A Few Thoughts On Greek Shipping And Taxes

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Includes: DSX, SB, SBLK
by: Lambros Papaeconomou

Summary

The agreement between Greece and its international creditors calls for an increase in tonnage taxes levied on Greek ship-owners.

Greek ship-owners are threatening to leave the country citing that increased tonnage taxes will undermine their competitive status.

In fact tonnage taxes are only a small component of running costs, and any increase will not justify a costly company relocation.

Greek ship-owners are lobbying not to avoid increased tonnage taxes but to keep their income tax-free status.

We have all witnessed a lot of Greek drama during the past few weeks as the impasse between the Greek government and its international creditors reached its climax. It now appears that after months of terse negotiations between the two parties, Greece has finally agreed to pass and implement austerity measures in exchange for financial aid.

One of the innocent bystanders in all this has been the Greek shipping community. As part of the broad agreement between Athens and the Eurozone, the Greek government has undertaken to increase the tonnage tax, a flat tax that is assessed each year on all ships that are managed by shipping companies based in Greece.

As expected the shipping community has been up in arms crying foul over the proposed tax and threatening to leave to more tax-friendly locales like Monaco, Dubai, or Singapore. This has made me wonder: what would be the effect of increased tonnage tax on a shipping company's running costs?

Before I answer this question I must clarify that tonnage tax is the only tax levied by the Greek government, since shipping companies are not subject to income taxes on their profits. In the following table I have calculated the tonnage taxes per ownership day for three of the largest dry cargo shipping companies based in Athens: Diana Shipping Inc. (NYSE:DSX), Safe Bulkers Inc. (NYSE:SB), and Star Bulk Carriers Corp. (NASDAQ:SBLK). Tonnage taxes are a component of vessel operating expenses.

Please note that tonnage taxes include taxes levied by Greece and also similar taxes levied by other countries where the vessels may be registered, for example Marshall Islands, Liberia, etc. Until 2012, only Greek-flagged vessels were subject to tonnage taxes in Greece. Since 2013, all vessels (whether Greek-flagged or foreign-flagged) were subject to tonnage taxes, and starting in 2014 the Union of Greek ship-owners reached a deal with the Greek government to effectively double the tonnage tax for four years, agreeing to contribute an additional 420 million euros in tonnage taxes through 2017.

As you can see from the analysis, even after counting for the levy of tonnage taxes to foreign flag vessels and the voluntary contribution, tonnage taxes remain a rather small component of vessel operating expenses, ranging between $113-$153 per day for year 2014.

Let's assume for example that the Greek government unilaterally doubles the tonnage tax in accordance with the agreement provision. Star Bulk Carriers will have to pay an additional $129 per ownership day. Is this amount really the straw that will break the camel's back and force a mass exodus of Greek shipping companies to greener pastures? I don't think so.

But let's further assume that Greek shipping companies do decide to move to Monaco, Dubai, Singapore, or even London or New York. Have shipping executives done a cost of living comparison between say Monaco or New York City and Athens? The argument that shipping companies will migrate to substantially higher cost locations to avoid tonnage taxes seems ludicrous.

I believe the lobbying on behalf of Greek ship-owners is not about tonnage taxes, but about keeping their income tax-free status. Greek ship-owners are some of the hardest-nosed traders you can find. I don't believe a tempest in a teapot will cloud their business acumen. I suspect that they will cut a deal with the taxman sooner or later, and if I may add, for the benefit of both sides.

Disclosure: I am/we are long DSX, SB, SBLK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.