There is wide range of tax incentives available for ship owners in order to encourage the investor to invest in the shipping industry. There are many schemes and models driven by the tax incentives to the ship owners. It is very important to assess the tax incentives with the investment along with the internal rate of return for the potential investment in the shipping industry. The tax allowance of the shipping industry is explained below:
Write down allowance: It is a reduction in taxable income on ship (assets) at special rates. The write down allowance reduces the company’s corporate liabilities. The allowance is offset against the profit before taxable income annually or semi-annually by either straight line method or reducing balance method of depreciation.
Accelerated depreciated allowance: This is the method of depreciation used for income tax purpose which allows depreciation more quickly during the initial phase. This form of allowance depreciates during initial period higher than the normal rate. For eg., Higher part of depreciation done during the construction phase of the ship.
Investment Allowance: This is the tax incentive available to the shipping industry to encourage capital investment. It permits the ship owners to deduct a some percentage of capital cost from the taxable income. It permits the ship owner to write down more than 100 percent of the cost of the vessel.
Investment Grants It is the grant paid by the institution/ Government to the company to help the ship owner to invest in ship. The investment grant has significant impacts on the tax liabilities since the asset depreciation is based on the asset value.
Tax free reserves The sinking fund in the shipping industry which is not taxed by the tax authorities. For egg. The dry docking fund set aside for the future dates will not be taxed
Interest payment It is the allowance for the ship owners in corporate tax liabilities by making a proper investment timing decision to take the advantage of tax allowance. Tax deferment flexibility to the ship owner gives a relief in interest payment during the period of trough market. Therefore it is necessary to analyse the market for investment especially spot rates and time charter rates.