Posted on April 25, 2024

Tax Planning Strategies for International Shipping and Logistics Operations

Finance is one of the four pillars that a business must manage efficiently for its growth. Tax, being a sub-set of finance, acquires a key role in an enterprise’s growth story. A conservative approach in meeting tax obligations could bring financial inefficiencies resulting in cash leakage. On the other hand, an aggressive or over optimistic tax position can result in penalties and loss of business reputation. Therefore, it is critical to have a balanced approach towards tax planning.    

With the expansion in international trade, shipping and logistics industry plays a pivotal role in bridging the trade gaps. Shipping and logistics companies generally have operations in several countries, thus exposing them to many tax issues.  Tax matters could be local or international, corporate tax related or withholding taxes, VAT / GST or other consumption tax, permanent establishment exposure or Transfer Pricing compliance.

From inception of the business to its winding up, at every stage tax consideration for a company would change. It is, therefore, pre-requisite to ask the right tax questions at each stage of business that would support in a good tax planning.  

Some of the tax considerations that a business needs to deal with are:

  • Pre – incorporation stage

There are many players in the supply chain of shipping and logistics industry. The company may be a ship owner, ship operator / manager, freight forwarder, container lessor, NVOCC or a shipping line agent. Taxability for each type of service provider would be different. While a ship owner would look for a favourable country to flag its vessels (Mashall Islands, Panama, Cayman Islands are popular choice), a freight forwarder will weigh commercial considerations higher over tax factors. While a ship operator would look for countries that offer special tax regime to shipping and logistics companies, an NVOCC may explore Free zones or Special zones for tax optimization.

The optimal solution at this stage must be tailor-made depending upon each business type and its commercial needs.     

  • Post commencement of business  

While the company may enjoy local tax benefits in the country of incorporation, for cross border income, different tax regime would come into play. Most of the tax treaties provide exemption to income from ship operation under a specific Article applicable for international shipping and air transport (generally Article 8). However, very few tax treaties extend the exemption under this Article to NVOCCs. Any other player in the overall supply chain does not get covered by the said Article. In such a situation, the entities that do not enjoy tax treaty benefit would get taxed as per the domestic tax laws of the source country. In case no tax treaty is signed between the home country and the source country, even the ship operators would get covered by the tax net of the source country. With business spread across various countries, this would mean taxability in multiple jurisdictions and likely additional compliance burden in different countries.

A thorough awareness of the potential tax exposure in the source country, applicable compliance requirements (some countries mandate non-resident companies to register for tax and file tax returns) and the possibility of claiming tax refund / credit would aid in minimizing the impact.

  • During expansion phase 

For shipping and logistics companies, expansion is organic – whether it is lateral or vertical. Each type of expansion has its own tax challenges. This manifolds if the expansion is across geographies. Starting with the types of set up, the investment planning to obtaining relevant registrations, tax is part of all discussion tables. More importantly, when dealing with expansion across countries. The key challenges here would be to determine the right kind of set up (branch, subsidiary, business acquisition, or third-party agency) as this would be linked to the wider tax issues of Permanent Establishment and Place of Effective Management.  

Not taking the right factors into consideration for decision making at this stage could lead a company to a negative growth trajectory.

  • Winding up stage

Winding up could be total or partial (only one segment or geography) or it could be just a sale or hive-off of business. Tax implications arise on sale / transfer and repatriation or distribution of residual surplus.  The general complexity involved in winding up and deregistration also makes this stage challenging. A step by step approach in planning and implementing winding up projects can mitigate any potential tax leakages.

In Conclusion

As they say, there is a very thin line between tax planning and tax evasion. While a good tax planning can have long term benefits, a short-sighted or faulty planning could be considered as tax evasion and thereby, lead to financial losses. To remove the disparity of taxes between geographies, more and more countries are moving towards global minimum tax, common transfer pricing compliance and simplified tax frameworks. Widening of tax treaty base between countries also makes international trade more attractive and less confusing taxwise. When it comes to shipping and logistics sector, there is no “one-size-fits-all” solution for tax matters. However, by monitoring the global trends in taxation for the sector, and making informed decisions, shipping and logistics companies can leverage to profitably manage all four pillars of business. 

How House of Shipping Empowers Shipping and Logistics Companies with Strategic Tax Planning Solutions

House of Shipping, a leading provider of shipping and logistics solutions, offers specialised finance and tax advisory services to help companies develop tax planning strategies. By getting to know each client’s unique needs and objectives, House of Shipping’s tax experts craft tailor-made financial solutions to optimise tax exposure and ensure compliance with all cities, state, and county rules.

Their approach emphasises the importance of understanding each business’s specific challenges and ambitions, allowing them to provide actionable advice and solutions that make business sense and go beyond addressing tax concerns. House of Shipping’s finance professionals and internal auditors, as part of their finance and tax consultancy services, are ready to provide assurance and help clients realise bottom-line tax savings, making them a valuable partner in managing financial strategies for shipping and logistics companies.

Tax Planning Strategies for International Shipping and Logistics Operations

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