The Panamanian Registry: Flexibility and Simplicity

When we talk about open registries, it is unavoidable to mention of Panama.

Panama is presently the world leader in ship registries, and the path to become such a key player in the world merchant marine been long and difficult. This article reviews the general picture of the world fleet and the current trends vis-à-vis Panama’s ship registry.

Nearly 90% of world trade is moved by ships across the sea, representing nearly US$8.9 trillion. In the year 2004, world seaborne trade increased by 9% as compared with 5% in 2003 and 3% in 2002.

The fundamental role played by registries is to provide different nations with their own growth environment. Today, the difference between national registry and open registry is disappearing due to the dynamics of trade that makes shipowners seek the most advantageous alternatives to flag their vessels. Additionally, some open registries are not managed by the State but by companies.

Traditional maritime nations, such as the United Kingdom, Denmark, Norway, Spain and Portugal, have provided experience and tradition to some offshore flags, including the Isle of Man, Norwegian International Ship Registry (NIS) and those of Canary Islands and Madeira. This has been the realistic response of those countries to the demand for opportunities under the concept of open registries. This tendency is driven by the dynamics of trade that calls for registries to be more open and willing to offer incentives to make their fleets more competitive.

Studies developed by the European Union (EU) indicate that more than 64% of European shipowners have flagged vessels in countries outside the EU. However European shipowners control 40% of the world fleet.

If national flag registries wish to attract their own shipowners, they should offer guarantees and options that allow them to compete with vessels flagged in countries such as Panama. The problem currently facing Europe is that there is no harmony among the rules, regulations and laws on employment and social security.

In June 2006, the international press reported on conditions and experiences occurring among shipowners and other shipping interests and the need they have to be heard and taken into account. Their respective governments need to be able to model legislation and structures on ones that allow owners to maintain competitiveness and at the same time retain registry of their ships in their countries of origin.

Obviously, governments face the fact of justifying special treatment to the ship registry while denying it to other sectors. In view of this, traditional maritime governments usually decide to ignore the demands of shipowners and ship operators, practically forcing them to emigrate and register in countries where fiscal conditions are more beneficial.

At the same time, the shipping industry has faced regionalist practices, as in the case of the European Union that is continuously criticized for ignoring directives issued by IMO and choosing unilateral policies relative to the rest of the world. In fact, so much so, that Lloyd’s List recently published an article that disclosed the EU’s desire to penalize ships on the basis of flag and shipowner. Its plan is to deny access to ports in EU member countries depending on the results obtained from inspections by the Port State or the performance of the operating companies. This initiative unleashed the criticism of the European Shipowners Association which considered the EU position counterproductive.

Although the European Shipowners Association supports the plan to maintain strict control to remove substandard ships from European waters, they are inclined toward a policy that bans entry into the port exclusively on the basis of the ship’s record. The draft of the Port State Control section of the legislative package known as Erika 3 included this prohibition. Although it is very easy to change flags and owner, it is easier to maintain the individual record of each ship.

The Shipowners Association recognizes the importance of pressuring State flags to ensure they comply with their obligations. For instance, some detentions are formulated on the basis that do not involve any wrongdoing by the crew or the company; for example, detaining a ship immediately after arriving at port for damages sustained due to storms at sea.

The following is information on a series of countries and current conditions relative to the maritime regime, based on information, reports and articles published in Lloyd’s List and other international trade media.

France: The tonnage tax was put into effect early in 2003, following a battle with seafarers unions and a portion of the Parliament on new legislation and requirements for a new RIF (Registre Internationale du France). The RIF and the fiscal regime have served as models for the development of the French registry, including a new refinancing scheme that was in effect since 1998.

Nevertheless, after the defeat suffered by the government at the beginning of the year on a labour law covering people below 26 years, the initiative was brought to a halt. Additionally, the EU has intervened declaring non-operational the tax-lease system, a system that was a fundamental part of the registry to promote growth.

