811.512358 Shipping/1

The Danish Minister (Brun) to the Secretary of State1

No. 156

The three Scandinavian countries, Sweden, Norway and Denmark, some time ago appointed commissions, one in each country, for the purpose of revising existing treaties with foreign countries, and of making suggestions with regard to new treaties. A close cooperation has taken place between the three commissions and a Joint Committee was appointed by them, including members from all three commissions. Among the questions which have been discussed at meetings both in Stockholm, Christiania and Copenhagen, is the question of taxation of Scandinavian shipowners by foreign countries.

This question has been the subject of very careful investigation and of earnest consideration and as a result the said Joint Committee drew up a Memorandum dealing with the principles involved, of which the Undersigned Danish Minister to the United States on behalf of his Government begs to forward a translation into English under this cover.

In submitting the said document the Undersigned ventures to ask that the United States Government will give due consideration to the arguments therein contained with a view to relieving a situation which would otherwise threaten the shipping interests of all countries concerned.

C. Brun


Memorandum by the Joint Committee of the Three Scandinavian Treaty Commissions

During later years we have seen a great tendency in various countries of taxing all trades and industries carried on in the country, no [Page 882] matter whether they are exercised by persons who are subjects of the country or not, and irrespective of their being resident in the country or not. It may be anticipated that this propensity, owing to the heavy financial burdens under which the nations are labouring will show a further development during coming years, as the states will endeavour to utilize all means of finding incomes and values which may come into the reach of an Income Tax Act.

In the same way must also be explained the attempts which have been made during the war at introducing without any warning a new taxation of foreign shipping, attempts which have caused considerable uneasiness and anxiety among shipowners, not only for fear of being charged with incalculable and heavy taxes which would increase the already burdensome taxation at home, but also by reason of the grave consequences to the international shipping, which the general introduction of such a fiscal policy of necessity will entail.

It ought to be in the interest of all nations that the shipping trade, the free expansion and development of which is of the greatest importance to the international trade and commerce, is not unnecessarily hampered or annoyed. This taxation resorted to by the States of their own or foreign shipping, must therefore bring them such gains as are large enough to make up for the drawbacks of such a system.

Taxation of foreign shipping must be on the assumption that the person liable to pay the tax carries on a trade within the country which is suitable for taxation, and the question is then, to what extent this may be said to be the case.

The profits of shipping result from the exercise of a carrying trade which broadly speaking may be said to consist of the following single parts: Engagement of cargo and passengers, loading and discharge and the transport itself.

Of these operations only that part of the engagement of cargo and passengers which takes place in the country in question, the loading and discharge in ports of the country as well as that part of the transport which is done within the territorial limits of the country may with some reason be said to be a trade exercised in the country in question.

With reference to the engagement of cargo and passengers then this is a work generally carried out by persons residing in the country where this trade takes place, and when the income of these persons from this trade is taxed, this as far as we can see should be sufficient.

As regards the trade which consists in the discharge or loading of goods, this of course is the business of a stevedore, and the firms who carry on this business are taxed on the income derived therefrom in [Page 883] the country in question, and so far the assessment of this part of the trade must be at an end.

What remains is only that part of the transport which takes place in waters within the territorial limits of the country in question, while the rest of the trade, viz. the transport of the high seas and the business of the Owners themselves, which is carried on where they are domiciled and where the dispositions are made, takes place outside the limits of the country in question, and therefore alone for this reason cannot with any justification and equity be assessed.

As will also clearly appear from the regulation issued by the different countries aiming at an assessment of foreign shipping, a great uncertainty prevails on the part of the Authorities as to the proper course to be pursued. It goes without saying that in the case of shipping it is altogether out of the question to show how large a portion of the profits of the sailing between two countries refers to each particular country, and it will also be impossible to show what portion of the profits relates to the sailing in the waters within the territorial limits of the country. As a further illustration of this point we will suppose that on a single voyage cargo is loaded in two, three or even more countries, and that the cargo is discharged in just as many different countries. If under these circumstances a general assessment of foreign shipping should be carried out strictly, this would lead to the fact of the Owner being compelled every year to make a return to the Revenue Authorities in all the countries where his vessels had been to during the year. He would for all his vessels have to answer a multitude of questions contained in modern assessment papers printed in a language which was not his own and which he is not supposed to understand fully without the assistance of a linguist, a lawyer or an expert accountant. According to the rules of taxation in his own country he would probably be entitled to claim those taxes he is to pay abroad deducted from the taxable amount of his income, but this of course will be impossible, when he is unable in time to ascertain the exact amount of such taxes.

