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Marine Log

September 10, 2007

Finance Minister hands Norwegian shipowners a tax shocker

Shipping stocks took a beating on the Oslo Stock Exchange on Monday, following a Friday announcement by Finance Minister Kristin Halvorsen proposing a new tax regime for Norwegian shipping companies in the National Budget for 2008. The proposed tax regime will be similar to the tax regimes available for the industry in the European Union.

The finance ministry said that since 1996 the Norwegian industry has had a favorable tax regime with taxation of company profits only upon withdrawal of profits or exit from the scheme.

"With the growing number of tax exemption regimes within the EU, it is apparent that the present regime no longer is able to attract new investments in Norwegian shipping companies," said a ministry statement.

According to one shipping company's analysis, the system being proposed is comparable to tonnage tax systems implemented in a number of other European countries and the effective tax rate is estimated at 0.6% of the 2006-results. The details will be presented early October in the budget proposal for 2008, and will be finally decided upon in December. The new system will be applicable as from January 1 2007.

The stinger is that the Government proposes that two-thirds of the taxes deferred under the present regime, estimated to NOK 14 billion, be paid over a period of 10 years. The shipping companies will be allowed to use the remaining one-third of the tax obligations for environmental investments. as much as NOK 20 billion in back-taxes.

The proposed change may have less to do with honing the competitiveness of Norwegian shipping than with bending to political ideology.

"Norway's left-center government coalition, led in this issue by Finance Minister Kristin Halvorsen of the Socialist Left (SV) party, has claimed that wealthy shipowners should pay more tax," noted newspaper Aftenposten. " While the Labor and Center parties had sympathy for the shipowners and don't want to jeopardize jobs in the shipping sector, SV wouldn't accept tax relief for a business that's dominated by many of Norway's wealthiest capitalists."

BW Gas said that if approved, the Norwegian government's back tax proposal would severely undermine the company's balance sheet and reduce its ability to invest in modern environmentally friendly vessels and compete internationally. Depending on the transition rules, the payable tax will be between NOK 3.8 billion and NOK 4.8 billion, equivalent to a present value of NOK 20-25 per share. Applying the book values, the equity ratio will be reduced from 38% to between 10% and 16%.

"BW Gas chose to remain in Norway on the understanding that this would be a stable long-term system under which to operate. This latest proposal to cancel the current taxation system would be a dramatic reversal of that understanding, in spite of us honoring our commitment to invest in Norway. We hope that the final details of the proposal will take into account the impact not only on individual companies, but on the entire Norwegian maritime cluster and the image of Norway as a dependable investment location", said CEO Jan Hkon Pettersen.

Odfjell noted that the current system, which was introduced in 1996, does not levy any taxes when the shipping company continues to perform shipping activities in Norway, and no dividend distributions are made to the shareholders. Odfjell chose to enter this system in 1996 based on the intention to continue to operate under the system in the long term and so far no dividends have been distributed to shareholders from companies within the shipping tax system. Odfjell's plan was to continue to operate under the current system. The income tax rate for undistributed profits earned within the system has therefore been zero and hence, based on this zero tax rate, tax liabilities have also been zero. Untaxed profits within the current tax system are partly capital gains from when ships were sold into the system as an internal transaction in 1996 and partly operating results in the period 1997 to 2007.

"Should the proposal be passed as law," said Odfjell, "this will reduce our ability to invest in our fleet renewal in an amount of close to $1 billion, and our relative competitiveness will be severly hampered compared to our main competitors that are operating under international tax regimes. We are sorry to realize that entering the current shipping tax system in 1996 on the trust that we would enjoy a stable and competitive business climate in Norway for our industry seems to have been a wrong decision."