In light of the G7 summit of leaders starting this Friday, the ETF reiterates its call for an international agreement on a global minimum tax for multinational companies.
As explained, global tax could be an important tool in addressing the negative effects of the use of flags of convenience in global shipping which allows shipowners of one country to hire the flag of another country.
The FOC flags offer regulatory advantages, low or zero corporate tax and complete flexibility over crew recruitment. This fuels a race to the bottom on social, environmental and safety standards.
The OECD proposal would ensure that corporations pay taxes and participate in the common societal effort regardless of where they base their operations and eliminate the practice of shopping for the most advantageous tax regime. This would curb social dumping practices in EU shipping by encouraging shipowners to choose bona fide flag States.
…as ETF noted.
Discussions are taking place at the OECD to try to reach an international agreement on a global minimum tax for multinational companies. This process has gained momentum now that the Biden administration has come out in favour of a 21% global minimum tax.
What the OECD is trying to address is the “base erosion and profit shifting” challenges and is proposing rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights, or the payment is otherwise subject to low levels of effective taxation.
In other words, the OECD proposal would ensure that corporations pay taxes and participate in the common societal effort regardless of where they base their operations.
This development is particularly interesting for the shipping industry because of its ability to move ships with ease from one legal jurisdiction to another.
“It is important to understand that the primary legal authority governing the activities of a merchant ship is the State in which the ship is registered i.e. the flag State. Under Article 94 of the United Nations Convention on the Law of the Sea (UNCLOS), a flag State is required to effectively exercise its jurisdiction and control in administrative, technical, and social matters over ships flying its flag. Additionally, under Article 91, there must exist a genuine link between the State and the ship”.
…ETF added.
Shipping today is dominated by “flags of convenience” (FOC) by which shipowners of one country can hire the flag of another country. These FOC flag States do not insist on a genuine link and consequently are unable to exercise jurisdiction and control. As if that was not bad enough, they corrode the governance of the global shipping industry and fuel a race to the bottom on social, environmental and safety standards.
The FOC flags offer regulatory advantages, low or zero corporate tax and complete flexibility over crew recruitment.
In addition, the global top three ship registers (Panama, Liberia, and the Marshall Islands), all declared “FOC” by the International Transport Workers’ Federation (ITF), account for over 40% of the world fleet but well over 50% of the world fleet is currently registered in FOC states.
The failures of these flag States to exercise effective control has led to the necessity for port States to step in to enforce international standards thereby externalizing the cost of flag State failures.
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These FOC flag States have been crucial for shipowners to increase profitability at the expense of society. For a shipowner, different factors can motivate them to seek the commercial advantage flowing from choosing to register their ships in these FOC’s including tax avoidance, limiting liabilities, light touch compliance with international maritime social, safety and environmental conventions and hiding behind the corporate veil by availing themselves of beneficial company and financial law, for example.
When it comes to employment standards the advantages provided to shipowners is often referred to as ‘social dumping’. Such practices are particularly evident in European shipping, where it is legally possible to employ third-country nationals on board ships engaged in regular intra EU/EEA services and pay them far below European standards. Such practices undermine the EU acquis and infringe upon the EU principles of equal treatment for equal work and enable discrimination between seafarers in terms and conditions of employment on grounds of their residence but in practice, this is de facto on grounds of nationality.
The ongoing COVID-19 crisis has exposed the complexity of a global industry with unfettered mobility of labour and capital. FOCs have not adequately assumed jurisdiction and control over the social matters concerning their ships. Shipowners have been forced to turn to their own countries for help and many have been ignored by their governments leaving seafarers working on ships registered in FOC States without access to their fundamental, social and employment rights.
It is estimated that 90 per cent of international trade by volume is carried by sea. And yet, seafarers who have been at the forefront of maintaining trade and the flow of essential medical supplies, food, and energy, have been treated like second-class workers. Hundreds of thousands of seafarers were beyond their original tours of duty, in some cases for more than 17 or more consecutive months, and often without access to shore-based leave and medical treatment.
Social dumping also undermines the goals of the EU state aid guidelines for maritime transport. It is a practice that needs a holistic response from Member States. Various countries have established favourable tax regimes under the EU guidelines, referred to as tonnage tax systems, through which subsidies for shipping activities are provided to support the growth of that country’s ship register and promote employment of national seafarers. These tax systems also cover so-called ancillary activities to shipping such as port operations.
Including shipping in the OECD global minimum tax proposal would encourage shipowners to choose bona fide flag States, those that comply with Articles 91 and 94 of UNCLOS, and still enable them to access favourable state aid systems and ultimately contribute to giving workers access to decent work in the most strategic sector involved in global trade. This would support and enhance the EU’s maritime resilience.
Concluding, in the current context, where all Member States are struggling to recover from COVID 19 and have committed at the Porto Summit to continue deepening the implementation of the European Pillar of Social Rights at EU and national level, the OECD proposal for a global minimum tax would ensure that public investments made by society to promote an industry, also provide returns in form of job creation, adequate training, and decent working conditions.