Japan: An Ad Hoc committee unanimously approved the introduction of a tonnage tax in the Japanese registry. The decision was made to ensure sustainable and competitive operations to Japanese ships carrying essential resources, including energy.

(Presently, there are 100 ships registered in Japan. This country is the principal source of the Panamanian registry.)

Denmark: The campaign started by the Danish Shipowners Association achieved the promise of a minister to study the Association’s proposals. The existing regime is only five years old and the proposals emerge at a time when the Danish government promotes Denmark as an important world class maritime nation. A document entitled Blue Denmark has been created in which no less than 70 proposals are presented to promote shipping activities. Currently, the industry is being consulted to implement such proposals. The high level of taxes creates difficulties to Danish shipowners, in addition to not allowing the employment of key personnel overseas.

In 2001, when the tonnage tax was introduced, the country was able to improve their international competitiveness. Many countries, however, have adopted the model. That was the case of Sweden, which is about to introduce the system, even including greater incentives than the Danish model.

(Denmark’s strategy covers three objectives: Converting the country into one of the most attractive in Europe for international shipowners, reinforcing conditions for the growth and competitiveness of the maritime cluster and maintaining the highest level of health, safety and protection of the environment to implement the highest industry standards.)

The Danish fleet will grow by 130% due to new orders from shipowners. Prestigious companies such as AP Moller-Maersk and J. Lauritzen have orders ranging from the largest containerships in the world to gas tankers, VLCCs and tankers.

Norway: The desired review of the current tonnage tax system requested by shipowners to the Norwegian government will not take place until the third quarter of 2006. The request to the Norwegian government renews and updates fiscal conditions and makes them equivalent to the rest of Europe. It was prepared by the more powerful shipowners, and is supported by industrial federations, unions and the business forum as well as by three marine unions and the Norwegian Shipowners Association, ports and the Maritime Forum. The study to revise the law could take several months or could take between 12 and 18 months to be put into effect.

(The Norwegian International Ship Register, NIS, has declined by 10% since the beginning of 2005 and by a third since 2000)

United Kingdom: Great Britain, usually known within the sector as the Quality Open Registry, has moved forward, taking advantage of the weaknesses of their neighbours. That is the case of Norway, for more than three years they have failed to respond to the requirements of shipowners and have, thus, set off an exodus from the Norwegian registry.

Presently, ship registrations have come from major Scandinavian companies, such as Maersk, Stena and Fred Olsen. The Norwegian company, Wilh Wilhelmsen, decided in June 2006 to register a recently built ro-ro ship in the United Kingdom. They had already flagged three ships with capacity for 6,350 automobiles – Toronto, Toledo and Torrens – and a fourth one with capacity for 6,500 units, the Morning Crescent. In August they added a 6,350-unit ro-ro that is operated from Southampton. In July they announced plans to register in Great Britain 12 newbuildings that have already been ordered.

(According to sources, there are 76 companies operating 816 ships under the British fiscal regime)

Ireland: The tonnage tax system was introduced in Ireland in 2002. Competition with other countries with the same fiscal regime is obvious; however, the government studied in detail the competition prior to formulating the new system. They opted for a transparent, flexible and competitive system to attract foreign investment in a direct manner, thus generating the interest of companies that communicated their willingness to visit the country to discuss new opportunities. The principal markets that Ireland wishes to attract are the U.S. and Asia. One of the objectives of the government is to maintain a fiscal regime until 2025. That affords stability, which is something that companies do not have in certain jurisdictions where they feel threatened by the uncertainty of over-regulated regimes. The Irish legislation does not contemplate applying the fiscal regime to yachts or super yachts.

(The Italian operator of tankers and dry cargo d’Amico is one of the large companies that have established themselves in Ireland. Although they maintain offices in Monaco, London, Singapore and Rome, management and control of the company are in Ireland.

(The main Irish attraction is a 12.5% rate, their stability and the fiscal and economic climate, in addition to specialized labour.)

