According to the latest Paris Memorandum of Understanding on Port State Control annual report, published on July 1 2013, Ukraine moved from the organisation’s black list to its grey list, which indicates certain improvements in flag performance. But will it bring real growth for the Ukrainian shipping sector, apart from a better image?
It is likely that the sole benefit of the upgrade to the grey list will be merely a boost in reputation, since the tonnage of the Ukrainian-flagged fleet continues to decrease. In the past few years the total deadweight of the fleet has fallen steadily from over 1.148 million tons in 2008 to 678,750 tons in 2012, while the Ukrainian share tonnage in the world trading fleet has dipped from 0.9% in 1993 to 0.07% in 2011. This trend has fuelled persistent debate over possible remedies.
Registration of a vessel under a certain jurisdiction’s flag makes a shipowner subject to all laws of that jurisdiction, especially in relation to taxation. Considering the high operating costs of the shipping industry, it is only natural for shipowners to fly the flag of a jurisdiction that offers preferential tax treatment. Ukraine can hardly be considered a preferential jurisdiction in terms of tax or administrative legislation. Moreover, national legislation prohibits the registration of ships under the Ukrainian flag where the shipowner has a foreign shareholder. The further decrease in Ukrainian tonnage thus seems inevitable under these circumstances. Measures to entice shipowners to fly the Ukrainian flag therefore need to be developed.
In this vein, open international ship registries provide significant incentives. The majority of world tonnage is concentrated in open registries, which provide significant advantages for shipowners over national registration (eg, low income tax). The idea of establishing an open international ship registry in Ukraine first surfaced in 2003 and 2004. Regrettably, the concept of an open registry with a preferential tax regime was inconsistent with the legislation in force at that time and required many fundamental legislative changes, which then seemed impossible.
In 2008 the National Security and Defence Council declared the shrinking of the Ukrainian-flagged fleet as a threat to national security. The need to establish an open ship registry as part of the national ship registry was confirmed by the president, who ratified by decree the decision of the Council of Defence. According to the decree, a bill was to be drafted by the Cabinet of Ministers; however, no further moves towards implementing the decision were taken and the issue was ultimately shelved.
However, debate over establishing an open registry was reignited in 2013. It is anticipated that the Cabinet of Ministers will soon submit a bill to Parliament on the international shipping registry, which is being finalised by the Ministry of Infrastructure. The adoption of the bill is supported by the Ministry of Revenue and Duties, the Association of Shipbuilders of Ukraine and many other industry players. The draft law is expected to provide an exemption from tax on income received from the trade of a vessel registered in the international shipping registry. As in other open registries, shipowners will be liable to pay a registration fee and fixed tonnage tax. Supporters of the bill claim that liberalisation of the flag regime will provide additional government revenue of about $1 billion a year.
However, experts reasonably state that, taking into account the recent move to the Paris Memorandum of Understanding grey list, the international reputation of Ukraine must be a top consideration with respect to establishing an open registry. The approach to implementing the registry must be balanced, particularly with regard to a ship’s age. Competition is particularly fierce in this area, since neighbouring countries such as Georgia and Moldova (which are on the black list) attract shipowners with low taxes and a low age limit for registration of vessels, among other incentives. The registration of old vessels in the Ukrainian international registry should be restricted and reasonable age limits must be stipulated in order to avoid making the Ukrainian flag a flag of convenience.
It is also expected that balancing the interests of the state and shipowners will not be an easy task. Other countries offering open registry opportunities typically have:
Unfortunately, Ukraine has little to boast about in these areas. Serious efforts must be made and political courage and goodwill must be exercised before the necessary changes can become a reality.
International Law Office, August 26, 2013; Image: iStock
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