Hong Kong.
Java..

Port Said.
London.

Amsterdam.

Antwerp.

Hamburg.

Liverpool.

This voyage is singularly free from liability to taxation, as the only Port at which tax is levied outside the United Kingdom is Java, but it only shows the potentialities for taxation in countries in which the system has not yet been adopted.

Further, shipowners dislike intensely the obligation to disclose to a foreign Government the most intimate details of their business which is necessarily involved in such a system as this. Members of this Association report that they prefer to pay the full duty on 10 per cent. of the gross homeward freights from South Africa, even though it involves a loss in comparison with paying only on actual profits, rather than submit detailed figures of the accounts.

One member of this Association was suddenly confronted with a claim for £100,000 tax in Java which was collected from his Agent, and though he was successful after six months' correspondence in recovering the whole of it, it illustrates the uncertainties to which the business may be subjected.

Another serious question with which shipowners and the Government are confronted is the long time that liabilities to British tax are kept open. Adjustments of United States of America tax involve readjustments of calculations in the United Kingdom, which affect the profits brought into average for a period of at least three years.

With regard to the alternative system, i.e., levying tax on a proportion of freight and passage money, the Association regard this as unjust in itself and unfair in its incidence.

The following is a list of the results of six consecutive voyages during the present year in the Australian trade submitted by one of the Lines, members of this Association, showing a loss on the six voyages of £102,545:

-

The foregoing figures make no allowance for depreciation. It will be seen that the loss on the six voyages is approximately equal to the total outward earnings and 40 per cent. on the total earnings, whilst every £1 disbursed involves a loss of 58. 9d.

During the same year the company in question has paid over £9,000 in Federal and a similar sum in State taxation in Australia. In addition it is understood there is a liability for dividend tax, as one of the companies in question has been called upon to lodge annually a summary of share capital and a copy of the last balance sheet, but no assessment has yet been made in this connection.

Further two lines, members of this Association, have been called upon to lodge returns in the Commonwealth for the purpose of War Profits Tax (which is another name for Excess Profits Tax) on profits which have already borne Excess Profits Tax in the United Kingdom. The question was not raised by the Commonwealth authorities till 1922, after all questions of Excess Profits Duty in the United Kingdom had been settled up and disposed of, and it is not yet definitely known whether a claim will be pressed. If liability is established the whole question of United Kingdom Excess Profits Duty will be reopened from the beginning and probably also the assessments for Income Tax for the same period.

The amount paid in Federal and State taxation by another Company are £6,500 Federal and £6,100 State taxation.

The injustice of taxing British shipowners for the privileges of carrying cargoes from Australia at a loss would appear self-evident.

The figures contained in the foregoing table may be taken as fairly representing the state of trade at the present time.

The system of taxation on gross homeward freight and passage money seems to be based on the assumption:

First-that profits bear a strict relation to turnover, and secondly, that the profits on a homeward voyage can be separated from the profits on the outward voyage.

Both of these hypotheses are demonstrably false.

At the present time British shipowners are, as has been shown, heavily taxed in the Commonwealth of Australia on profits which are entirely non-existent.

The system has the sole advantage in that it does not involve the enormous labour and expense entailed by the system of ascertaining true profits, and where the tax is collected on the spot from ship's agent or master the labour entailed on the shipowner is relatively small.

On the other hand, the system is not uniform either as to the basis of tax or mode of collection, and the difficulties of ascertaining the amount of relief to which the taxpayer may be entitled are comparable with the difficulties of ascertaining profits entailed by the true profits system. For example, in some countries the tax is levied on gross freight, in others on gross freight less a certain proportion of expenses. In some the rate of tax is graduated according to the amount of freight carried in a year. In some it is collected on the annual return made by the shipowner; in others it is collected on the spot.

This want of uniformity causes great labour and expense to the ship

owner.

As an example, one shipowner, a member of this Association, has vessels which trade to the following parts of the world, in all of which tax is levied and he has to make a separate computation for tax in each country:

(1) British India, including Aden and Perim.-Tax ascertained on apportionment of actual trading results.

(2) South Africa.-Tax calculated on 10 per cent. of gross homeward freights.

(3) Kenya (now abrogated).-Tax calculated on 10 per cent. of gross homeward freights. Graduated tax from 1 per cent. up to 25 per cent. over £15,000.

(4) Barbadoes.-Five per cent. on gross homeward freight. Graduated tax from 2d. for first £200 to 1s. for over £1,000.

(5) Trinidad.-Five per cent. on gross homeward freights. (6) Kingston, Jamaica. Five per cent. on gross homeward freights, subject to an allowance for a proportion of operating expenses. (7) St. Kitts.-Tax graduated from 1d. to 1s. on percentage of gross homeward freights.

(8) Grenada.-Tax levied on percentage of homeward freights, subject to an allowance for proportion of operating expenses.

(9) Australia.-Commonwealth tax on 10 per cent. of homeward freights and State Tax in addition.

