UK: WHY UK SHIPPING HAS A SINKING FEELING. - The British shipping industry is at its lowest ebb. In the concluding part of our series, Stephanie Cooke looks at how tax breaks and other subsidies given to EC, Far East and US competitors have affected UK s

by Stephanie Cooke.
Last Updated: 31 Aug 2010

The British shipping industry is at its lowest ebb. In the concluding part of our series, Stephanie Cooke looks at how tax breaks and other subsidies given to EC, Far East and US competitors have affected UK shipping, which the British Government has determined should sink or make way under its own steam.

The damage done to London's Baltic Exchange, the world's only international shipping exchange, by a terrorist bomb last year, was difficult but not impossible to repair. Can the same be said of the damage that has been done to the British shipping industry over the last two decades? In the late '30s, with 25% of world tonnage, Britain led the world in shipping. Now Britain's share is less than 2%.

One reason for this precipitous decline is that Britain's shipping competitors in the EC, Far East and the US receive special tax concessions and other government subsidies which have allowed them to prosper. British shipping companies do not enjoy similar advantages, as the Government is determined that the industry sinks or swims under its own steam. 'We are being forced to compete on unequal terms with the heavily-assisted shipping industries of our EC neighbours and other countries,' says the president of the Chamber of Shipping, Edmund Vestey, whose Vestey Group owns Blue Star Line, one of Britain's largest cargo carriers.

There is little comfort from Brussels. The EC has no agreed guidelines on state aid to shipping. In fact, the majority of EC officials openly supports subsidies. Many governments believe that subsidies, justifiable or not, are necessary to keep their industries alive. Shipping, a highly unregulated, intensely competitive market, is struggling to remain profitable. Freight rates have plummeted, access to inland ports and transport facilities are often restricted and cheap labour, low taxes and lax safety standards - especially among competitors in developing countries - are all too often the norm.

Even if EC officials were opposed to shipping subsidies, there would be little effective action they could take - many forms of aid are of the back door variety. Member states offer tax concessions to their industries in various forms: the replacement of corporation and income tax with lower taxes based on shipping tonnage; the reduction of corporate tax rates and accelerated depreciation; the reduction or removal of income tax, and reduced social security payments for seafarers; tax-saving schemes for investors; tax-free reserves or so-called roll-over relief which allows companies to buy and sell ships without being taxed on the profits.

Mark Brownrigg, the Chamber's director of shipping policy and external relations, says, 'Quite frankly, the market is a mess. There are subsidies everywhere.' There is little the EC can do to prevent special tax breaks while tax and fiscal policy remains under the jurisdiction of member states. The grey area between fiscal policy and state aids has not been sorted out, so it makes it difficult to bring cases before the Commission.' In addition to tax incentives, some governments allow companies to buy and sell ships without being taxed on the profits. Greece, for example, has no corporate income tax. Instead shipowners pay annual lump sums according to the size and age of their vessels. For ships built and registered in Greece, reductions in these lump sums are granted for the first six years, when the cash outlay is heaviest. Passenger liners, for example, enjoy a 50% reduction on tax liability. Seamen also pay lower rates of income tax. The outcome, according to the British Chamber of Shipping, is that, on any given investment, a Greek owner pays only 40% of the tax that a British owner pays.

The tax incentives, known as K/S schemes, offered in Germany, France, Denmark and Norway, allow small investors major tax breaks for investing in limited partnerships which in turn finance new ships. Denmark also offers low-interest loans covering 45% of the contract price, with repayment over 14 years. The Italian and French governments inject cash regularly into their state-owned companies Finmare and CGM respective, both heavy lossmakers.

To compete with low-cost crews in developing countries, some EC governments provide income tax relief for higher-cost domestic crews. In Holland, for example, the government collects income tax from seafarers and then returns it to the shipping companies to pay for higher salaries. In France and Germany direct cash assistance is provided to counter this problem. 'High-cost countries are trying to survive as best they can,' says the Chamber of Shipping's Brownrigg.

The British shipping industry has only two forms of tax relief, the Chamber says. These are income tax exemptions for seafarers who are away for at least 183 days a year, and one-year, roll-over relief - a period during which companies are exempt from capital gains tax on profits from the sale of a ship. Brownrigg argues that they are not enough. The Chamber has recently asked the Government for an extension of roll-over relief to seven years and 100% depreciation for shipping investments, measures that would allow ship-owners more flexibility in writing off their investment costs. It has also requested that ship operators be allowed to retain seafarers' income tax and national insurance contributions.

