Tax code may foil vessel phase-out plans   

February 10, 2010

With the decline in asset prices for new ships, many shipping companies are planning to replace their fleet with newer vessels. However, the tonnage tax and the additional capital gains tax charged on earnings from phased-out or sold vessels could be a stumbling block, says a tax expert.

“As per the tonnage tax code, shipping companies have to pay tax as per their total tonnage and not on a profit or loss basis. When you sell a ship, you realise a certain amount and when you realise more than the depreciated value, it is a capital gain, which is not covered in the tonnage tax code. Thus, the company has to pay an additional tax on this capital gain,” said Samir Kanabar, partner for tax and regulatory services, Ernst and Young.

Talking about the likely effect of this tax on the balance sheets of shipping companies, he said, “For the phasing-out of single-hull vessels, a 9-12 month window is available. In this period, people will either be upgrading or selling (their fleet). This will thus start reflecting in the next two to three quarters in their books.”

Typically, companies which are actively buying new ships, also have a considerable number of vessels to be phased out. Shipping Corp of India (SCI) has recently placed an advertisement for two more new ships. Moneylife had earlier reported that SCI had 10 single-hull vessels to be phased out, out of which it has already sold five ships. It plans to sell the remaining five by 2010.

GE Shipping is planning to sell five single-hull ships for scrapping. “We may not necessarily phase out all the vessels by 2010. We will plan the phase-out as per the opportunities available and will consider fixing a fleet-age limit of 25 years,” said Anjali Kumar, head of corporate communications, GE Shipping.

Mercator Lines also plans to phase out three of its existing single-hull vessels ahead of the implementation of the International Maritime Organisation (IMO) guidelines on phasing out of single-hull vessels.

Apart from the phase-out, the tax expert pointed out that shipping companies are buying new ships and selling old ones even if it is not mandatory, in order to have a younger fleet. “In terms of buying a new ship, the tax code does not matter, other than the added tonnage tax. However, you have to pay an added tax on the capital gains from the old ship sale,” Mr Kanabar said. — Amritha Pillay