One of the most important elements of domestic and international trade is transportation. In this context, approximately 90% of international trade today is carried out by sea. The maritime sector is one of the most important sectors that allow countries to open up and integrate with the world. The stronger this opening and integration, the higher the economic power of the countries. A developed shipbuilding industry in a country will lead to the raising of the standard of living in that country and will also enable the country to compete more easily in the international market. This development will serve as an example to other developing countries, and this interaction will continue.
So, where do we stand in this interaction? In our country, the transportation sector has been largely reliant on road transport for domestic (cabotage) transport (95%) and sea transport for international transport (85%). According to the IMEAK Chamber of Shipping 2019 data, 89% of our country’s foreign trade cargo is carried by sea. If we express this rate in terms of the value of the cargo transported, 61% of our export and import volume (approximately 238 billion dollars) is carried out by sea. 11% of this transportation is carried out by Turkish-flagged ships. This means that more than 3 billion dollars in freight is paid to foreign-flagged ships every year. Although the Eighth Five-Year Development Plan foresaw that at least half of the imported and exported goods would be carried by domestic ships, it has been observed that this plan has not been fully implemented by public institutions. One reason for the large-scale foreign-flagged ship usage in foreign trade transport is the preference for CIF shipping in imports, which results in foreign sellers mostly choosing foreign-flagged ships.
FAVORABLE FLAG ROAD TO THE TURKISH FLAG – TUGS
Looking at Turkey’s position in terms of its commercial ship transportation capacity in the world, in 2017, the total capacity of ships carrying the Turkish flag was approximately 8 million DWT, while the ships carrying the flag of the Marshall Islands had 216 million DWT and those under the Panama flag had 343 million DWT. As seen, “open flag” countries, thanks to the advantages they provide, not only have very large fleets, but are also more successful than our country and many others in growing these fleets. In order to remain competitive in ship transportation, our country has implemented the “International Open Registry” system, which provides similar advantages to those of easy-flag countries. In this context, in 1999, the Turkish International Ship Registry Law (TUGS Law) was accepted. The two main purposes of this law are to prevent local ship owners from turning to convenient flags and to attract foreign ship owners to Turkey.
To achieve these goals, in 1999, a secondary registry called the “Turkish International Ship Registry (TUGS)” was established in addition to the existing “National Ship Registry (MGS)”.
To make TUGS attractive to both local and foreign ship owners, the first move was to exempt from income and corporate taxes the earnings from the operation and transfer of ships and yachts registered in TUGS by locals and foreigners residing in Turkey and companies established in Turkey (except imported yachts).
Additionally, the buying, selling, mortgaging, registration, credit, and freight contracts related to these ships and yachts were exempted from stamp duty, fees, and bank and insurance transaction taxes.
These provisions are clearly regulated in the TUGS Law.
Salaries paid to personnel working on ships and yachts registered in TUGS are exempt from income tax (except for stamp tax) without nationality requirements, resulting in significant savings in crew costs. However, it should also be noted that this exemption does not apply to personnel outside the ship (such as company managers, office workers, etc.).
The owners of ships and yachts registered in TUGS are only required to pay registration fees and annual tonnage fees. If the ship or yacht is directly or dual-class registered with the Turkish Lloyd, a 50% discount is applied to these amounts (TUGS Law, Art. 12).
Thus, compared to income taxes (income or corporate tax), the tax burden on ships and yachts registered in TUGS has been significantly reduced. This lump-sum taxation regime has increased Turkey’s competitiveness with easy-flag countries. Indeed, the number of ships registered in TUGS has been increasing every year.
WHAT DOES “FLAG OF CONVENIENCE” MEAN?
A Flag of Convenience (FOC) refers to the practice of an owner operating their ship under the flag of another country. Several factors influence owners’ preference for FOC. The use of FOC was heavily utilized during World War II for ships crossing the Atlantic to avoid being sunk by German submarines, and after the war, it continued to be used to break the organized power of British and American maritime unions.
Today, approximately 75% of the world fleet, which totals 2 billion DWT, operates under flags of convenience. Currently, 79% of the Turkish-owned fleet operates under foreign flags, while the top five countries in terms of fleet size have the following statistics: Greece’s fleet of 401 million DWT, 84% of which operates under foreign flags; China’s fleet of 300 million DWT, 68% of which operates under foreign flags; Japan’s fleet of 257 million DWT, 86% of which operates under foreign flags; Germany’s fleet of 87 million DWT, 91% of which operates under foreign flags; South Korea’s fleet of 86 million DWT, 84% of which operates under foreign flags.
