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Norwegian Shipping Sector Up In Arms Over Tax Proposal

by Ulrika Lomas,, Brussels

11 September 2007

A proposed change to Norway's maritime tax system could leave the country's shipping companies owing billions of dollars in back taxes, it has been claimed.

Under the measures put forward in the 2008 government budget, income exempted from tax since the last change in the system in 1996 will now become taxable. Two-thirds of this revenue will flow back to the government over a period of ten years, with the remaining third to be spent on "environmental investments", with the intention of making the shipping sector more competitive.

The present system levies no tax on operating profit unless taxable dividends are paid to shareholders, or if assets are moved out of Norway. This has helped Norway to retain shipping companies and remain competitive as a location from which to conduct international shipping activities. However, shipping companies are outraged by the proposed change, which they say will hit their profits, throw investment plans into chaos, impede their ability to compete internationally, and ultimately cost them up to US$2.4 billion in back tax bills.

The new system will be presented on October 6, 2007 as part of the the 2008 fiscal budget, and is expected to be ratified later in the year, provided Parliament approves the budget.

Norway's BW Gas, a leading global provider of gas marine transportation services, says that, depending on the transition rules of the new system, it could pay between NOK3.8 billion and NOK4.8 billion (US$668,400 and US$844,300) in back taxes, equivalent to a present value of NOK20-25 per share.

"BW Gas chose to remain in Norway on the understanding that this would be a stable long-term system under which to operate. This latest proposal to cancel the current taxation system would be a dramatic reversal of that understanding, in spite of us honouring our commitment to invest in Norway," warned Jan Hakon Pettersen, CEO of BW Gas.

"We hope that the final details of the proposal will take into account the impact not only on individual companies, but on the entire Norwegian maritime cluster and the image of Norway as a dependable investment location," he added.

Another shipping company, Farstad Shipping, has stated that on the surface, the new tax system would have been positive for the company, but for the provisions to tax earnings which so far have not been taxable.

Since entering into the current system in 1997, Farstad says it has invested approx. NOK5.7 billion. An additional investment of NO4.7 billion is going towards expanding its fleet, but the company now says that these investments are dependent on the present tax system remaining in place, because they are partly financed by the capital now requested to be paid as tax.

"When Farstad Shipping in 1997 decided to enter into the current system, we had a strong intention to grow the company within a competitive Norwegian tonnage tax system. At that time we planned to be a long term operator within a stable Norwegian tax system," the company stated.

"The fact that the Government now proposes this tax to be paid, is by Farstad Shipping looked upon as an obvious breach of promise and a severe punishment to a company that has been loyal to the system and developed a strong and sound shipping company based upon the maritime cluster in our region and within the framework presented by the authorities. We are sorry to realize that entering into the current shipping tax system in 1997 seems to have been a wrong decision."

Farstad estimates that its back tax payments may reach as high as NOK1 billion, equal to NOK25 per share.

"It is obvious that the introduction of this tax payment will have serious consequences for the further development of the company. Our relative competitiveness will be severely hampered compared to competitors that are operating under other tax regimes," Farstad stated.

News of the potential negative effect of the maritime tax reform on shipping companies' balance sheets has also filtered through to the financial markets. On Monday, BW Gas's shares tumbled by more than 8% to NOK75 on the Oslo Stock Exchange, while Wilhelm Wilhelmsen's stock fell by 2% and Odfjell's shares dipped by more than 3%.

The government has argued that the proposed new tax system will "ensure competitive conditions for Norwegian shipping companies", but if the budget is approved with the proposals intact, many firms are expected to consider leaving Norway for more tax-friendly jurisdictions in the European Union or offshore.

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