Howard Lutnick, the newly confirmed US secretary of commerce, said during a televised Fox interview on Thursday morning, “Donald Trump has announced the External Revenue Service and his goal is very simple: to abolish the Internal Revenue Service and let all the outsiders pay.
“I’ll give you an example: cruiseships. You ever see a cruiseship with an American flag on the back? They have flags of Liberia or Panama. None of them pays taxes. Every supertanker — none of them pays taxes.
“This is going to end under Donald Trump,” said Lutnick. “Those taxes are going to be paid.”
Within moments of his comments, cruise stocks plummeted. At their lows on Thursday morning, the aggregate market cap of the four US-listed cruise companies — Carnival, Royal Caribbean, NCL and Viking — was down $15.4bn, an average of 10%.
Cruise stocks are “getting crushed” by “Lutnick’s misinformed tax comments”, wrote Stifel analyst Steven Wieczynski, who called it “a massive overreaction”.
Cruise shares traded back up after the initial plunge as investors saw a buying opportunity. But even so, the aggregate market cap of the four US-listed cruise companies closed the day down $9bn, an average of 5%. Trading volume in Royal Caribbean stock was over four times the 30-day average on Thursday, with Carnival and NCL at 2.5 times average volume.
Any Trump administration policy that involves cruising would ensnare commercial shipping as well.
According to Wieczynski, “From a tax standpoint, the cruise industry is embedded under the cargo industry in the eyes of the Internal Revenue Service. That would mean the entire cargo industry would have to be turned upside down even before they got to the cruise industry, which is a sliver of the size of the cargo industry.
“We have seen this story play out before,” wrote Wieczynski. “This is probably the 10th time in the last 15 years we have seen a politician or other [Washington] DC bureaucrat talk about changing the tax structure of the cruise industry. Each time it was presented, it didn’t get very far.”
He doesn’t see it happening this time either — he thinks Lutnick made comments “off the top of his head” — but there’s a caveat. “Could we be wrong? Sure, because the Trump administration is doing things very quickly and taking a much different approach versus other administrations.”
Trump gave his view of the foreign-flag shipping industry in December, when he was president-elect and came out in support of the International Longshoremen’s Association, the union of dockworkers at US east and Gulf coast ports. Trump dubbed container liners “foreign companies” with “record profits” that are “looking for every last penny”.
Current tax exemption
Shipping income from non-Jones Act cargo services is exempt, in certain circumstances, under IRS Section 883.
Shipowner annual reports include boilerplate language that “shipping income that is attributable to transportation that begins or ends, but does not both begin and end, in the United States will be considered to be 50% derived from sources with the United States. The company was exempt from taxation on its US source shipping income under Section 883”.
The tax rate is 4% prior to deductions, and shipping companies state in their filings that their charter parties require the charterer to pay if there is no exemption.
There is also the general warning: “Future tax law changes may result in significant additional taxes to us.”
The Section 883 exemption applies to shipping companies that have at least 50% ownership in countries that provide an equivalent exemption, or a stock that is traded in one of those countries, or the US.
External Revenue Service plan
The External Revenue Service plan espoused by Trump is largely about tariffs. Trump recently announced a sweeping reciprocal tariff plan that could go into effect as soon as April. The US commerce secretary has now confirmed that the External Revenue Service is about taxes, as well.
The general concept is that the US charges foreign entities for the privilege of US market access, and the US government uses revenue from foreigners to offset lower taxes on US citizens. “Americans’ tax rates are going to come down,” maintained Lutnick.
From the perspective of basic shipping economics, it could work out differently in practice.
Tariffs would be to some extent absorbed by currency depreciation of exporting nations, as well as lower margins for exporters and importers, but beyond that, tariffs would theoretically translate into higher prices for US consumers, with tariffs serving as a backdoor consumption tax. The largest-volume buyers of containerised consumer goods are lower- and middle-income Americans.
If there is a new tax on foreign-flagged vessel operators carrying US imports and exports, the charterer would pay in the case of tramp trades and the cost would presumably be passed along to the container shipper in the case of liner trades.
To the extent higher tax costs could not be passed along, vessels are mobile and move to the markets where they earn the highest margins.
If a new US tax reduced margins for shipowners serving US trades, more vessels would theoretically shift elsewhere, reducing competition in US trades and increasing rates paid by cargo shippers, which would in turn be passed along to consumers and exporters.
- Greg Miller/ Lloyd’s List
