The end of the US shipping tax exemption for Hong Kong
On 19 August 2020, the US State Department announced the “suspension or termination” of various agreements with Hong Kong, including the termination of the bilateral, US-Hong Kong International Shipping Agreement, which relates to the tax treatment of shipping income. This is the one of the most recent examples of the Trump Administration’s ongoing efforts to eliminate certain differential treatment of Hong Kong compared to the People’s Republic of China. The US State Department made the announcement following President Trump’s Executive Order 13936 (July 14, 2020) which, among other things, required the heads of relevant government agencies to give notice of intent to terminate the Shipping Agreement within 15 days of that Order. It is unclear at this time what the effective date of the termination is, or will be, but it is our understanding that public guidance is coming soon.
Although this may not be the most high-profile of the recent policy changes between the US and China, this US government action may have a significant impact on Hong Kong shipowners and operators as well as on shipping operations in Asia more generally.
In short, the termination of this shipping tax agreement means increased tax exposure for both Hong Kong and US-based shipping companies.
Under Section 883 of the US Internal Revenue Code (USIRC), a non-US shipping company (i.e., foreign shipping company) generally is exempt from US tax if its home jurisdiction grants a reciprocal, equivalent exemption for US companies.
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Dry bulk market: capesize segment ends week in a bang
The week ended with a flurry of Brazil fixing which is now hovering in the low $18’s – approximately a dollar up on last week. Vale were rumoured to have been active, taking possibly three vessels over 203,000 dwt, in the $17.50/17.65 region. Meanwhile there was less activity in the transatlantic market where the C7 and C8 routes came off a shade and the fronthaul was relatively static. The Ocean Cobalt (180,200-dwt 2008) which sailed from Mundra on 21 August, was rumoured fixed but no specific details emerged. In the Pacific the benchmark C5 route nudged up around a dollar to $8.11, with talk of Genco tonnage to Rio Tinto around $8.20 and possibly CCL tonnage to FMG at around $8.10 level for 12/14 September. Ore & Metals covered their tender for Saldanha Bay/Qingdao at $13.30 with 1.25 percent total for 13/24 September.
US Gulf soya bean exports appeared to come to the fore this week with talk in the news of strong volumes to come for the rest of 2020. Charterers principally opted for decent specification and Neo Panama fitted specification tonnage, altering the dynamic in the Pacific somewhat, and signalling firmer rates and sentiment aided by solid enquiry ex NoPac and Australia. This was highlighted by an 82,000-dwt delivery North China achieving $15,250 via US Gulf redelivery Far East. In comparison, it was something of a damp squib in the north Atlantic for most of the week as the Continent tonnage count grew.
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Trade talk gets dirty
With the US presidential race gathering a head of steam ahead of the November 3 polling day, China and trade with the eastern powerhouse have become battlegrounds for the two lead candidates.
In remarks delivered last week at the 2020 Council for National Policy Meeting, President Donald Trump stated that, if re-elected, his party will “permanently end” the US’ reliance on China.
The Democratic Party nominee Joe Biden kept the rhetoric on China to a minimum in his acceptance speech at the Democratic National Convention. He simply stated that the US will “never again be at the mercy of China and other foreign countries, in order to protect our own people”. He was specifically referring to medical supplies and the protective equipment that the US needs. That was the only reference to China in his entire speech.
Just a few days after Trump’s incendiary comments, US trade representative Robert Lighthizer and secretary of the treasury Steven Mnuchin took part in a much lower profile, but equally as significant, regularly scheduled call with China’s vice premier Liu He to discuss implementation of the phase one agreement of the Economic and Trade Agreement between the two countries.
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Refinery rationalisation shaping up future tanker demand
Shifts in refinery usage around the globe, is expected to make waves in the product tanker market. In its latest weekly report, shipbroker Gibson said that “refinery rationalisation is back on the agenda. With a prolonged weakness in refinery margins due to Covid-19 related demand destruction and an uncertain future for hydrocarbon consumption, many refiners have decided to throw in the towel, choosing to either sell, close, or convert their refining assets. The impact is not just in Europe, but global. Aging capacity in the United States, Asia and Australia is also under threat”.
The shipbroker added that “over the past few months, a number of refineries in Europe have been sold, announced plans to convert or are considering permanent closure. Total recently sold its UK refinery to Prax Group and is considering converting its Grandpuits refinery to biofuel production. Gunvor announced a review of its refining assets, whilst Lukoil’s Italian operation is also said to be at risk. Further plants are also rumoured to be analysing their options, although no public statements have been made”.
Gibson said that “in the United States, following Philadelphia Energy Solution’s (PES) decision to close its 300,000 b/d refinery prior to the Covid-19 pandemic, an increasing number of refineries – primarily in the West of the country – have been forced to evolve to changing demand conditions, however, increasingly this has been focused on switching to biofuel production. P66, Marathon and HollyFrontier have all announced plans to convert crude distillation capacity into biofuel production.