Classification Societies as Tax Exempt Organizations

2015

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All major classification societies enjoy the status of being charitable organizations dedicated to public service with the stated objective of enhancing safety of life and property at sea and protection of marine environment.  

Many of them have declared themselves as nonprofit organizations and have been granted Tax Exempt Status by many countries.  Tax exempt status is granted to them with the provision that they would confine themselves to their stated public service objective and not stray into activities that are carried out by tax paying business organizations.

In pursuit of their objective the classification societies set standards called rules for building and classing the ships and also lay down requirements for surveys of ships after construction. When a ship is built to the rules of a classification society the ship is granted class and to maintain this class the ship should also comply with survey requirements, of the class, throughout the life of the ship.

As described by International Association of Classification Societies these societies are dedicated to safe ships and clean seas and make a unique contribution to maritime safety and regulation through technical support, compliance verification, research and development.

Considering their unique position and nonprofit character many flag states authorize these societies to carry out statutory surveys and issue certificates such as Safety Construction, Safety Equipment, Load line, pollution prevention etc.

They enjoy this special status with the provision that they restrict themselves to operating within the prescribed limits relevant to their stated objective and as laid down by statutory authorities (Flag States).  For example a class society cannot start a ship repair yard or become a ship chandler supplying provisions and stores to the ship as these functions are carried out by tax paying business organizations.  Of late, however, it is seen that some class societies in an effort to maximize their revenues are straying into activities prohibited to them.

ONE SUCH AREA BEING THE TESTING OF BUNKER FUELS SUPPLIED TO THE SHIP.

This activity involves supplying sample bottles to the ship, taking samples of the bunker fuel during transfer of bunkers, transporting them to a laboratory, testing according to already well-established international standard (not set by the society) and conveying the results to the ship and charging the fees for this service.

This service is already being provided for many years by a number tax paying companies. Class societies have not been involved in any research and development in this area or set any standards.  They just follow what others are already doing, sole purpose being to generate profits.

As classification societies they are in an advantageous position vis-a vis the shipowner (Whose ships may be classed by the society and statutory certificates issued by the society) they are able to influence the owner to choose the society for this service in preference to other providers of same service.

This in my opinion amounts to monopoly and unfair trade practices besides breaking trust reposed in them based on their assumed public service activities.  Further in many instances they club the fuel testing fee in their five year block fee for classification services thus hiding the price they are charging for this service.

The questions that come to mind are:

  1. Is testing of bunker fuels as they are supplied to the ship a part of classification rules? – The answer is NO.
  2. Is it a part of statutory requirements by the flag state? – The answer is NO.
  3. Has any flag state authorized them to do this testing on their behalf? – The answer is NO.

The conclusion therefore is that by offering the fuel testing service, already being provided by tax paying organizations, they are diversifying and operating outside of prescribed limits of relevant approvals granted to them.

I would request your readers to send their comments expressing their views on this issue.

R.C. Bhavnani

Vice-President,

Viswa Lab

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