Shipping Industry Almanac 2013 Shipping Industry Almanac 2013 2013almanac_8pt.indd 1 23/5/2013 5:18:26 μμ About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. © 2013 EYGM Limited. All Rights Reserved. 2013almanac_8pt.indd 2 23/5/2013 5:18:26 μμ Table of contents Introduction i Australia 1 Barbados 23 Belgium 29 Brazil 45 Canada 61 China 77 Curaçao 89 Cyprus 95 Denmark 101 Dominican Republic 109 Egypt 121 Estonia 125 Finland 133 France 139 Germany 149 Greece 159 Hong Kong 169 India 177 Indonesia 191 Ireland 199 Isle of Man 209 Italy 219 Japan 227 Luxembourg 233 Malaysia 247 Malta 255 Mexico 265 The Netherlands 273 New Zealand 285 Norway 295 Oman 305 Panama 315 Philippines 331 Portugal 353 Qatar 359 Russia 373 Singapore 389 South Africa 399 Spain 407 Sri Lanka 415 Sweden 421 Taiwan 427 Thailand 435 Turkey 441 United Arab Emirates 451 United Kingdom 459 United States of America 469 Ernst & Young shipping industry network 475 2013almanac_8pt.indd 3 23/5/2013 5:18:27 μμ Shipping Industry Almanac 2013 2013almanac_8pt.indd 4 23/5/2013 5:18:27 μμ Introduction The Shipping Industry Almanac is published annually by Ernst & Young’s shipping industry network, which comprises more than 100 shipping executives from Ernst & Young member firms in over 50 countries around the globe. The Shipping Industry Almanac has been keeping our clients and friends informed and updated for the last 16 years since our first edition in 1998. It provides a valuable overview of the current investment climate for shipping companies in 47 countries worldwide. A directory of Ernst & Young shipping professionals across our four service lines of assurance, tax, transactions and advisory is included, and highlights our in- depth local knowledge and our global reach. The information published in this Almanac was researched and compiled by Ernst & Young professionals in the countries concerned. Each country chapter covers the following subjects: tax, human capital, corporate structure, grants and incentives as well as general information, such as registration requirements. The content is based on information current as of 1 January 2013, unless otherwise indicated. For more information, please visit us on ey.com or contact us at [email protected] or call your local Ernst & Young office. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. Shipping Industry Almanac 2013 i 2013almanac_8pt.indd 5 23/5/2013 5:18:27 μμ Australia 1. Tax 1.1 Income tax treatment of shipping companies 1.1.1 Australian domestic tax law Shipping companies are subject to the general tax laws of Australia, including income tax, goods and services tax, stamp duty and employment-related taxes (including fringe benefits tax, payroll tax and superannuation, i.e., compulsory pension). Subject to the following comments, shipping companies operating in Australia generally pay tax at the rate of 30% of taxable income. Australian tax resident companies include worldwide income in their taxable income. Non-Australian tax resident companies include only income derived from sources in Australia. The “source” of specific income depends on the individual facts and circumstances of each case and relies on a range of factors, including the place of execution of contracts, where the services are performed, and where the remuneration is payable. Where a non-Australian resident shipping company “operates” by way of leasing equipment (i.e., a bareboat charter) for use in Australian waters, specific rules apply to impose Australian royalty withholding tax on the charter payments at the non-treaty rate of 30% on gross. The imposition of such royalty withholding tax is subject to the overriding application of Australia’s double tax agreements (DTAs). For the sake of completeness, true time charter payments (i.e., payments for the provision of services) are not subject to such royalty withholding tax. A specific regime, commonly referred to as the “freight tax regime,” applies to entities whose principal place of business is outside Australia and who own or charter a ship to carry passengers, goods, livestock or mail “shipped in Australia.” These entities will be taxed at the current corporate tax rate of 30% on 5% of the amount paid or payable to them in respect of such carriage. In this regard, 5% of charter fees is effectively deemed to be that entity’s Australian taxable income, with no offsetting deductions allowed. This means effectively a final tax of 1.5% is imposed on gross freight income. Under this regime, “shipped in Australia” means that goods or passengers are placed on board the ship in Australia, regardless of their final destination, i.e., the regime applies to Australian coastal trade as well as exports from Australia. In March 2006, the Australian Taxation Office (ATO) issued the finalized Taxation Ruling, TR 2006/1, which considered the type of payments that form the basis for calculating the deemed Australian taxable income for the freight tax regime. In the ruling, the ATO considered whether the following types of payments were subject to the freight tax regime: •► Amounts paid or payable by way of demurrage •► Any dispatch moneys paid by a shipowner or charterer •► Cleaning charges •► Deadfreight payments 1.1.2 Potential effect of Australia’s double tax agreements Australia’s DTAs may impact the Australian tax treatment of shipping companies, including those subject to the specific freight tax regime. Australia has negotiated DTAs with a range of countries, including the following: Argentina, Austria, Belgium, Canada, Chile, China, Czech