2007

The Tax Man Runs Amok

Our inbox was full last week with press releases from Norwegian shipowners decrying their government’s latest effort to enrich its coffers. Frankly, we didn’t understand why one of the richest and strongest economies in the world needed more tax revenues. Things however became clearer once we understood that it was a Socialist Party initiative.

On September 7th, the Norwegian government presented a proposal for a new shipping tax system in Norway that is modeled on the tonnage tax systems prevalent in a number of European countries. The effective rate is estimated to be 0.6% of 2006 results. The details of the new system will be presented in early October in the budget proposal for 2008 and will be decided upon in December to be effective with this year’s tax filing.

To better set the stage for this proposal we need to understand the system currently in place, which was introduced in 1996. At that time if you recall, Norwegian owners were threatening to leave Norway given the lack of a level playing field in the industry particularly when it came to taxes. To combat the exodus, the tax authorities agreed not to levy any taxes so long as the shipping company continued to perform shipping activities in Norway and no distributions were made to shareholders. These two caveats required owners to not only to remain in Norway but also largely reinvest the income as no distributions could be made and there was no reason to keep the funds liquid. Under the latter premise, undistributed profits were not taxable and therefore no tax liability was accrued on the balance sheet.

This is only an excerpt of Market Commentary – 09/20/2007

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