It is submitted that a clear and comprehensive understanding of the tonnage tax
phenomenon is only possible after at least an elementary understanding of the
international law of ship nationality and registration is gained. Of even more
importance is an appreciation of the different types of ship registries particularly
those that are of the non-traditional variety. This is germane to understanding why a
traditional maritime state such as the UK has embraced the tonnage tax system.
Incidentally, several EU member states have over the years done the same which
has prompted the EU to accept this as a reality and to design Guidelines under which
EU states can adopt the tonnage tax system without gross disregard for the taxation
principles embedded in EU law and policy, in particular, the rules relating to state
aid. These are known as the Guidelines for maritime state aid. Compliance with the
Guidelines prevents such states from being accused of engaging in harmful taxation
practices and tax avoidance. In this context, the contention that the practice of
tonnage tax may encourage and engender tax avoidance is discussed in detail.
The author’s conclusion on this point is that tax avoidance is not illegal; but at the
same time devices must be put in place to avoid proliferation of tax avoidance
mechanisms. In this regard, it is evident that the UK has, through the Merchant
Shipping (Tonnage Tax) Regulations, put into place limitations on the utilization of
the tonnage tax facilities by entities engaged in the shipping industry. The notion of
state aid in terms of national taxation regimes is discussed and the question of
whether tonnage tax is a form of state aid is considered. In this regard the position
of the European Union has been discussed which considers tonnage tax as a form of
justified maritime state aid.
It is recognized that from the perspective of the shipping industry which is an
international activity fostering global trade, which in turn is the life blood of every
trading nation, the introduction of the tonnage tax system has proved to be considerably fruitful and beneficial. The tonnage tax system in the UK has successfully
prevented the rapid decline of the shipping industry in that country less than a couple
of decades ago. Although in this chapter the UK has been singled out for analytical
treatment to assess the compatibility of its tonnage tax laws with EU requirements, it
is evident that the tonnage tax system has been proven to be a viable fiscal measure
for the shipping industry in various other countries not to mention the so-called open
registries from where the system derives (Fayle 1933, pp. 271–290).
In conclusion it is submitted that the success of the tonnage tax system in the UK
and in numerous other countries has altered some of the fundamental precepts of
shipping, trade and commerce and is emerging as an important aspect of fiscal
arrangements and regimes within an international context while benefiting the
shipping industries of national economies. It is apparent that this is the only viable
way of preventing the decline of shipping in many traditional maritime states which
have been suffering a steady departure of ships to the open flag registries. At the
same time, it must be recognized that in the post-WWII and decolonization era,
newly independent sovereign states have an equal right to participate and engage in
world shipping. However, these so-called developing states lack the resources and
expertise to compete with the traditional maritime states and have therefore resorted
to the innovative fiscal measure of tonnage tax as an integral component of the open
The United Kingdom Tonnage Tax Regime: Compatibility with Relevant. . .
737
phenomenon is only possible after at least an elementary understanding of the
international law of ship nationality and registration is gained. Of even more
importance is an appreciation of the different types of ship registries particularly
those that are of the non-traditional variety. This is germane to understanding why a
traditional maritime state such as the UK has embraced the tonnage tax system.
Incidentally, several EU member states have over the years done the same which
has prompted the EU to accept this as a reality and to design Guidelines under which
EU states can adopt the tonnage tax system without gross disregard for the taxation
principles embedded in EU law and policy, in particular, the rules relating to state
aid. These are known as the Guidelines for maritime state aid. Compliance with the
Guidelines prevents such states from being accused of engaging in harmful taxation
practices and tax avoidance. In this context, the contention that the practice of
tonnage tax may encourage and engender tax avoidance is discussed in detail.
The author’s conclusion on this point is that tax avoidance is not illegal; but at the
same time devices must be put in place to avoid proliferation of tax avoidance
mechanisms. In this regard, it is evident that the UK has, through the Merchant
Shipping (Tonnage Tax) Regulations, put into place limitations on the utilization of
the tonnage tax facilities by entities engaged in the shipping industry. The notion of
state aid in terms of national taxation regimes is discussed and the question of
whether tonnage tax is a form of state aid is considered. In this regard the position
of the European Union has been discussed which considers tonnage tax as a form of
justified maritime state aid.
It is recognized that from the perspective of the shipping industry which is an
international activity fostering global trade, which in turn is the life blood of every
trading nation, the introduction of the tonnage tax system has proved to be considerably fruitful and beneficial. The tonnage tax system in the UK has successfully
prevented the rapid decline of the shipping industry in that country less than a couple
of decades ago. Although in this chapter the UK has been singled out for analytical
treatment to assess the compatibility of its tonnage tax laws with EU requirements, it
is evident that the tonnage tax system has been proven to be a viable fiscal measure
for the shipping industry in various other countries not to mention the so-called open
registries from where the system derives (Fayle 1933, pp. 271–290).
In conclusion it is submitted that the success of the tonnage tax system in the UK
and in numerous other countries has altered some of the fundamental precepts of
shipping, trade and commerce and is emerging as an important aspect of fiscal
arrangements and regimes within an international context while benefiting the
shipping industries of national economies. It is apparent that this is the only viable
way of preventing the decline of shipping in many traditional maritime states which
have been suffering a steady departure of ships to the open flag registries. At the
same time, it must be recognized that in the post-WWII and decolonization era,
newly independent sovereign states have an equal right to participate and engage in
world shipping. However, these so-called developing states lack the resources and
expertise to compete with the traditional maritime states and have therefore resorted
to the innovative fiscal measure of tonnage tax as an integral component of the open
The United Kingdom Tonnage Tax Regime: Compatibility with Relevant. . .
737