Republic, Denmark, Fiji, Finland, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Japan, Kiribati, Malaysia, Malta, Mexico, Netherlands, New Zealand, Norway, Papua New Guinea, Philippines, Poland, Romania, Russian Federation, Singapore, Slovakia, South Africa, South Korea (ROK), Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Timor-Leste*, Turkey, United Kingdom, United States of America, Vietnam. * The treaty between Australia and Timor-Leste (formerly East Timor), the Timor Sea Treaty, is an 1 Shipping Industry Almanac 2013 2013almanac_8pt.indd 2 23/5/2013 5:18:27 μμ agreement which creates the Joint Petroleum Development Area (JPDA) and dictates how tax revenues, etc., from petroleum resources within the JPDA are to be shared. The treaty grants taxing rights over 90% of the income from petroleum resources derived from working in the JPDA to Timor-Leste and 10% to Australia. Under the shipping and air transport profits articles of Australia’s DTAs, profits from the operation of ships are generally only taxable in the country of residence unless the profits relate to operations “confined solely to places” in the other country. Unlike the business profits article (refer below), such taxing rights (i.e., over coastal shipping) will be granted to Australia regardless of the existence of a permanent establishment (PE) for the non-Australian resident company. In this regard, it must be noted that it is the view of the ATO that “voyages to nowhere,” embarking and disembarking in Australia, are considered to be “confined solely to places in Australia.” In determining residence, tiebreaker provisions apply under most (but not all) DTAs, deeming residence to be the place of effective management. In addition, as a result of the broad interpretation of the 2005 decision in the McDermott case (see below), each of Australia’s DTAs needs to be carefully considered to determine whether the use of equipment (e.g., ships) in Australia may cause a PE to exist. This has been reinforced by recent DTAs (e.g., Finland, Japan, Norway, the UK, the US) that require the lessor to “maintain” or “operate” the substantial equipment in Australia in order for a PE to arise. Significant ATO guidance now exists on these issues in the form of public rulings: Taxation Ruling TR 2007/10 and TR 2007/11 (refer below). 1.1.3 Recent ATO activity impacting shipping companies Application of the decision in the McDermott case The ATO continues to focus attention on the shipping industry. During 2005, the Full Federal Court (the A Court) handed down a decision in the McDermott case. This dealt with a Singaporean company which u s bareboat chartered (i.e., an equipment lease) a barge to a related Australian company for use in Australia. tra The Court determined that while the charter payments constituted a royalty for Australian tax purposes, the lia Australian company was not required to withhold royalty tax. The Court found that the use of the barge in Australia resulted in the Singaporean company having a PE for the purposes of the Australia/Singapore DTA. Some current Australian DTAs (including the Singapore DTA) deem a foreign resident to have a PE and to carry on business through that PE where substantial equipment is used in Australia “by, for or under contract with” the foreign resident. Where such a PE exists, Australia’s DTAs generally prevent Australia from imposing royalty withholding tax (as the income of the PE is subject to 30% Australian tax on a net assessment basis). In this regard, it is worth noting that Australia’s current approach to DTAs is to exclude equipment leasing from the definition of royalty such that withholding tax will not be levied. This approach is reflected in the US, UK and Norwegian DTAs, among others. The Court also commented that the shipping article was not applicable, as the barge was not a ship for its purposes. Public rulings on vessel leasing structures Over the last decade, the ATO has released a number of rulings relating to the treatment of shipping and vessel leasing operations, setting out its interpretation of how both domestic Australian tax law and DTAs treat such arrangements. These rulings include TR 2003/2, TR 2006/1, TR 2007/10, TR 2007/11, TR 2007/31 and TR 2008/8. As a result of those rulings, there is now greater clarity around the approach the ATO is likely to take in considering the Australian tax implications of vessel leasing arrangements as well as the use of ships for transport and non-transport operations. A central theme in these rulings is that the ATO will determine the implications of an arrangement by its substance rather than its legal form. For example, if a Baltic and International Maritime Council (BIMCO) Shipping Industry Almanac 2013 2 2013almanac_8pt.indd 3 23/5/2013 5:18:27 μμ time charter arrangement is in substance a true bareboat charter (i.e., a contract for the lease of equipment, albeit with, for example, supernumerary crew), the ATO is likely to characterize the payments as a royalty. As such, care needs to be exercised in relation to the tax implications where payments (e.g., royalties, payments for services) are made to a non-Australian resident relating to a vessel located in Australian waters. The tax implications for the parties will depend on a number of circumstances, including the substance of the arrangement, the nature of the activity undertaken, the degree of activity required and whether any of the parties have an Australian PE. In relation to finance, lease or hire purchase arrangements, the foreign resident lessor/provider (subject to other facts and circumstances) should generally not have a PE in Australia, as such arrangements