New tax benefits for shipping related activities in South Africa
11 February 2014
Posted by: Author: Van Velden Pike Inc
Author: Van Velden Pike Inc
Attractive new shipping provisions in South Africa's new Taxation Laws Amendment bill go some way in showing that the government is serious about taking steps to revive South Africa's rather sleepy international shipping sector. This recognition that the SA shipping industry needs to be supported by creating incentives which not only encourage SA ship owners to register their ships in South Africa, but also to incentivise the business of owning and operating ships and the consideration of a career at sea, is to be welcomed.
Contrary to the position in the 1980's, there are presently no cargo or passenger vessels of any significance on the South Africa Ship Register, which comprises mostly of small-scale fishing vessels and research or pleasure craft. The importance of attracting more vessels to the Register lies in the fact that, at present, all freight generated by the ocean carriage of goods and passengers (which amounts to billions of rand each year) leaves South Africa due to the relevant ships being foreign owned and registered. Aside from the income which is generated by ports and related cargo and vessel services, this potentially huge source of revenue stemming from freight remains largely untapped, and the SA economy receives no direct benefit. Similarly, because all of these large vessels are flagged in foreign states, there is also obviously no obligation on the ship owners to employ South African citizens as crew. The key underlying purposes behind increasing the number of large and internationally going cargo and passenger vessels on the SA Register are accordingly to prevent the outflows of freight and passenger fares, to bolster the South African maritime industry in general, and to create jobs for local seafarers.
The reality is that, presently, many foreign states offer comparatively attractive shipping tax regimes, where associated taxes are either exempted altogether or significantly reduced so as to discourage ship owners from migrating to other registers. Conversely, the current South African tax regime subjects all South African companies to an income tax rate of 28% and no real incentives exist so as to make our shipping sector truly competitive.
What's right with it?
The new bill proposes introducing the following provisions, which apply in respect of South African ships involved in international shipping:
- Exemptions from normal tax, capital gains tax and dividends tax;
- Exemptions from withholding tax on interest payable to foreign financial institutions which finance the construction and improvement of South African ships;
- Exemptions from normal tax in respect of all officers and crew employed aboard South African ships involved in international shipping, including South African citizens.
What's wrong with it?
While the above amendments introduced by the proposed legislation are mostly to be welcomed in keeping with the international trend mentioned above, the glaring exclusion of cabotage or coastal shipping from the new provisions is a concern. Frankly, it does not seem to make sense for cabotage activities to be excluded, especially in the context of there being no ships on the South African Register that is actively trying to attract new tonnage. Realistically speaking (provided the incentives of doing so are sufficient) most ships plying a coastal trade in South Africa would likely get the ball rolling by being among the first to migrate to the register. Further, given that the South African Revenue Service presently earns no revenue from shipping, SARS would not be forfeiting anything by extending the tax exemptions to all core shipping activities. On the other hand, these tax incentives could attract more ships to the Register and boost industries such as the ship repair and ship building industry, from which SARS do in fact earn revenue. Another important consideration is that ships which are mainly used for the coastal trade in SA do from time to time make international voyages to neighboring countries such a Mozambique. If just a single international voyage were to be made in a tax year, that ship would qualify for the relevant exemptions in the bill as drafted in any event. There would also be an additional administrative burden of separating income derived from international trade from that derived by a ship in coastal trade when that ship is involved in both types of trading.
Due to the above concerns, it is submitted that further amendments allowing for a new definition for "international shipping" would be well-received, as well as amendments allowing for the coastal trade (and to seafarers in the coastal trade) to benefit directly from the stated exemptions.
For the moment, the proposed Act will come into operation on 1 January 2014 and will be effective for years of assessment beginning on or after that date, however the bill is subject to change and the proposals outlined above could be amended before being tabled in the National Assembly.
This article first appeared on mondaq.com.