For a number of years it has been possible for U.S. citizens to set up foreign corporations through which they would register ships in tax haven countries, primarily Panama and Liberia, and pay absolutely no taxes to anyone.
A number of European and Japanese shipowners seeing the advantage of this no tax operation have followed suit to the point where the traditional European merchant fleets have practically disappeared. These tax loopholes and the various government policies that have promoted these "runaways" have been developed by the "runaways" for their own interests.Professor Rodney P. Carlisle, in his book "Sovereignty for Sale," outlines in detail the origins and evolution of this runaway operation, which has contributed so significantly to the erosion of the U.S.-flag merchant marine.
To cover this very lucrative and unfair scheme, the runaway operators have continually advanced the false assertion that their ships are requisitionable by the United States and, therefore, under "effective" U.S. control in time of an emergency. A section of the Merchant Marine Act, 1936, states that ships owned by "citizens of the United States" may be requisitioned by the government in time of a national emergency. This act also defines "citizen of the United States" and according to that definition, these runaways are not U.S. citizens and are, therefore, not requisitionable.
The fact that the country whose flag the ship is flying has the final say on what that ship will do is never mentioned by those who claim the ships can be requisitioned.
When this question is raised with the Navy, it side-steps the issue by saying it believes the courts would give it the authority to requisition if asked. But this seems a very strange way to plan sealift in time of an emergency. If it were possible to get these ships - which it is not short of physical seizure - there are not enough U.S.-citizen seamen to man them. (The Department of the Navy, in a study just released, estimates a seafarer shortage if a mobilization occurred today and a larger shortage by 1992.)
The primary reason for this shortage in able-bodied seamen is the disappearance of a U.S.-flag merchant fleet, which was created in great measure by these runaways. The Navy's wish list of these runaways only contains approximately 20 of these ships. There are, however, some 500 engaged in the U.S. commerce that pay no taxes.
Over a year ago, the president offered his reform proposals for a simple tax system to promote fairness and growth. He recognized and addressed the public's perception that our system was riddled with loopholes and burdened by special tax privileges enjoyed by the favored few. Among these loopholes and special privileges are several enjoyed by foreign-flag shipowners, both Americans who incorporate and flag their vessels abroad to avoid taxes as well as basic U.S. safety and labor laws, and foreigners who flag their vessels in flag-of-convenience jurisdictions like Liberia or Panama to avoid taxes everywhere in the world.
A recent article in The New York Times by Gary Klott on the tax rewrite effect on multinationals said the following in regard to the change relative to the runaways:
"Multinational companies with shipping subsidiaries, which are typically registered in Panama and Liberia, will face a particularly harsh change in the tax climate. Instead of earnings from the shipping operations being tax-free, they will be taxed each year by the United States - even if the profits are not repatriated.
"'Shipping has now come full circle,"' said Eli H. Fink, an international tax partner at the accounting firm of Deloitte Haskins & Sells. `"Here was one of the few active business that generally did not pay tax to any country, and now it will be the least favored."'
These operators say that the tax change will only generate approximately $10 million a year, the implication being that the effort is worthless, revenue-wise. The Joint Committee on Taxation estimates the tax change will generate approximately $2 billion over a five-year period.
The operators also have warned that the payment of $10 million a year in taxes would put them out of business. This is equally difficult to believe. These runaways carry approximately 50 percent of our waterborne foreign trade, employ seamen at below international standards, yet they maintain they would be driven out of business if they had to pay an insignificant amount of tax. Clearly, the tax change will not put them at a competitive disadvantage.
The closing of these loopholes will not in itself automatically restore a U.S. fleet. It is necessary, however, that these unfair advantages be eliminated before a bulk fleet under the U.S.-flag can be developed. Their elimination will also narrow the tremendous advantage that the foreign-flag passenger ship operators have over a U.S. operation.
It is difficult to understand how the U.S. fleet, which currently carries 3 percent of our commercial cargo and relatively none of the passenger ship trade, will be harmed, because now its number one competitor will have to pay the same federal corporate income tax that it now pays. In short, the element of tax has been removed from the marketplace or, as President Reagan stated when he started this tax rewrite effort, "the playing field has been leveled."
House Chairman Rostenkowski and Senate Chairman Packwood and their cohorts are to be commended for their outstanding efforts in accomplishing what many thought was impossible.