Singapore: The Singapore Maritime Authority had made public their new Maritime Finance Incentive Scheme, which includes total tax exemption on qualifying income over the life of any ship acquired under the Approved Ship Investment Vehicles system. This means that any ship obtained and leased during two decades is exempt from paying taxes on that leasing. They hope that having the certainty of the incentive, investments on the maritime sector will increase.

The scheme establishes a concessionary tax rate of 10% on qualifying management-related income for Approved Ship Investment Managers for a period of 10 years
Tax exemption on qualifying income from both finance and operating leases derived by Approved Ship Investment Vehicles from:

Ship leasing activities to non-tax residents of Singapore
Leasing of vessels registered with the Singapore Registry of Ships
Leasing of foreign-flagged vessels operated by companies under the Approved International Shipping Enterprise Scheme

(Recently, the local and international market of financial institutions has shown interest in financing the maritime sector. The scheme of incentives, both in the public and private sectors, presents itself at the right moment, since the maritime sector is seeking new products and shipping companies are in search of alternatives to finance their growth. The impact of growth pursued by Singapore as an international maritime centre is achieved through the thrust provided to the development of financing activities on top of the activities offered by the auxiliary maritime sector.)

India: Due to the opening of cabotage operations in the country, Indian shipowners have lost markets and, therefore, have requested the government to provide them with some type of incentive, above all, fiscal. The introduction of the tonnage tax provided the shipping sector with comfort, but the maritime auxiliary services industry has been hurt by the introduction of new taxes on services. While the government is seeking new taxes, Indian companies must compete with foreign companies established in India for the same cargo within the same territory. Nationals, however, have to pay taxes while their foreign counterparts established in the country are exempted.

One of the observations made by the Indian Shipowners Association is that taxes on services should not be applied when services are provided in foreign countries, a common practice of many maritime nations. Similarly, personnel aboard should be exempted. Another demand is that maritime companies should be exonerated from paying interest on external commercial loans, as well as payments on charters to foreign shipowners.

Unfortunately, the maritime industry in India is facing an alarming reality – the scarcity of officers to navigate their ships. Indian officers, after having been trained locally, emigrate to foreign flagged ships attracted by tax-free salaries.

Another request posed by Indian shipowners is that the tonnage tax include gains from sale of ships, interest income and that taxed income be aligned with the same schemes observed in other maritime countries.

Spain: One of the reasons behind the decline of the Spanish fleet has been the new regulations that make it difficult to employ crews from countries outside the European Union for Spanish flagged vessels. The Spanish Shipowners Association (ANAVE) indicated that, unlike other European countries, Spain has not been able to capitalize on the two years of record freight rates to increase their fleet. During 2005, Spanish maritime trade increased by more than 8%, but after ten years of continuous growth, the fleet dropped by 3%.

Competitiveness and stability in the legal structure is fundamental and it becomes necessary for Spanish ships to have the opportunity to employ a percentage of non-European seamen and officers. Without that alternative, shipowners will be forced to flag their vessels in other registries. Nevertheless, ANAVE has reached agreements with the country’s major unions to open labour opportunities to foreign crews in Spanish ships. The government will work on new employment rules and procedures.

In 2006, ANAVE and the Merchant Marine Office have been able to place the Spanish flag on the White List of countries included in the Paris Memorandum of Understanding on State Port Control.

(On January 1, 2006, the Spanish fleet had 183 ships totalling 2.3 million gt; 3.6% down from 2005 levels. In addition to the national fleet, Spanish companies control 112 ships (4 million tb) in other flags. During the first semester of 2006, tonnage increased by 14%. The average age of the fleet is 14.5 years compared with the global average of 19.1 years.)

Italy: The leader of Italian shipowners, Tirrenia, has called for a new relationship between industry and the Italian government to re-establish competition in matters of maritime transportation. Italian shipowners want to expand and one of their objectives is for the Italian fleet to grow by 100% in the next decade. To achieve this, however, the Italian government should develop a clear and coordinated policy with regard to functional control lines and take urgent measures on the future of the Tirrenia line, which is subsidized by the Italian government.

