Following an application, Swedish shipping companies that meet certain basic requirements have been able to opt for tonnage tax since 1 January 2017. The shipping company's taxable income has subsequently been calculated on a lump-sum basis, based on the size of the vessel tonnage the company has at its disposal. This is a model that often leads to favourable corporate taxation. In order to create a more inclusive regulatory framework, the Riksdag has now, in May, requested through an announcement that the Government initiate an investigation into the regulatory framework for tonnage tax. Some of the issues where a review is important are highlighted below.
International traffic
The current regulatory framework for tonnage tax has been associated with certain limiting conditions which have made it difficult or impossible for some shipping companies to apply for and be approved for tonnage tax. For example, a fundamental requirement to be able to apply the rules on tonnage tax has been that the shipping company's vessels have been engaged predominantly in international traffic. This is a condition that has meant that shipping companies primarily engaged in inland and coastal shipping have been excluded from applying the rules on tonnage tax.
The requirement for international traffic creates further problematic distinctions in its application for both shipping companies and the Swedish Tax Agency. The predictability for shipping companies subject to tonnage tax can also be problematic. For example, a shipping company that has its vessels chartered on a time charter basis and where the charterer wishes to operate new routes which do not meet the requirement for ships to operate on international voyages. Such a wish might be impossible to comply with while simultaneously meeting the requirements for international traffic in order to apply tonnage tax. Furthermore, the current regulations also lead to a lack of competitive neutrality between Swedish shipping companies and also in relation to foreign shipping companies.
There are therefore several strong arguments for domestic and coastal shipping also to be covered by tonnage tax. In this regard, it can therefore be expected that the inquiry will present proposals that involve a more generous design. Hopefully, the Government will go the full way and abolish all geographical restrictions regarding the type of shipping that can be the basis for tonnage tax.
Ship size
Another limitation has been the size of ships permitted to apply the tonnage tax rules. The current rules mean that a ship must be at least 100 gross tonnes, and this limit could be lowered to include smaller vessels too. Denmark, for example, has a limit of 20 gross tonnes, and it is to there that most flag-switching has occurred.
Ships sized between 20 and 100 gross tonnage also form the basis for a strongly growing business segment within shipping, and if the expansion of permitted sailing areas is implemented, this expansion should also be combined with a lowered size limit for vessels in order for the effects of an inclusive regulatory framework to be fully realised.
Untaxed reserves
Write-downs, the untaxed reserves, have been another factor that has acted as a deterrent for shipping companies when deciding to enter tonnage tax. The current structure means that upon entering tonnage tax, there is no immediate write-down of the write-downs, nor is there a waiver of the untaxed reserves.
The design of the regulations means that the excess depreciation within the tonnage tax system is to be taxed over time, but that the untaxed reserves can, in certain situations, be forced to be taxed in full all at once. A taxable income that can amount to several million. Thus, a financial burden that, for self-evident reasons, a shipping company in many cases cannot bear and which constitutes a further deterrent when deciding to move into tonnage taxation.
Perhaps an immediate release of untaxed reserves upon entering tonnage tax is too big a step, but a gradual reduction of the recapture obligation during the period of tonnage tax, according to one of the models applied in Denmark or Finland, could be an alternative.
In any case, rules must be introduced that prevent the entire untaxed reserve from being taxed at once. It is not an acceptable model for a shipping company to risk being forced in certain situations to be compulsorily taxed on millions of pounds in income at one time. A postponement of the obligation to repay, inspired by how negative adjusted acquisition costs were handled in the corporate sector after tax exemption for partnership shares was introduced in 2010, might possibly be an alternative.
Commentary
It is of course positive that Sweden has had a system of tonnage tax for five years, similar to other seafaring nations, even if it was one of the last EU countries to introduce one. At the same time, the regulations need to be reformed so that the fundamental aim of tonnage taxation, to increase the number of Swedish-registered vessels, can be better achieved. Currently, there are just over 100 Swedish-registered commercial vessels.
I have above pointed to some of the areas where the current regulatory framework should be reviewed to create a more inclusive, competitive, and predictable regulatory framework. Hopefully, the Government will act quickly on the Riksdag's initiative and soon return with proposals that address the shortcomings in the current tonnage tax regulations.
