Shipping’s Ugland House problem

Santosh Patil on shipping’s continued way of avoiding paying tax.

I’m not sure if many are aware of the infamous Ugland House, which reportedly houses over 40,000 entities in a single small building on the Cayman Islands, a British overseas territory.

According to the website ‘Ugland House Explained’, the sole tenant of the place is a ‘leading international law firm’. The website states that the ‘Offshore Vehicles’ registered in Ugland House ‘operate in a highly developed and stable regulatory structure, make a lasting and necessary contribution to economies and jobs onshore and play a crucial role in the worldwide economic recovery and growth as a whole’.

Yet, Barack Obama during his presidential campaign in 2008 had called it the ‘biggest tax scam in the world’.

Who created these tax havens?

According to a paper published in 2009 on Tax Justice Network titled ‘History of Tax Havens’, there are three types of tax havens – UK-based or British Empire based tax havens, European havens, and thirdly new tax havens from the transitional economies in South America and Africa.

A 2012 interview of Jamie Stern-Wiener titled ‘Britain’s Second Empire’ poses the question ‘Why, in the era of Wall Street hegemony, do close to half of global financial transactions still flow through territories linked to Britain?’ The Corporate Tax Haven Index 2021 includes 4 British Overseas Territories / Crown Dependencies amongst the Top 10.

Shipping too has its own ‘Ugland House’ problem which manifests itself as ‘open registers’, a nomenclature which attempts to mask the tax evasive nature of its clients who are amongst the biggest names in shipping. However not all open registers are necessarily ‘flags of convenience’.

During World War II Roosevelt could not ensure supplies to Britain with US flagged ships due to the Shipping Neutrality Act; so America conveniently allowed US owners to flag their ships in Panama paving the way for creation of ‘flags of convenience’.

Currently more than 70% of global shipping fleet in both gt and dwt terms is flagged with open registers. Today it is so pervasive across the shipping sector that these FOCs have become too large for any authority to even discuss, let alone question.

Most people in shipping have come to accept it as the way things operate best. There are many arguments mooted to support the FOCs, however it doesn’t change the fact that these are merely used for tax evasion and regulatory ease.

So why does it matter? Tax evasion is one key reason and flexibility of operations i.e. less regulatory burden. Let us look at some data points. Out of the 76 cases of crew abandonment listed on the ILO website for 2020, at least 57 ships were flagged with FOCs. The figures for 2021 are even more stark with 12 out of 13 cases in January & February 2021 alone. This indicates a clear proclivity to leave the crew to their fate when convenient without the fear of any regulatory action.

What tax evasion creates is a competitive disadvantage for companies who are registered in non-tax havens and pay significantly more taxes. This creates a vicious cycle, the more you evade, more profits you derive.

If one looks at Big Tech, we can find strong similarities where tax avoidance is achieved by means of registering in tax havens and often taking advantage of lax regulatory norms and little accountability.

The recent news report by a leading European financial publication on 130 countries agreeing for a global minimum corporate tax rate has this to say about shipping – ‘The global shipping industry has also benefited from an exemption because it is almost impossible to determine where entities are located’. Can this really be a reason to provide exemption?

This development, however, is not surprising as the previous OECD/G20 Inclusive framework on BEPS Progress Report July 2019 – July 2020 had clearly stated ‘The effect of nearly all bilateral tax treaties is to assign exclusive taxing rights over the profits of an enterprise from the operation of ships and aircraft in international traffic to the state of residence of the enterprise. This long-standing practice has its own rationale, and it is therefore considered inappropriate to include airline and shipping businesses in the scope of the new taxing right.’

An opportunity to bring transparency and accountability in shipping has certainly been lost.

One can only say – plus ça change, plus c’est la même chose.


  1. Excellent article – a lot more spotlight should be shone on the way shipping avoids paying tax. Amazon, Google and Apple learned all their structures from international shipping and yet it is only the tech companies that are mentioned in efforts to bring public awareness to this problem. Transparency in shipping? Not if the maritime community can help it.

  2. The writer is getting confused between perfectly legal tax planning and illegal tax evasion.

    While he may think it’s unfair that shipping laws allow this to happen it’s perfectly legal.

    While he waxes lyrical about Ugland House in the Cayman Islands he forgets the similar situations in the USA, Delaware, Wyoming and Nevada are well known states that are home to 10s of thousands of companies for tax reasons.

  3. With the recent tax developments, shipping at some point will get confronted with some kind of global minimum tax, same as aviation. This tax in the end will be paid by the end consumer and result in an increase of inflation, but this aside. The author is confusing tax avoidance with sub standard shipping. Since the introduction of Port State Control (PSC) the overall standard of “flags” has been improved. It is a misunderstanding that a Flag of Convenience (FoC) is equal to substandard shipping. All vessels over 300GT need to comply with SOLAS and this is being monitored by the flag as well as PSC. The Paris MoU white list consist of 39 flags (United States is listed as number 33). The top 20 contains 8 flags which can be considered as FoC and related to tax havens. It is obvious that the flags with substandard performance will have more deficiencies, including non-compliance with MLC (such as crew abandonment) otherwise they wouldn’t be substandard and black listed. Correlation and cause are often confused but they are not the same. Perhaps there is a correlation between certain FoC’s and non-compliance but it is not the cause.

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