The FINANCIAL -- Despite Georgia being No. 9 in the world according to the World Bank ranking in ease of doing business, international shipping companies, amongst others, simply do not exist in Georgia. The reason is simple: other countries offer business-oriented tax legislation to international business, especially to the shipping industry.
Ship owners “face trade-offs” to register their company and manage their vessel in a specific country. The shipping company has options, whether to register the company in advanced European maritime countries; the United Arab Emirates; offshore jurisdictions; or in Georgia. From the above-listed alternatives, almost each country has certain tax benefits, or fully relieves international shipping companies from taxes. Regrettably, it is the opposite in Georgia.
According to the Tax Code, the ship owner is obliged to pay: a) Property tax that is unacceptable for the capital-intensive maritime business sector; b) Non-resident tax applies if the service is received from a company registered in a country Georgia has not signed a double taxation avoidance agreement with; c) Income tax for sailors for a Georgian company, which should also be exempted for international sailing; D) Tax on profit, regardless of the Estonian tax model if the dividends are taken by shareholders of the company. Non-availability of appropriate taxation considerations in Georgia for an international shipping business, leads the country to reap the following: there is no ship owner in Georgia who owns large international sailing ships. At the same time, the Georgian flag is a non-listed flag, because flags whose total number of inspections over a 3-years rolling period do not meet the minimum of 30 are not included in the Paris MoU White, Grey and Black lists. To meet the criteria of Low Risk Ships, flags should be on the Paris MoU White List. It would be the highest rating of the flag administration and position Georgia in the global maritime industry. In June 2014, the EU and Georgia signed an Association Agreement which entered into force on 1 July, 2016. Accordingly, let’s review successful examples on how leading European maritime states promote international shipping business in their countries.
Based on the Deloitte Malta factsheet on tax, Malta offers a regime with complete tax exemption for ship owners, charterers and financiers of Maltese ships over 1,000 net tons. These ships qualify as ‘exempted ships’. Consequently, Malta is in the top six ship registers globally. As per Malta tax treatment, a shipping organization is exempt from tax on any income derived from shipping activities and any income or gains derived from the sale or other transfer of a tonnage tax ship or from disposal of any rights to acquire a ship which, when delivered or completed, would qualify as a tonnage tax ship. No Malta tax is charged upon any payments of interest or other income in relation to the financing of operations of shipping organizations or the financing of any tonnage tax ship and no Malta tax is chargeable upon dividends distributed by a shipping organization to its shareholders, out of profits derived from shipping activities. Furthermore, the concept of a tonnage tax ship has been extended to cover foreign-flagged vessels; in particular, those registered in EU/EEA states, in respect of which Maltese tonnage tax has been paid. Despite tax benefits, the maritime and shipping sector accounted for more than USD 1 billion of Malta’s GDP.
Based on KPMG tax services information, the Cyprus Shipping Regime is a well-established international business and maritime centre within the European Union. Cyprus enjoys a favourable tax system in line with EU requirements and OECD principles. Many of the ship management companies operating in Cyprus rank among the largest of their kind in the world and it is estimated that they manage over 20% of the world’s third party management fleet. The new tonnage tax law is fully compatible with the requirements of the EU acquis on State Aid to Maritime Transport. The tonnage tax system (TTS) is based on the payment by beneficiaries of tonnage on the basis of the net tonnage of ships and provides full exemption from all income taxes that would normally be imposed according to the Cyprus income and defence tax laws. TTS is available to ship owners, charterers, ship managers, who respectively own, charter or manage a qualifying ship, engaged in a qualifying shipping activity. The benefit also applies to mixed fleets, i.e. fleets comprising of EU/EEA and non-EU/EEA flag ships, making Cyprus an EU-approved Open Registry. A qualifying ship is any seagoing vessel certified under applicable international or nation rules and regulations and registered in the ship register of any member of the International Maritime Organization. Any activity that constitutes maritime transport, or crew and/or technical management of a qualifying ship is a Qualifying Shipping Activity. TTS benefits tax exemption on the following sources of income: profits from shipping operations; disposal of ship or interest therein; disposal of shares in the ship owning entity; dividends paid, directly or indirectly, out of the above profits; bank interest earned on funds used as working capital and/or on income from shipping operations provided these funds are used for the financing and/or operation and/or maintenance of the ship. A qualifying Ship manager is a Cyprus tax resident, legal person providing crew and/or technical ship management services to qualifying ships. In addition, the ship manager must satisfy the following conditions: must have a fully-fledged office in Cyprus and employ personnel sufficient in number and qualifications within specific requirements. Despite tax benefits, the maritime and shipping sector accounted for more than USD 1.5 billion of Cyprus’s GDP.
Georgia enjoys the possibility of registering an unlimited number of companies in its legal entities registry. Despite Georgia being No. 9 in the world by World Bank ranking in ease of doing business, international shipping companies, amongst others, simply do not exist in Georgia. The reason is simple: other countries offer business-oriented tax legislation to international business, especially to the shipping industry. The Government of Georgia has two types of choices: to not carry out any tax reform, and continue receiving zero income from specific international business sectors, or to take into account the potential interests of the companies, to pay more than zero in the form of fixed amounts, so that the Georgian state budget would benefit, and decrease unemployment in the country.
Just like individuals and firms, the Government can also opt for optimal decisions, if they act as rational people, which think in the margins, and systematically and purposefully do the best they can to achieve their objectives. Given the opportunities Georgia has, a rational decision-maker would take action immediately, because the marginal benefit of such action exceeds the marginal cost, and would benefit overall economic development.
Jaba Tarimanashvili, Business Analyst and Director of Maritime services and Transportation company Trans Logistic, Business Administration Doctoral Student, of Batumi Shota Rustaveli State University.