The mere loading or discharge yields no profits to the Owner. The remuneration is attached to the performance of the whole transport, it being impossible to dissolve the same into the different component parts so that a fixed part of the freight should be earned when the goods have come on board, another part at the termination of the transport, and the last portion at the discharge and the delivery of the goods. Of course the law may contain arbitrary provisions for the computation of the income, but their operation will easily be unjust and the introduction of this system will sooner or later lead to the Owners protecting themselves with suitable clauses in the freight contracts through which it will be the shippers of the [Page 884] goods and not the Owners who will have to pay the tax. Under these circumstances it will not be the shipping trade which is taxed, but the export or the import [trade] of the country provided the tax is also levied at the discharge of the goods. Moreover such a collection of tax will in most cases act particularly unjust, not only because the voyage—even under normal conditions—may bring the Owner loss instead of gain, but also because detention and damage during the voyage or the loss of the vessel may altogether upset any estimate as to the result of the voyage.

It is the timecharter [time charterer] who bears the loss of the voyage or receives the profit of the same, and it is he who recharters the vessel and to whom the freight for the voyage is due. The same applies in reality to every time the loading of goods takes place for the charters [charterer’s] account, this is more frequently the case where a vessel is fixed for a lumpsum and thereupon is placed by the charterer along the quay for loading a general cargo which is booked with the charterer or his agents.

The merchant who gets goods from abroad and sells them at home pays taxes in his native country on the full income of his business. It would be impossible to separate that part of the income earned abroad from the portion earned at home. Nor is such a division or separation possible as far as the Owners are concerned. If it is contended that that part of the voyage which is performed in foreign waters is a profitable trade carried on aboard [abroad?], and that therefore a corresponding part of the freight must be looked upon as earned abroad and liable to assessment there, we must bear in mind that the income which might thus be due to the foreign State would be small in comparison with the drawbacks and the difficulties which would be caused, if the Owner and the Revenue Authorities thus for every voyage made within the territorial limits of the country were to keep accounts or control the amount of income which computed according to the duration and distance is attachable to this part of the voyage compared with the whole voyage.

It is true that some Governments also before the war in accordance with their Laws have to a certain extent introduced rating of foreign Shipping Companies who carry on regular lines. Of course such taxation of regular steamship lines will not entail so many drawbacks and difficulties as an all round taxation of foreign shipping, but even in the case of liners wellfounded objections may be brought forward against an assessment which rests on the illusion that it is possible to make rules for a division of the taxable income for the different countries the vessel is calling at on the way. If it is intended to tax the income said to be derived from trade and business in foreign countries, how are we then to draw the line? Is it the place where [Page 885] the freight contracts are made that settles the question, or does it depend upon where the goods are shipped or perhaps where they are discharged? Or shall the liability to pay taxes be dependent on whether the freight is paid in the foreign country to which the vessels of the line are trading? It is also difficult to give a definition of Ruteskibsfart (regular service) so exact and clear that it cannot give rise to doubt and disputes.

We think it will be obvious from the above that the rating of foreign shipping is a problem which contains just as great difficulties to the Authorities as inconvenience to the receivers. The economical gain that may be derived from the taxation of foreign shipping will prove delusive on closer investigation, while the burdens, the drawbacks and the difficulties caused thereby may be rather perceptible.

Such an assessment is sure to create disaffection and bitterness, and will undoubtedly lead to retaliatory measures wherever it is possible. Even if the taxation is kept within such bounds that it cannot reasonably be objected to, we must be prepared that rating in one country will cause a corresponding rating in the other. What is gained at home will therefore easily be lost abroad. Whether the experiment will be in favor of the one country or the other will depend upon the size and movements of the mercantile marine, but broadly speaking we may take it that loss and gain in the long run will balance each other, leaving only a lot of trouble both for the taxpayers and the Revenue Authorities, to say nothing of the heavy costs of the assessment and collection of the tax.

For these reasons it would be very desirable if the question of taxing foreign shipping could form the subject of further investigation before passing final legislation in the different countries with reference hereto. The best plan would be if attempts were made at arriving at an international arrangement, by which the States mutually bound themselves not to place any obstacles in the way of foreign shipping by taxing the profits of the same, no matter whether the tax refers to Municipalities or to States.

We believe the question of such an international arrangement would more especially adopt itself for discussion at an international conference, and if such a conference were to be proposed by one of the leading sea-faring nations we would consider it to the advantage of all parties interested in the shipping trade.

  1. The Secretary of State received identic notes dated June 16 and June 17, 1920, from the Swedish and Norwegian Ministers, respectively; for further correspondence, see vol. ii under Norway, p. 635, and Sweden, p. 875.