in the jurisdiction of its parent company or elsewhere. The foreign jurisdiction is
often an offshore tax haven. That is not to say that all foreign jurisdictions offering
preferential treatment to shipping enterprises are tax havens in the popular sense.
Rather, they are the typical open registries that offer a host of advantages germane to
profitable shipping operations which attract shipowners to register their ships
there.
59
In the ordinary scheme of things, income earned by a foreign subsidiary would be
taxed in that foreign jurisdiction. Tax may also be payable in the owning company’s
home jurisdiction, but is likely to receive credit for the tax paid abroad. In any event,
the parent company will be inclined to set up its foreign operation in a zero tax or low
tax jurisdiction. In such a situation, if no dividends are remitted to the owner’s home
jurisdiction, no tax will be payable. Such an arrangement will obviously afford the
owner the opportunity to defer taxes and reinvest its profits virtually tax-free. The
downside of such an arrangement would be that the owner would have to forego
returns in the form of dividends. If profits are sent back to the parent company in the
home jurisdiction, it will have to pay corporate income tax there; if dividends are
then drawn, the individual owner or shareholder will incur personal tax liability.
Where the registration of a ship is moved to a foreign jurisdiction, it will have the
nationality of the new flag state.
60
The CFC scheme has been designed and put into place by countries with sizeable
direct foreign investments to reduce opportunities for tax avoidance. Under this
scheme, income from a company in a tax-friendly jurisdiction controlled from the
owner’s home jurisdiction is deemed to be CFC income so that its income is taxed as
if it were located in the home jurisdiction and was subject to its taxation regime. The
object is to assimilate all CFC income regardless of where it is earned into the
taxation regime of the owner’s home jurisdiction and eliminate or reduce the
instances available for tax deferral or tax-free reinvestment of profits.
Obviously, the CFC scheme can only work if proper disclosure of incomes is
made supported by information flow from the foreign jurisdiction in question to the
home jurisdiction of the owner or parent company, as the case may be. In practical
terms, in the shipping business at least, it is rather difficult if not impossible to
achieve the level of full and complete disclosure of incomes from the foreign
controlled corporation or the foreign flag state of the ship. Often release of fiscal
information is prohibited by law in offshore jurisdictions whose economies depend
or thrive on banking operations and/or open flag ship registration. It is submitted that
the utility of the CFC system in shipping is questionable at best in view of the fact
that shipowners are free to register their ships wherever they wish and under the
international law flag states enjoy the sovereign right to establish their own ship
registration laws and regulate their own fiscal affairs according to their national
policies.
61 As discussed above, the tonnage tax system is a better option for the
59 Burns (2005), pp. 14–19.
60 Brownrigg et al. (2005), p. 220.
61 Ibid.
The United Kingdom Tonnage Tax Regime: Compatibility with Relevant. . .
733
often an offshore tax haven. That is not to say that all foreign jurisdictions offering
preferential treatment to shipping enterprises are tax havens in the popular sense.
Rather, they are the typical open registries that offer a host of advantages germane to
profitable shipping operations which attract shipowners to register their ships
there.
59
In the ordinary scheme of things, income earned by a foreign subsidiary would be
taxed in that foreign jurisdiction. Tax may also be payable in the owning company’s
home jurisdiction, but is likely to receive credit for the tax paid abroad. In any event,
the parent company will be inclined to set up its foreign operation in a zero tax or low
tax jurisdiction. In such a situation, if no dividends are remitted to the owner’s home
jurisdiction, no tax will be payable. Such an arrangement will obviously afford the
owner the opportunity to defer taxes and reinvest its profits virtually tax-free. The
downside of such an arrangement would be that the owner would have to forego
returns in the form of dividends. If profits are sent back to the parent company in the
home jurisdiction, it will have to pay corporate income tax there; if dividends are
then drawn, the individual owner or shareholder will incur personal tax liability.
Where the registration of a ship is moved to a foreign jurisdiction, it will have the
nationality of the new flag state.
60
The CFC scheme has been designed and put into place by countries with sizeable
direct foreign investments to reduce opportunities for tax avoidance. Under this
scheme, income from a company in a tax-friendly jurisdiction controlled from the
owner’s home jurisdiction is deemed to be CFC income so that its income is taxed as
if it were located in the home jurisdiction and was subject to its taxation regime. The
object is to assimilate all CFC income regardless of where it is earned into the
taxation regime of the owner’s home jurisdiction and eliminate or reduce the
instances available for tax deferral or tax-free reinvestment of profits.
Obviously, the CFC scheme can only work if proper disclosure of incomes is
made supported by information flow from the foreign jurisdiction in question to the
home jurisdiction of the owner or parent company, as the case may be. In practical
terms, in the shipping business at least, it is rather difficult if not impossible to
achieve the level of full and complete disclosure of incomes from the foreign
controlled corporation or the foreign flag state of the ship. Often release of fiscal
information is prohibited by law in offshore jurisdictions whose economies depend
or thrive on banking operations and/or open flag ship registration. It is submitted that
the utility of the CFC system in shipping is questionable at best in view of the fact
that shipowners are free to register their ships wherever they wish and under the
international law flag states enjoy the sovereign right to establish their own ship
registration laws and regulate their own fiscal affairs according to their national
policies.
61 As discussed above, the tonnage tax system is a better option for the
59 Burns (2005), pp. 14–19.
60 Brownrigg et al. (2005), p. 220.
61 Ibid.
The United Kingdom Tonnage Tax Regime: Compatibility with Relevant. . .
733