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08 May 2013
On July 5 2012 Norway and Poland ratified an amendment protocol to the Polish-Norwegian Tax Treaty 2010. Indications from the Norwegian Ministry of Foreign Affairs suggest that the 2012 protocol may become effective on January 1 2014.
The 2012 protocol aims to restore the tax exemptions for Polish workers on Norwegian ships which were in force before 2010. However, the Norwegian shipping market has shown little enthusiasm for the change, as there seems to have been limited take-up of the restored tax exemptions.
The 2010 treaty replaced the former Polish-Norwegian Tax Treaty 1977. Under the 1977 treaty, Polish seafarers were exempt from Polish tax when working onboard ships registered in the Norwegian International Ship Register, which were trading in international waters and managed from Norway. This resulted in Polish workers being exempt from tax in both Poland and Norway, as Norwegian domestic tax law provides no legal basis for taxing them.
For Norway, the purpose of the 2010 treaty was to introduce the 'credit method' for avoiding double taxation. However, a further feature of the 2010 treaty, which was apparently initiated by Poland, was the introduction of an exclusive right for Poland to tax Polish seafarers onboard ships registered in the Norwegian International Ship Register trading in international waters (Article 14(3)). The consequences of this change soon became clear to the shipping industry. Contrary to the position of seafarers onboard foreign vessels, income earned by Polish workers on ships registered in the Norwegian International Ship Register became subject to taxation in Poland. Consequently, many Norwegian shipowners chose to flag out their registered vessels.
Shortly after the 2010 treaty came into effect, the Norwegian Shipowners' Association took steps to amend it. The view held by the association was that the 2010 treaty regime discriminated against Polish workers on vessels registered in the Norwegian International Ship Register, as compared to Polish workers on foreign vessels.
Norway and Poland entered into negotiations, which were concluded on the signing of the 2012 protocol. The purpose of the 2012 protocol was to restore equal treatment of Polish seafarers, regardless of the flag of the vessel on which they are employed. According to the preparatory works to the 2012 protocol, this objective has been achieved by removing the provision in Article 14(3) that gave Poland the exclusive right to tax Polish seafarers onboard vessels registered in the Norwegian International Ship Register.
In order to avoid taxation in Poland, a new provision has been introduced (Article 22(1)(d)) whereby Polish seafarers are granted tax credits, provided that their salaries are exempt from tax under Norwegian law. Article 22(1)(d) refers to, and relies on, the application of the standard credit method provisions of the 2010 treaty. This in turn presupposes that tax has been paid in Norway. However, for Polish workers on board ships registered in the Norwegian International Ship Register, no tax is payable under Norwegian law and their salaries are exempt from Norwegian tax.
Thus, in practical terms, it is no longer possible to identify and calculate the potential tax credit amount based on the provisions of the 2010 treaty, as amended by the 2012 protocol. The Norwegian preparatory works simply state that according to Polish explanations, the new method satisfies the requirements of a specific Polish law allowance, which in turn leads to a tax exemption in Poland.
As the restored tax exemption for Polish seafarers onboard vessels registered in the Norwegian International Ship Register depends on Polish domestic law, it is debatable whether Poland can reintroduce unilateral taxation of these seafarers simply by amending Polish domestic tax law.
Further, although not mentioned in the preparatory works, it is likely that Polish seafarers will still be subject to advance payment of tax. The advance payment will be refunded to the Polish seafarers at the time of tax assessment (after approximately 18 months), unless they are granted an exemption.(1)
Unofficial numbers suggest that since 2010 some 50 vessels have been flagged out from the Norwegian International Ship Register, and there are 500 fewer Polish seafarers on registered vessels. This shows the dramatic effect that the 2010 treaty had on the Norwegian shipping market.(2) Fortunately, the impact of the new provisions appears to have been quickly recognised and the Norwegian authorities took steps to amend the 2010 treaty without delay.
However, the Norwegian shipping industry has expressed its disappointment over the fact that the 2012 protocol will not become effective until January 1 2014. Further, Norwegian shipowners which currently employ Polish seafarers are faced with the bureaucracy of seeking tax exemptions that are not applicable to their international competitors.
Looking ahead, it remains to be seen what impact the 2012 protocol will have and whether flagged-out vessels will return to the register; at present, there are few indications that this will happen. For the future, the ambition must clearly be to avoid further flagging out of Norwegian vessels and Norwegian shipping activities. This is best done by establishing and maintaining a tax regime that is competitive, efficient and predictable.
(1) Polish seafarers may independently apply to the Polish tax authorities for an exemption from the duty to pay advance tax. Although it is assumed that exemptions will be granted, no general exemption has been put in place.
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