Of the above, Australia alone collects the tax on the spot; in all the others an annual return is made to the Colony, and in cases where the tax is on true profits or is graduated or is subject to a deduction for operating expenses, the labour is correspondingly increased.

The chief difficulty inherent in the system of taxation on freights and passage money is, however, due to that of ascertaining for the purpose of relief the appropriate rate of tax corresponding to the rate of tax in the United Kingdom.

Annexed will be found copy of a statement prepared by one of the Income Tax inspectors for the purpose of calculating the Dominion rate of Income Tax, substituting symbols for actual figures. The original document is more formidable; the symbols in many places representing seven figures.

The Auditor of the Company concerned has estimated the time occupied in collecting the material and compiling the statement at not less than a month to six weeks. It is necessary, therefore, to consider not only the loss to the shipowner but the expense to the country involved in these complicated calculations.

Furthermore, the statement only deals with four out of nine Colonies in which the Company has paid Income Tax. The remainder will be dealt with subsequently.

The trouble and difficulty of obtaining relief in respect of Australian tax is shown by the fact that only one member of this Association, so far as can yet be ascertained, has been so far successful in obtaining any relief. A further difficulty with regard to relief is that under English Law all relief has to be passed on to shareholders in calculating the tax deducted from dividends, involving further calculations and minute fractions in the rate of deduction.

It may be suggested that shipowners themselves do not pay the tax owing to the provisions for relief and also owing to the power of passing on the tax at once in the form of the increase in freights.

It is clear, however, that the provisions for relief are uncertain in their operation and largely illusory for following reasons:

(1) The relief does not represent the tax, but merely the rate of tax, and a small fraction only will be recovered if the amount of the tax represents a large proportion of the profits, so that the less the profits the less proportion of tax recoverable.

(2) Where there is an actual loss resulting in no liability for United Kingdom tax, no relief is obtainable.

(3) In some cases, as shown in the annexed statement, the rate is indeterminable.

(4) There is in any case great delay in obtaining relief. In the majority of cases no relief has yet been obtained for 1921 and 1922

(5) Any relief obtainable for isolated voyages is spread over the three subsequent years' earnings. The relief will be three years in arrear, and in some cases the Inland Revenue Authorities contend that in strict law no relief is allowable, though as a concession some relief is in practice granted.

The following is an extract from a letter from the Inland Revenue to one of the members of this Association, dated 13th July, 1923, on the subject:

66

66

"In strict law no relief at all would be allowable. Take for example the case of a concern making a single voyage to Dominion X "in 1920, its normal Lines running elsewhere. In 1920 British average no profits for Dominion X are included in the average; the profits "of the 1920 voyage come into average in 1921, 1922 and 1923, but "in these years there will be no assessment if the 1920 voyage was "an isolated one."

The absurdity of the whole situation is summed up in a letter received by a member of the Association from the Inspector of Taxes, an extract of which is as follows:

66

"The reliefs given are by reference to rates and not by reference
to amounts of tax. Thus it may happen that in any year :-

"In Dominion A tax of £100 is paid and relief is £10 only. "In Dominion B tax of £10 is paid and relief is £100 is allowable." The correctness of this statement is proved by the following three illustrations:

1. THE A.B. SHIPPING Co. TRADES WITH DOMINION X ONLY.

British assessment 1922/3 is 200000+200000+50000 = £150,000

3

Part Dominion profit average=150000+100000+20000

=

= £90000

3

In Dominion X the tax is based on the profit of the year of assessment, at 2s. in the £.

The chief cause of such discrepancies is the fact that British Assessment is on three years' average; most Dominions on preceding year (e.g. India. Australia, and New Zealand) or year of assessment (e.g. South Africa and Canada).

NOTE. The £150,000, £200,000, and £100,000 have all paid South African Tax.

t

It follows that shipowners cannot estimate the amount of relief or in fact count on any relief, and a state of uncertainty is introduced which is bad both for the shipowner and merchant. It tends to increase freights as the shipowner is bound to budget for the full tax owing to the uncertainty of its recovery.

On the question of the incidence of the tax, it is clear that this must ultimately be borne not merely by the country imposing it, but by a particular section of the community of that country, and in so far as the shipowner obtains relief and does not allow for that relief in the freight he charges, he is enabled to pass on a burden which in result he does not bear.

The position of the liner owner, of which this Association is almost wholly composed, is somewhat different from that of the tramp owner. The latter calculates all the expenses of a voyage, including the liability to taxation, before he accepts an engagement and is probably in an immediate position to pass on the full incidence of the tax.

The liner owner has no such choice, and in order to preserve his organisation and goodwill, built up in many cases by many years of energy and skill, is obliged to run his vessels, loss or no loss, at the best freights obtainable, and it is possible that a considerable time may elapse before he is in the same position as the tramp owner. It is obvious however that no business can be run indefinitely at a loss, and sooner or later he will be forced either to recover from the shipper in the form of extra freight and passage money the extra cost of the service or to give up business.

6th October, 1923.

F. RUSSELL ROBERTS,

Secretary.