Another request from the group of Italian shipowners is the creation of an Italian registry, only for ships operating internationally and in the cabotage market, as well as a new financial instrument, including a tax scheme on leasing to stimulate the future expansion of the Italian fleet.

This discussion and other requests from the shipowners were made at their annual meeting of the Italian Shipowners Association with the presence of the Italian Minister and Vice-minister of Transportation.

(The Italian shipowners have invested about US$21 billion in the expansion and modernization of the fleet. Currently, 40% of the Italian fleet is less than five years old. Nevertheless, they have not been able to exploit the market growth due to the competition they face.)

Mexico: With the new navigation law that was put into effect in Mexico in 2006, foreign shipowners have difficulty in operating in the Mexican cabotage market with ships not flagged in Mexico. Under the new legislation, foreign ships operating in the Mexican cabotage market will not be able to navigate freely in Mexican waters during limited periods and will need a special provisional license that will be renewed every three months. Once the special license is renewed seven times, the ship will need to register under the Mexican flag, or simply, leave the country. This new cabotage policy means that there will be more ships of foreign capital flagged in Mexico.

The law needed two years to be approved and will not affect extraordinary cases of ships considered essential for the development of key sectors of the country. This exempts more than 300 crew and supply boats operating in the oil industry in the Gulf of Mexico. Also, a new investment fund has been created to promote shipowners for domestic service. They are also studying the possibility of creating a port tariff to be applied to foreign ships in order to add capital to the fund.

Along with the cabotage restriction, a new measure introduced to stimulate new business is the creation of a discount system for Mexican ships docking at national ports. The Mexican Chamber of Shipping approves of the new measures because that means that in two years foreign shipping companies operating in Mexico will be forced to employ exclusively crews of Mexican nationality.

Belgium: The Belgian Shipowners Association maintains the dream of adding to the European Union’s power a Union Ship Registry. One of their arguments is that 64% of ships controlled by European shipowners is registered under other flags. But European shipowners control more than 40% of the world fleet. They indicate that unifying the European fleet under the European flag would make them the biggest world maritime block. According to the Belgian Shipowners Association, that would bring the possibility of pressing the world into following the maritime policy dictated by Europe.

In Belgium, the return to the national flag was achieved successfully. Belgian tonnage has surpassed that of Spain, Portugal, France and Holland, generating a 3% gain in direct employment. Since 2001 the value added has experienced a 65% increase. Due to the absence of harmony in fiscal matters and social security, however, they have failed to attract ships from flags other than those of the European Union.

Protectionism must be avoided and ships under the European flag should be in position to face the competition that shipowners using open registries, such as Panama’s and Liberia’s, represent. The attitude of European legislators has been considered arrogant by the international community and as a source of misunderstandings by the maritime industry. Those policies have many times produced disastrous results.

The Panamanian Registry

The success of the Panamanian registry is due to a fundamental reason, flexibility to resolve problems and find adequate solutions in every situation.

The fiscal regime applicable to the Registry guarantees ships, from the moment of registration, that the regime will not be changed in 20 years. Under the Panamanian registry, shipping companies do not pay taxes on the basis of their operations or profit. Shipping companies pay an annual fee on the basis of tonnage and type of service provided by the ship. The payment of income taxes is precisely the item that makes the operation in other registries more expensive. For that reason, many shipping companies seek the open registry scheme to operate on a more competitive basis.

But that is not the determining factor. It is obvious that presently the majority of registries must comply with IMO regulations. Codes such as ISM and ISPS are obligatory. Then, what is the advantage of the Panamanian flag?

Actually, if we analyze costs compared with other flags, those savings are so insignificant that a shipowner or the financing entity of a ship does not seek savings of one or three thousand dollars. The shipowner wants simplicity, efficiency, flexibility, safety, trust, reliability, and above all, that the registry representative speak his language. Evidently, that flexibility is provided under a legal framework and has as a driving force the Panamanian maritime lawyers.

