Friday, February 1, 2013

Greek Competitiveness II: the tax man cometh. End of the era of Law 89 offshore shipping?

Greek shipping is not only facing difficult freight markets and lagging in investor returns in the face of competitors; but now due the Greek debt crisis, the Greek government is beginning to abrogate its offshore status by imposing a new onslaught of taxes as well as threatening to regulate office practices like domestic industry.

Already, the Euro has been hardening this year against US Dollar, the shipping industry base currency, making office costs and salaries more expensive.  Now the Greek shipping industry will have to pay Greek flag tonnage tax level on all foreign flag vessels managed in Greece.  The shipping services offices in brokerage and crewing were slapped with a ‘temporary’ retrogressive special tax of 10% on all foreign exchange that they bring to Greece starting last year for the next four years.  The golden years of Law 89 offshore shipping seem to be coming to an end.

Being locked into a heavy (quasi-Deutschmark) currency zone never seemed a sustainable policy for an industry based on the US Dollar and emerging market cargo demand such as Greek shipping. Eurozone entry has destroyed already a number of traditional Greek industries such as ship repairs and textiles. Will ship management be added to the list of bygone traditional Greek business, no longer competitive and be forced to move abroad?

As opposed to cautious distance from the Eurozone by the UK financial industry in the London City , Greek ship owners warmly embraced Greece in the Eurozone. They never considered the long term implications of this on their industry in Greece with the higher costs from unfavorable currency parities, the risks of encroaching EU regulations and the potential tax liabilities that would eventually render Greece an unattractive jurisdiction for shipping offices. Greek owners and managers are losing their structural competitive advantages, without even thinking about it.

Already Greek crews are largely a thing of the past with most of the sea academies closed and Filipino seamen manning a large portion of the Greek-controlled fleet. The middle management of port captains and engineers that run the ships and serve as the link between the office and the vessel remain predominately Greek. Many are retired seamen. Now their jobs are at risk because of new, heavy-handed government policy that would restrict them from working as a second career in offices.

The new tonnage tax agreement was negotiated by the large Greek ship owners, where there is the biggest concentration of Greek flag vessels. The smaller Greek shipping companies simply cannot afford to operate under Greek flag with its higher costs. This agreement permanently extends the same Greek flag tonnage tax rates to all foreign flag vessels. It makes the operation of foreign flag vessels more expensive in Greece as opposed to other jurisdictions. The rate increase more than doubles the tonnage taxes for medium size tonnage. The money involved is not large prima-facie amounting to approximately US$ 5.000- 7.000 per vessel per annum, but it can be even more onerous for companies managing very large vessels like VL’s or large numbers of vessels.

It is a direct threat to third party management in Greece because foreign principals will be loath to accept the extra cost for management with venue in Greece and may likely prefer to change management venue to more competitive jurisdictions like Dubai, Monte Carlo and Singapore, without these charges. These alternative jurisdictions are not heavily burdened with high public debt, keep taxes low and are generally business friendly without the Greek uncertainty.    

Already foreign ship management firms are seriously considering curtailing their activities in Greece or moving out. One major foreign management firm with over fifty employees in their Greek office called on the Greek government in protest. The Greek official in charge reportedly told them that he could care less if the people were laid off and the closed office was closed. It was also reported that the Greek tax authorities invaded the offices of a major Greek ship owner and manager. The owner was compelled to fire a large part of his staff of port captains and engineers. Greek politicians have always been indifferent to Greek jobs in the private sector.  

Shortly after the Greek ship owners thought that they had resolved their problems with the tonnage tax agreement, they were suddenly confronted with a new special ‘temporary’ tax that amounts to 10% on the foreign exchange brought into Greece starting retroactively in 2012 for the next four years. The owners reportedly sent a high profile law firm to the Greek government, protesting and threating litigation if the law were passed. At the last minute, just prior the vote of new draconian tax laws in January, the ship owners escaped these special taxes through amendment, but the law still stands for all the Greek shipping services offices under Law 89 such as brokerage firms and crewing offices. Ironically, these are smaller firms, who have also been suffering in difficult market conditions. They are less able to cover the taxes than their ship owner/ ship management brethren, but generally seen with complete contempt by the Greek political class.

Just as there is no guarantee that the tonnage taxes may be increased in future years, neither is there any guarantee that this ‘temporary’ tax may become permanent.  These new tax laws are going to put a lot of pressure on the smaller service firms, forcing them to close or curtail their activities. The larger firms are already considering changing venue and reducing their staff in Greece. Foreign firms may prefer to move out of Greece and service Greece via more business friendly jurisdictions.

There is no doubt that the current climate of taxes and government heavy handedness means that unemployment will rise in the Greek shipping industry. Greek shipping jobs are among the best paid in Greece. These people will be joining other social groups in unemployment in the general mounting social misery that prevails in Greece.

Added to these issues is the reorganization of the domestic Greek banking system and question marks on availability of credit for Greek shipping companies. Eurobank, for example, is going to be merged into the National Bank of Greece. Commercial Bank of Greece is being absorbed by Alpha Bank. We still do not know how the new Basel regulations as well as the EU overseers of the Greek banks will view shipping credit, moving forward.

All indications are that Greece is not going to be a place for small companies, entrepreneurial startups and innovation in the shipping space. Industry consolidation seems far more likely with fewer and larger shipping firms across the board. Larger firms may prefer to move out and downgrade their Greek presence to representative or technical offices It remains to be seen how this traditional Greek franchise will evolve; but the creative, expansionary phase of offshore Greek shipping under Law 89 seems over.

Greece like most of the EU has become a high tax, big government, heavily regulated jurisdiction that simply cannot compete with the Far East or the US, either on innovation, costs or low energy prices. The EU has lagged for many years on growth rates compared to other parts of the world. The EU is probably unique in terms of favoring very high unemployment and severe recessions as affirmative public policy choices to make its member states more ‘competitive’. It seems likely that these policies will continue to kill more jobs than they create.  This is the dismal track record of European policy makers for many years now.

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