are viewed as a sale from an Australian tax perspective. As a result of the ATO’s interpretation in TR 2008/8, there is the potential for non-transport activities aboard a ship in Australian waters to be caught in the Australian tax net, despite not giving rise to a PE for the purpose of the treaty. Summary of general characterization of charter party contracts Royalty Character Substance of arrangement withholding tax* of income Equipment lease (e.g., a true demise or a Royalty income bareboat charter or dry lease) ** Provision of service (e.g., a true time charter Fee for services N/A party or wet lease) A voyage charter party Fee for services N/A * Particular DTAs may affect the liability for royalty withholding tax, particularly if the use of the equipment results in the non-resident having a PE. ** Particular DTAs (e.g., UK, USA, Norway) do not treat payments under equipment leases as royalties. Focus on international transactions The ATO has continued to take an increased interest in international tax transactions. In particular, the ATO has increased its scrutiny of corporate transactions of large businesses. Specific areas of interest have included mergers, acquisitions and divestments; classification of instruments into debt/equity; capital raisings; international structures used; debt funding; and the interaction of the thin capitalization and transfer pricing regimes. The ATO has released various discussion papers and rulings over the last five years relating to international transactions, business restructuring, and intra-group financing and loans. Among other things, these provide the ATO’s position regarding the application of the transfer pricing, thin capitalization and general anti- avoidance provisions, as well as domestic Australian tax law and relevant compliance obligations. The rulings released include: •► TR 2010/7 – interaction of the thin capitalization and transfer pricing provisions •► TR 2011/1 – transfer pricing impact of cross-border restructures by businesses TR 2010/7 contains the ATO’s observations on appropriate methods to be used to determine the arm’s length consideration for cross-border intra-group debt arrangements under Australia’s transfer pricing provisions. These methods apply even where such arrangements comply with the safe harbor thresholds under the thin capitalization rules. The ruling is retrospective in its application. Furthermore, the ruling provides that the transfer pricing rules are paramount; therefore, the thin capitalization provisions do not prevent the transfer pricing provisions from operating to price intra-group debt at arm’s length. 3 Shipping Industry Almanac 2013 2013almanac_8pt.indd 4 23/5/2013 5:18:27 μμ TR 2011/1 considers cross-border business restructures of Australian activities and the transfer pricing implications. The ruling also sets out the ATO’s views as to the need for: •► A commercial rationale for the restructuring from an Australian benefit perspective •► Appropriate pricing of functions or assets moving overseas •► Its power to recharacterize a restructuring to reflect arm’s length behavior Advance pricing arrangements have also been revised through Practice Statement Law Administration (PS LA) 2011/1 as released on 17 March 2011. This restates the ATO’s commitment to Advance Pricing Agreements (APAs) and sets out timelines and processes for such agreements between taxpayers and the ATO. Changes to the transfer pricing rules Historically, Australia’s transfer pricing legislation has been encompassed in Division 13 Income Tax Assessment Act 1936 (Cth). Division 13 applies to any taxpayer who has supplied or acquired property under an international agreement, where the Australian Commissioner of Taxation (the Commissioner) considers that the taxpayer has: •► Received consideration which was less than the arm’s length consideration in respect of the supply Royalty Character •► Not received any consideration, when an arm’s length party would have expected such consideration Substance of arrangement withholding tax* of income •► Given consideration that exceeds an arm’s length consideration in respect of the acquired property Equipment lease (e.g., a true demise or a These provisions were intended to counter “non-arm’s length transfer pricing” or “international profit Royalty income bareboat charter or dry lease) ** shifting” by enabling the Commissioner to adjust “profits by reference to the conditions which would have existed between independent parties under comparable circumstances.” . However, during recent transfer Provision of service (e.g., a true time charter Fee for services N/A pricing court cases in Australia, the ability of the ATO to apply profit-based transfer pricing methods and party or wet lease) rely upon the Organisation for Economic Co-operation and Development (OECD) Guidelines was called into A voyage charter party Fee for services N/A question, since the wording of Division 13 refers specifically to “arm’s length consideration” and the OECD Guidelines are not specifically incorporated into Australian law. In particular, the ATO has historically relied upon the Associated Enterprises articles of Australia’s double A u s taxation treaties as a separate power to impose transfer pricing adjustments/apply profit-based transfer pricing tra methods and it became apparent during the course of these court cases that the legal ability of the ATO to do lia this may be viewed as questionable by the Australian courts. As a result of the recent activity in the courts and the associated concerns with the appropriate application of Division 13, which