[Exclusive] Extension of Sunset for 'Tonnage Tax System' That Reduces Shipping Companies' Taxes

As the 'Tonnage Tax System,' a corporate tax special system that reduces taxes for shipping companies, approaches its sunset at the end of this year, the Ministry of Economy and Finance has decided to extend the system. Since it is a global system implemented by major shipping powers, it was judged that only Korea abolishing the Tonnage Tax System would not align with international standards.

원본보기 아이콘

According to related ministries on the 15th, the Ministry of Economy and Finance is discussing extending the sunset of the Tonnage Tax System. Because the Tonnage Tax System is a global system operated by major shipping powers, it was deemed undesirable for Korea alone to abolish this tax system. Considering that if Korea alone removes the tax benefits in a globally standardized situation, it could lead to a decline in shipping competitiveness.

The Tonnage Tax System is set to expire at the end of this year. According to the Restriction of Special Taxation Act, domestic shipping companies can apply the Tonnage Tax method to their corporate tax base only until December 31 of this year. The Tonnage Tax System is a system that, when calculating corporate tax for shipping companies, applies estimated profits based on the tonnage of ships and the number of operating days instead of operating profit. Korea introduced the Tonnage Tax System in 2005 with a five-year sunset period and has extended it three times since. Shipping companies can choose between the general corporate tax method and the Tonnage Tax method every five years and pay whichever is more advantageous.

원본보기 아이콘

The Ministry of Oceans and Fisheries has argued for the necessity of extending the Tonnage Tax System, considering the highly volatile nature of the shipping industry due to economic fluctuations. A Ministry of Oceans and Fisheries official explained, “Given the industry's characteristic of large swings between profit and recession, if profits are heavily taxed, it becomes difficult for shipping companies to retain funds for ship reinvestment or liquidity.” The official added, “From the government's tax revenue perspective, maintaining the Tonnage Tax System ensures stable tax collection even when net income is negative.” According to the Ministry of Oceans and Fisheries, most container shipping companies, excluding bulk carriers that carry heavy cargo such as freight and coal, pay taxes under the Tonnage Tax System.

Global shipping freight rates, which surged due to logistics disruptions originating from the Red Sea, have recently turned downward. The Shanghai Containerized Freight Index (SCFI), which rose to 2206 in January, dropped to 1885 as of the 8th of this month. The higher the container sea freight rates, the higher the fees shipping companies receive for transporting cargo. The freight rates, which surged last November when the Yemeni Houthi rebels indiscriminately attacked ships in the Red Sea, a gateway to the Suez Canal, have entered a downward trend due to increased ship supply on the Red Sea bypass route and reduced demand following the Chinese Spring Festival holiday. A Ministry of Oceans and Fisheries official stated, “Freight rates have fallen significantly,” adding, “With the increased supply of ships ordered during the COVID-19 period, there is no sign of freight rates rising next year.”

원본보기 아이콘

The shipping industry emphasized that since the Tonnage Tax System is a global standard, it needs to be not only extended but also made permanent. They argue that the Tonnage Tax System must fundamentally be in place for national shipping companies to compete fairly. Except for Korea and Japan, most major shipping powers have made the Tonnage Tax System permanent. More than 20 major shipping countries, including the United States, the Netherlands, Norway, Germany, the United Kingdom, and Taiwan, operate the Tonnage Tax System as a permanent tax system. For this reason, the Korea Shipping Association has identified that if the Tonnage Tax System expires, 85% of domestic shipping company vessels intend to register under a flag of convenience (a system where shipowners register ships in third countries).

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.