Tax questions for owners may dash merchant fleet hopes
Shipping matters – Norma Wheeler
IT HAS been nearly two years since amendments to the Income Tax Act came into effect, exempting domestic shipping companies from normal tax, capital gains tax, dividends tax as well as cross-border withholding tax on interest.
The purpose of the tax exemptions was to attract merchant ships back to the South African register. Yet only two ships have opted to register in South Africa. One of the reasons could be that the legislation is unclear as to who qualifies for the exemption.
The relevant section in the act refers to companies engaged in “international shipping”. Such a company is defined as “a resident that holds a share or shares in one or more South African ships used in international shipping”.
“International shipping” is defined as “the conveyance for compensation of passengers or goods by means of the operation of a South African ship mainly engaged in international traffic”.
The core issue is what is meant by the term “engaged in international traffic”.
Commonly, vessels are subchartered (or sub-leased) and a typical charter party chain might include the registered owner, head charterer, several sub-charterers and an endcharterer (who contracts with the shipper).
Would a charterer or registered owner or both be engaged in “international traffic”, as defined by the act?
It may seem all parties in a charter party chain are engaged chartering (rather than from directly conveying goods).
A possible interpretation is that a shipping company can derive the tax benefit if it is operating the ship under a charter where it is the charterer and carrying goods, but not if it is the owner/disponent owner in a charter party chain.
If it were the owner, it could of course benefit if it carried the goods for its own account.
If the legislation does not exempt head charterers from tax, it’s a wonder the legislation has not attracted shipping companies to the register. Since chartering is a large component of the shipping industry, ship owners would certainly not choose to register their ships in a jurisdiction with uncompetitive tax rates on charter income.
However, if the definitions are read in context, the section is capable of interpretation in such a way so as to hold true to its purpose of attracting vessels to the South African registry.
The proper reading of definitions together with the relevant sections of the Income Tax Act provide that South African ships used or engaged in international shipping qualify for the exemption.
In other words, it is not necessary for the ship-owning company to use the ships to meet the requirements. Rather, the ships must be used in the manner prescribed.
In short, the better interpretation is that a South African ship owner can still enjoy the benefits of the tax exemptions where a third party (such as a sub-charterer) uses the ships, provided the third party does so to convey goods through the operation of a South African ship mainly engaged in international traffic.
It is hoped Sars will issue a directive clarifying the relevant section, failing which South Africa’s aspirations to develop a merchant fleet may be stalled.
Wheeler is an associate in Bowman Gilfillan Africa’s shipping and logistics practice.