became apparent as a result of the various proceedings, a major reform of Australia’s transfer pricing legislation is currently under way. During August 2012, a bill was introduced into the Australian parliament which included new proposed transfer pricing legislation in the form of ”Subdivision 815-A – Treaty-equivalent cross border transfer pricing rules.” This bill has now been given Royal Assent and is hence now effective. The key aims of the legislative reforms are: •► To ensure that the ATO is empowered to apply profit-based transfer pricing methodologies, where deemed appropriate •► To align Australia’s domestic legislation around transfer pricing with OECD guidelines and guidance (the OECD Model Tax Convention and OECD Transfer Pricing Guidelines are now specifically referred to as being relevant in interpreting the arm’s length principle •► To further clarify and legislate the ATO position in relation to financing arrangements and the interaction of the thin capitalization/transfer pricing rules. During November 2012, a second exposure draft was released (containing Subdivisions 815-B to 815-E), which, if (as expected) enacted, will introduce a full self-assessment regime in Australia for transfer pricing and implement similar rules to those outlined above for all international related party transactions. The new draft legislation also makes reference to the concept of a “transfer pricing benefit” and requires taxpayers 1 Taxation Ruling TR 94/14 – para 10 2 Taxation Ruling TR 94/14 – para 10 3 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations Shipping Industry Almanac 2013 4 2013almanac_8pt.indd 5 23/5/2013 5:18:27 μμ to consider whether the actual conditions with related parties are consistent with what the ”arm’s length conditions” would have been. The exposure draft released in November 2012 did not introduce mandatory contemporaneous transfer pricing documentation requirements; however, it does state that where a taxpayer has not prepared contemporaneous transfer pricing documentation, it will be treated as not having a reasonably arguable position in relation to their transfer pricing arrangements. Where no reasonably arguable position is accepted by the ATO in any future review, higher penalties are likely to apply in the event of any adjustments to taxable income. The new draft legislation contained in the second exposure draft will apply prospectively from the date of Royal Assent being granted (which is expected to be in early 2013). At this time, Subdivision 815-A and Division 13 will be repealed and replaced by Subdivisions 815-B to 815-E (applicable to all international related party transactions in treaty and non-treaty countries). One of the key impacts of the new legislation is that it effectively reinforces the power of the ATO to reconstruct a transaction between related parties, on the basis that independent parties dealing at arm’s length would not have entered into the arrangements which actually exist between two related parties. In this case, the ATO may seek to hypothesize an arm’s length arrangement and then assess what a commercial outcome from those arrangements would be. International dealings schedule The ATO has introduced a new schedule, the International Dealings Schedule (IDS), which replaces Schedule 25A and the thin capitalization schedule for 2012 income tax returns, including early balancers. The IDS is mandatory where the aggregate amount of transactions or dealings with international related parties, including the value of property transferred or the balance outstanding on any loans, is greater than A$2 million or the thin capitalization provisions apply. The IDS requires a greater level of detail in many of the disclosures compared to Schedule 25A. The ATO has recognized that taxpayers might not be able to fully complete the schedule and has stated that taxpayers should approach the 2012 IDS on a “best efforts” basis. However, the ATO does expect taxpayers to be in a position to be fully compliant for the 2013 IDS and onward. Reportable tax position schedule The ATO undertook a pilot program for the 2012 income year that required some taxpayers to disclose whether they have a material reportable tax position (RTP). A RTP is one or more of the following: •►► A material position that is about as likely to be correct as incorrect or less likely to be correct than incorrect, i.e., where there is 50% or less likelihood of the position being upheld by a court •► A material position in respect of which uncertainty about taxes payable or recoverable is recognized and/ or disclosed in the taxpayer’s or a related party’s financial statements •► A taxpayer triggers a capital gains tax event during the income year, the taxpayer’s capital proceeds exceed A$200 million, and there is a material difference between the accounting and tax consequences of the event This pilot applied to selected large and key taxpayers in Australia, other than those with advance compliance arrangements with the ATO. It is expected that the RTP pilot will be rolled out to a wider population of taxpayers in 2013. Other issues Consistent with recent OECD and G20 activity, the renewed focus of the ATO has also extended to scrutiny of tax haven countries. In this regard, Australia has recently signed tax information exchange agreements with a range of countries, including Andorra, Bahrain, the Cook Islands, Costa Rica, Liberia, Liechtenstein, Macau, Mauritius and Montserrat. 1.2 Other Australian income tax considerations 1.2.1 Shipping reforms 5 Shipping Industry Almanac 2013 2013almanac_8pt.indd 6 23/5/2013 5:18:27 μμ