Maritime lawyers know the law, both national and international, as well as the maritime market. They perform as fusion points to link the administration with maritime reality. It is, therefore, possible to advance and create mechanisms that adapt to changing realities occurring in the market. The days when the shipowner had a ship and needed a mortgage to be able to send it to sea are far away. Today, the maritime business implies complex charter contracts, elaborate financing involving millionaire credits and collaterals and interrelated multidisciplinary operations of ships under different flags.

To deal with a foreign registry, know the telephone number, find the right department, get to the point of contact are extremely complex operations. In the case of a ship under the Panamanian registry, it suffices to visit the nearest consulate to obtain what is necessary. The service culture provided by the Panamanian flag and the simplicity of steps make Panama one of the favourites.

One of the most important programs ever designed in the Panamanian merchant marine is already in progress. In a few months the registry will be modernized and automated. During the 2006 Posidonia Conference, in Greece, the maritime industry was informed that beginning in 2007, Panama will issue new identity books to seafarers and officers. Complaints about delays in issuing those documents will be in the past. Indeed, with the new mechanism and equipment, it is foreseen that in about ten days the final document will be issued to the interested party. Using the modern biometric I.D. system, Panama will issue approximately 400,000 marine books in 2007.

In the same manner, the merchant marine will be completely computerized, which means that the system will be much more simple and fast. The most complete data base that any merchant marine can have will be created. The Panamanian model will be worthy of any first world merchant marine.

The bidding to award the modernization and automation contract was managed, at the request of the Panama Maritime Authority, by the United Nations Development Program (PNUD) because of their prestige, neutrality and transparency. The PNUD prepared the call for tenders and selected three of their own experts to evaluate proposals. The contract was awarded to INDRA, a Spanish company of international repute in computer technology. The company proposed implementing the program in five years at a cost of US$13.4 million and obtained the highest punctuation (83.67 points of 100) among contestants.

With a presence in more than 50 countries, INDRA specializes in high technology, having developed air traffic control systems, aircraft simulators, air defence networks, ticketing and traffic control on highways. The project of modernizing the Panamanian maritime administration includes the development of software, design and implementation of biometric information certificates with high levels of security, hardware service and the operation of a call centre 24 hours and 365 days.

The 77 merchant marine consulates operating worldwide, as well as the four regional centres operating in Panama, Manila, New York and London, will be connected into this system, which will improve efficiency and expedite work relative to the merchant marine and seafarers.

Also, the system will expedite the payment and registration of fees and services provided by the registry, leaving behind omissions and delays in these procedures. Problems such as occasional loss of documents certifying payment of fees and services will be something of the past, with the elimination of the risk of duplicate payments.

The new system contemplates offering access to users of the Panamanian registry – both shipowners and operators and their legal representatives – to certain type of information of public domain. Additionally, delays caused by different working hours at consulates or because of holidays in Panama will be eliminated.

During my years of experience, I have observed that the shipowner demands systems that allow him to be competitive and provide him with the best service. Also, the shipowner is resistant to governments that take them by surprise with the implementation of new regulations. They like to be consulted and, above all, they want that new rules represent a benefit more than a waste of resources. They know that many of the directives demanded are due to international conventions and that they will have to comply with them wherever they go.

If we analyze the above information, we see that the objective of grouping a tonnage majority in a registry is something that Panama has already achieved. Panama is a leader in the world merchant fleet and has a unequal capacity to influence the fleet. Additionally, Panama offers not only cost benefits, but flexibility, skills and professionalism in legal matters of the first order. On top of that, it offers the security that a stable regime is able to provide when it keeps in contact with users.

Throughout more than 80 years of service, Panama has played a principal role, from a safe flag for the transportation of food to a war ravaged Europe to the stability of its registry. Financial institutions have trusted the Panamanian flag because of the security that it has provided at the moment of securing their loans. The flexibility of using crews of any nationality has provided many families of developing countries the certainty of having an income. This is what became clear when we analyzed the role of Panama in the world merchant fleet.

This article was published in the Panama Maritime Handbook 2006