Taxpayers are missing out on windfall from pandemic shipping profits

The unprecedented windfall from container shippers has gone largely untouched by governments. Use profits responsibly or risk a backlash

Chris Bryant, Bloomberg

February 15, 2022, 8:25 p.m.

Last modification: February 15, 2022, 8:32 p.m.

Shipping containers at the inner port of Behala in Berlin, Germany. Photographer: Liesa Johannssen-Koppitz/Bloomberg

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Shipping containers at the inner port of Behala in Berlin, Germany. Photographer: Liesa Johannssen-Koppitz/Bloomberg

Container shipping companies have found plenty of ways to spend their huge pandemic-related profits. They raise staff salaries, make acquisitions and return heaps of cash to shareholders.

One person who won’t benefit much is you, the taxpayer. Based on their recent financial statements, I calculate that major European container lines AP Moller-Maersk A/S, CMA CGM SA and Hapag-Lloyd AG only owe 1% or 2% of their windfall profits in taxes.

This conflicting result is due to very unusual tax arrangements in the shipping industry: companies pay a fixed amount based on the tonnage of their vessels, rather than a percentage of their revenues. More than 20 European countries have a tonnage tax system, as does Japan; Singapore and Hong Kong also offer generous shipping tax incentives.

Already on the defensive in the face of broken global supply chains, shipping lines have so far faced remarkably weak scrutiny of their taxes.

Last week, a former UK business minister demanded an exceptional tax on container shipping profits, echoing similar demands for a special levy on oil companies such as BP Plc.

Of course, there is a risk that one-time taxes will be passed on to customers via even higher freight rates. I would be happy if shipping companies were just taxed at a normal rate.

Instead, the industry successfully lobbied the Organization for Economic Co-operation and Development to be excluded from last year’s global agreement to set a minimum tax rate of 15 % for multinational companies. 1

According to his latest accounts, Maersk only owed $138 million in tonnage and freight taxes on $17.6 billion in international shipping profits in 2021, an effective tax rate of less than 1%. (from Maersk group tax rate last year was 3.7%, but this mainly reflects higher taxes on land-based activities).

I calculate that German rival Hapag-Lloyd and French CMA CGM had effective tax rates of 1% and 2% respectively, in the first nine months of the year on combined pre-tax profits of around 17 billion of dollars.

As container lines buy their place in adjacent shipping sectors, their transoceanic profits barely taxed risk of distorting competition; logistics holders pay much higher taxes and therefore don’t have as much cash in reserve.

Although the opportunity for comprehensive tax reform has passed, tonnage taxes should be redesigned to provide greater benefits to the public. Carbon taxes are another way to force industry to pay its fair share. In the meantime, these companies must show that they are spend financial gains responsibly.

Rather ironically, the industry obtained an exemption from the 15% minimum rate, in part, by emphasizing its historically low profit margins. Still, some shipping companies made more money in 2021 than in the past two decades combined.

Global container shipping lines likely made $190 billion in operating profit in 2021, according to maritime research firm Drewry. With continued port congestion, this year’s earnings could be even bigger.

Politicians are not done doing favors for the industry. Landlocked Switzerland, home of Mediterranean Shipping Company SA, the world’s largest container shipping company, is set to introduce a tonnage tax. (MSC is private and does not publish earnings or tax information). Meanwhile, Britain recently made its tax system even more shipping-friendly to underscore the supposed benefits of Brexit.

In fairness, taxing shipping is complicated because ships operate in international waters and call at multiple ports. A tonnage levy offers simplicity and predictability. Without such favorable treatment, more ships would likely be registered in low-tax offshore jurisdictions under so-called “flags of convenience”. It should also be borne in mind that some shipping companies pay higher taxes but are subsidized in other ways.

Tonnage taxes are due even when ocean liners make losses, which has happened frequently over the past decade; therefore, carriers paid more in those years than they otherwise would. 2 Shipping is capital-intensive, but tonnage taxes provide no relief for such investments. And in some cases, the tax benefits are tied to national economic activity and job creation.

But if tonnage taxes weren’t so good, shipping companies wouldn’t push for them anymore. Israel’s Zim Integrated Shipping Services Ltd., the world’s tenth-largest container line by capacity, has asked local authorities to switch to a tonnage system. 3 Currently, it faces the same 23% tax rate as other Israeli companies. It’s bold demand tax cuts after winning massive windfall profits. But can you really blame the US-listed group for asking, given how their rivals are treated?

Even after the current acute port congestion subsides, freight costs could remain high compared to historic levels: desperate customers now place more importance on reliable service and accept longer contracts. Mergers and alliances may mean that the industry is better able to reduce overcapacity. If the industry is more profitable than it was in the past, that’s all the more reason to tax it fairly.

An easy first step is to redesign tonnage taxes so that they better support decarbonisation, as for example Portugal is doing. Maritime transport should also be included in carbon markets, as proposed by the EU, in order to pay to pollute.

In the meantime, shipping companies can avoid any threat of windfall taxes by demonstrating that they are responsible stewards of lightly taxed wealth: in addition to increasing dividends and stock buybacks, Maersk has ordered a dozen vessels running on cleaner methanol, called for a global shipping fuel tax and aims to become carbon neutral by 2040, for example.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

Warning: This article first appeared on Bloomberg and is published by special syndication agreement.