With the help of ChatGPT Santosh Patil questions whether shipping gets the governance part of ESG.
Amongst the buzzwords you can find at various maritime seminars and conferences Environment Social and Governance (ESG) is the new omnipresent catchphrase.
If one scrolls over social media feeds, it’s difficult not to find posts by ‘forward thinking’ and ‘progressive’ shipping companies virtue signalling and stating how ESG ranks high on their agenda.
With increased regulatory compliances and decarbonisation being unavoidable, the environment aspect is a work in progress. Diversity, equality and inclusion also has gained reasonable traction with organisations expressly stating their eagerness to meet social parameters of ESG, although there is still a long way ahead.
However, the big ‘G’ of Governance is where the fault lines lie. Shipping’s complex ownership landscape and lack of transparency have been its defining characteristics for ages. Even the more ‘progressive’ large owners hide behind flags of convenience for taxation benefits while positioning themselves as leaders in governance matters.
ChatGPT, when asked “is tax avoidance a governance issue?” states: “Yes, tax avoidance can be considered a governance issue as it pertains to the proper functioning and regulation of the government’s taxation system. Tax avoidance is the practice of minimizing tax liability by legal means, often through exploiting loopholes in the tax code or taking advantage of discrepancies in tax laws across different countries. While tax avoidance is not necessarily illegal, it can reduce the amount of revenue that the government collects, which can have significant implications for public services and infrastructure.
“Governance involves the processes and structures by which decisions are made and implemented within a society, including by the government. In this sense, tax avoidance can be seen as a governance issue because it can undermine the government’s ability to effectively collect revenue and allocate it towards public goods and services. When corporations and individuals engage in tax avoidance, they are effectively reducing the funds available for public spending, which can ultimately impact the well-being of citizens and the overall functioning of the state.”
I then asked ChatGPT whether shipping has a governance problem due to tax avoidance?
Chat GPT: “Shipping is a sector that has been known to face tax governance issues related to tax avoidance. This is because shipping companies often operate across multiple jurisdictions and are therefore able to take advantage of discrepancies in tax laws between different countries to minimize their tax liability.
“One common strategy used by shipping companies to avoid taxes is to register their ships in countries with low tax rates, such as Panama or Liberia, and to conduct their operations from there. This allows them to take advantage of favourable tax laws in those countries, while still accessing the benefits of operating in other countries.
“In addition to flagging their ships in low-tax jurisdictions, shipping companies may also engage in transfer pricing, which involves shifting profits to subsidiaries located in countries with lower tax rates. This allows companies to minimize their tax burden in higher-tax jurisdictions, and can result in significant revenue losses for governments.”
AI views notwithstanding, a long-evolved ecosystem enabled by leading western countries which prevents open discussion on taxation has been shipping’s hallmark for long. A labyrinth of complex mechanisms involving multiple stakeholders operating in separate jurisdictions continues to define shipping operations worldwide.
The clout that shipping holds over governments across the world is such that even the OECD/G20 report excluded shipping from global minimum tax rates.
A 2016 journal paper entitles ‘The Effect of Corporate Governance on Tax Avoidance’ by Jon Kerr, Richard Price and Francisco Román states: “There is a causal link between the strength of governance systems and tax evasion. We also show that firms with higher reported governance engage in less tax avoidance. Overall, our results contribute to this growing literature by documenting that improved governance does appear to curb tax avoidance.”
Olaf Merk of the International Transport Forum opines in an earlier article in the Wall Street Journal on flags of convenience: “They guarantee no corporate taxes and limited requirements related to labor or transparency…. this structure is problematic for the enforcement of global shipping regulations as it depends to a large extent on the oversight of a small number of states that are favored registration locations.”
There is a reluctance even from leading shipping companies to work on this governance aspect and it doesn’t appear that it will change for a considerable amount of time.
While there is heightened focus on Environment and Social aspects, discussion on Governance is notably absent in almost all maritime and shipping conferences. Yet, governance is critical to drive both environment and social policies of any organisation.
Without governance how will a shipping company’s ESG vision sound?
“We embrace diversity and inclusion and are committed to protection of environment but will make every attempt to avoid paying taxes.”
The author should do his homework about what ESG is really about and how destructive it is to free enterprise and business and nothing but a political ideology. with under pinning’s of the likes of a Marxist/Communist control of business, Not to mention the angle within this article demonizing corporations leveraging tax opportunities globally. Do your research, leveraging tax opportunities basis a countries tax structure is not fundamentally wrong. and in fact, those tax structures aid the countries of origins that have more favorable tax structures than others. This is such a shallowly written opinion and under researched. Unless of course the writer’s agenda is pushing a political ideology and communist agenda.