On the face of it, the proposals seem drastic: they would put Britain almost on a level with Greece in terms of fiscal concessions. However, the Chamber insists that the proposals were designed only as a means of helping the industry get back into shape and that they need only be temporary measures. 'Ideally, we would rather not have government intervention, but so long as there is substantial intervention elsewhere, the terms on which we have to compete are not equal,' says Brownrigg.

The Chamber argues that, as a result of interventionist measures, many European countries have increased their fleet size. The UK fleet, on the other hand, has continued to decline. In the past two years a dozen or so major British shipping firms have registered their ships in countries where taxes are lower or non-existent (a practice known as flagging out), or replaced their British crews with lower-cost crews from the Far East or Eastern Europe. The Chamber claims that the situa-tion in Britain is so desperate that the UK-registered fleet could disappear within three years and the total fleet of British-owned vessels within two decades. 'The proportion of the UK fleet registered abroad is much larger than in other European countries,' says Brownrigg. 'And the decline has been greater than inany other country in Europe.' Furthermore, ships in the British fleet are, on average, 16 years old, while the ships of its main EC competitors - the Germans, the Dutch and the Danes - have a median age of eight or nine years.

British seamen are suffering, too. In 1980 the industry employed 50,000 seamen. Today there are only 20,000. The Chamber estimates that, by the end of the century, British officers will be down to 5,000, half the current level, with an average age of 50. The Chamber also claims that the decline in British shipping is damaging both merchant shipbuilding - its building capacity is roughly a quarter of what it was in 1975 - and the marine equipment industry.

Shipping is currently the third largest contributor to the UK's invisible earnings. The Chamber believes that if the Government gave shipping a boost, this contribution would increase. 'Our industry contributes more than £2.5 billion net to the balance of payments - in a year in which the Chancellor expects a £17.5-billion deficit. Our skills and business also underpin a wide range of other activities in the City, which contribute a further £1.5 billion, and in manufacturing," says Vestey.

The Chamber is not alone in arguing the case for government intervention. Maritime services - including the Baltic Exchange, Lloyd's Register of Shipping, salvage associations, lawyers specialising in maritime affairs and the insurance market - all support the proposals. But the Government has not been persuaded. After intensive lobbying of Treasury officials by the Chamber, the Department of Transport and the President of the Board of Trade, Michael Heseltine, its proposals were turned down in the March Budget. The Treasury's stance on the issue was that for one sector of industry to seek special arrangements for itself would run counter to Britain's commitment to achieving a level playing field in a free market economy.

The Government is, however, trying to bring pressure to bear on Brussels to restrict subsidies. Unfortunately, it is proving an uphill struggle. 'The proper way ahead is to get rid of state aid, but we realise that this will not happen immediately,' says a Department of Transport official. Rather than focusing on state aid, the Commission is currently looking at ways to increase the industry's competitiveness.

Last year, EC commissioners Martin Bangemann (responsible for industrial affairs) and Karel van Miert (former transport commissioner, now in charge of competition) set up the EUROS/Maritime Industries Forum. Its aim is to strengthen the relationship between EC maritime industries - encompassing shipping, shipbuilding, marine equipment manufacturers, port operations, fishing and marine resources. It is examining how European-registered owners can best compete with vessels registered in Third World tax havens where labour costs are low and safety regulations lax. One solution is to establish a European shipping register and stricter safety standards so that it will be harder for sub-standard ships to enter European ports. And it is already working with the OECD to open up markets overseas.

Although state aids are also being examined, no agreement has been reached on exactly how these should be tackled. The only recent major state aids case brought before the Commission in 1991 involved a threat from outside the Community when China's giant state-owned shipping company, Cosco, ordered four container ships from yards in the former East Germany with the promise of low-cost finance from the German government. The EC blocked the deal, stating that the aid would distort competition in the shipping market and that it was not justified on the basis of development aid to China under OECD rules. Whether the EC would lay down such a strict ruling if a similar deal was proposed between shipping companies within the Community is another matter. Certainly, given the general level of political support for shipping subsidies throughout most EC countries, similar strictness does seem unlikely.

The British Government is, however, pushing for a set of guidelines that would control, and eventually reduce, subsidies. 'We would like to see a disciplined approach to state aids that would reduce them,' says a government official. This, he explained, might mean allowing member states to continue to support their industries in the short term, on condition that they targeted troubled spots more rigorously and reduced the types of aid available.

While the discussions drag on, the Government is taking a calculated risk by not intervening in the industry. 'British shipping is, in our view, an efficient, successful and capable industry,' says a government official. The industry sees things differently, and the Chamber of Shipping is still campaigning for tax concessions. In the 1960s British shipping enjoyed massive subsidies. Time will tell whether, without them, the industry is made of stern enough stuff to withstand the competitive blasts from its state-aided competitors.

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