2007

The Taxman Cometh (Part II)

Back in September, we reported on the Norwegian government’s variation on the “bait and switch” tax ploy. Perhaps troubled by the fact that ship owners were paying no tax, the government, as bait, offered owners a new tax system based upon the tonnage tax system prevalent in Europe. Taxes would be extremely low but the cost of conversion was high. In fact, they were intending to unwind the current system, which charged no tax provided there were no distributions to shareholders and the company continued to perform shipping activities in Norway. Under the old system, owners, in good faith, presumed the undistributed profits were not taxable and therefore no tax liability was accrued on the balance sheet. Moreover, since no distributions were permitted and there was no reason to keep the profits liquid, the proceeds were reinvested giving owners a competitive cost of capital.

What a deal! Instead of paying no taxes, owners would now pay a small amount. That would be tolerable until you factor in the price, a retroactive tax on all the profits made under the previous regime. The government, whose motivation, given the health of the economy, is uncertain but perhaps may be construed as out of spite, decided that the previously untaxed profits would now be taxed at a 28% rate retroactively. By way of relief, the government is allowing the payment to be made over 10 years and will waive up to a third of the liability if that portion was re-deployed in environmental investments.

This is only an excerpt of Market Commentary – 11/08/2007

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