
activities. All qualifying shipping companies within a group must make an election
for entry into the tonnage tax regime.
53 This feature of the UK regime which is not
shared by some other jurisdictions, is designed to prevent entities from only entering
their high profit enterprises into the regime to take advantage of its offerings. Picking
and choosing is thus discouraged. The legislation creating the tonnage tax regime
has provisions which provide for rigid safe guards so that electing companies are
ostensibly prevented from transferring profits from their overseas operations simply
to benefit from the tonnage tax scheme.
54 This is achieved by imposing rules on
capitalisation of companies and other anti-avoidance measures. The rules also create
obstructions to provide taxation relief between shipping and non-shipping activities
with a group. Transactions within a group must be demonstrably at arm’s length
which must be reflected in the use of arm’s length values when they stretch across the
limitations imposed by the law.
55
The treatment of foreign profits is another issue relevant to tax avoidance within
tonnage tax regime. Should the tonnage tax regime apply to dividends remitted from
subsidiaries in foreign jurisdictions so that they are exempted from the application of
domestic corporate tax? If this is answered in the affirmative the domestic jurisdiction would have the potential for attracting shipping entities with global interests.
Foreign entities involved in joint ventures with local companies would not be
inclined to risk being caught by local corporate taxation when they are relatively
safe in offshore tax-friendly jurisdictions. If the tonnage tax regime is applied to
foreign profits, neutrality of capital export would be maintained. In other words,
investors would pay the same tax on profits from both domestic as well as foreign
investments and earnings. In EU terms the problem is that there is no uniformity in
fiscal policy in this regard. There would thus be disparity in fiscal regimes which
would translate into some jurisdictions being more favorable to the shipping industry
than others. For example, the Netherlands does not impose any domestic corporate
taxation on remittances made from a foreign subsidiary to the parent company in the
Netherlands but the UK previously had no such general policy. However, further to
the recommendations made by Lord Alexander, the UK government decided to
make foreign shipping dividends subject to the UK tonnage tax regime. Even so, any
opening of the doors in this regard would have to be subject to strict precautionary
measures being taken against potential tax avoidance. For the sake of uniformity
within EU member states in terms of fiscal policies designed to suppress distortion of
52 Brownrigg et al. (2005), p. 213.
53 Leggate and McConville (2005), p. 180.
54 See “The Tonnage Tax Regulations 2000, 2000 No. 2303”.
55 Leggate and McConville (2005), see also “The Tonnage Tax Regulations 2000, 2000 No. 2303”.
The United Kingdom Tonnage Tax Regime: Compatibility with Relevant. . .
731
balances” or control measures to ensure that tax avoidance is not unduly or inadvertently encouraged.
52
Eligibility for tonnage tax treatment is also restricted to management companies
located within the UK only and engaged in commercial or strategic management
activities. All qualifying shipping companies within a group must make an election
for entry into the tonnage tax regime.
53 This feature of the UK regime which is not
shared by some other jurisdictions, is designed to prevent entities from only entering
their high profit enterprises into the regime to take advantage of its offerings. Picking
and choosing is thus discouraged. The legislation creating the tonnage tax regime
has provisions which provide for rigid safe guards so that electing companies are
ostensibly prevented from transferring profits from their overseas operations simply
to benefit from the tonnage tax scheme.
54 This is achieved by imposing rules on
capitalisation of companies and other anti-avoidance measures. The rules also create
obstructions to provide taxation relief between shipping and non-shipping activities
with a group. Transactions within a group must be demonstrably at arm’s length
which must be reflected in the use of arm’s length values when they stretch across the
limitations imposed by the law.
55
The treatment of foreign profits is another issue relevant to tax avoidance within
tonnage tax regime. Should the tonnage tax regime apply to dividends remitted from
subsidiaries in foreign jurisdictions so that they are exempted from the application of
domestic corporate tax? If this is answered in the affirmative the domestic jurisdiction would have the potential for attracting shipping entities with global interests.
Foreign entities involved in joint ventures with local companies would not be
inclined to risk being caught by local corporate taxation when they are relatively
safe in offshore tax-friendly jurisdictions. If the tonnage tax regime is applied to
foreign profits, neutrality of capital export would be maintained. In other words,
investors would pay the same tax on profits from both domestic as well as foreign
investments and earnings. In EU terms the problem is that there is no uniformity in
fiscal policy in this regard. There would thus be disparity in fiscal regimes which
would translate into some jurisdictions being more favorable to the shipping industry
than others. For example, the Netherlands does not impose any domestic corporate
taxation on remittances made from a foreign subsidiary to the parent company in the
Netherlands but the UK previously had no such general policy. However, further to
the recommendations made by Lord Alexander, the UK government decided to
make foreign shipping dividends subject to the UK tonnage tax regime. Even so, any
opening of the doors in this regard would have to be subject to strict precautionary
measures being taken against potential tax avoidance. For the sake of uniformity
within EU member states in terms of fiscal policies designed to suppress distortion of
52 Brownrigg et al. (2005), p. 213.
53 Leggate and McConville (2005), p. 180.
54 See “The Tonnage Tax Regulations 2000, 2000 No. 2303”.
55 Leggate and McConville (2005), see also “The Tonnage Tax Regulations 2000, 2000 No. 2303”.
The United Kingdom Tonnage Tax Regime: Compatibility with Relevant. . .
731