Unless you are looking for brief, general information about which tax haven to register your freight ship or yacht in and how flags of convenience work, this probably isn’t going to be an interesting article to you.
What is a Flag of Convenience?
A flag of convenience (FOC) is to a ship what a tax haven often is to a corporation: a cozy place to call home, far far from where it actually is located. The term FOC is sometimes considered pejorative and the term open registry or open ship registry is instead used.
Jurisdiction over maritime vessels is a complicated matter that dates back hundreds of years. It is to this day one of the least transparent industries and freight ships and yachts account for billions of value in pure assets as well as goods shipped across the globe.
The concept of FOCs has been around for a long time, but it started its modern history in the 1920s when American ship owners grew weary of increased regulations and started registering their ships in Panama.
Advantages of FOCs
A ship registered under a FOC is subject to far more lenient regulations than common flags when it comes to things like taxation, ownership disclosure, and workers’ rights. This can lead to access to cheaper labour and less money spent on insurances and liabilities.
Flying a FOC can save a lot of money for a shipping company and enable transport of goods otherwise not possible.
It can also be associated with significant tax savings. By claiming that a ship is domiciled in a tax haven, it can sometimes bypass certain import and export duties or other taxation. Things like tax residence work a lot differently at sea.
Ships owned through FOCs often have almost impenetrably secretive ownership.
Disadvantages of FOCs
To the shrewd ship owner, there aren’t a lot of disadvantages to flying a FOC aside from reputational disadvantages, which in and of themselves can be a problem.
The disadvantages are mostly to the seafarers, for whom fewer securities are guaranteed by law when working on board a ship that’s registered in a FOC jurisdiction.
Workers’ protection laws and regulations are rarely enforced in open registries. Screening of workers is also more relaxed, which can affect shipowners as well as workers in that less qualified staff can be certified.
Criticism of FOCs
The International Transport Workers’ Federation is a global union with over 4.5 million members. It has a division just for maritime called ITF Seafarers.
The ITF Seafarers campaigns against FOCs because they see them as hurtful to the industry and safety of workers.
Another organisation, the Paris Memorandum of Understanding (Paris MoU) has criticized open registries, for example going so far as to blacklisting Panama. This blacklisting was removed after Panama took steps to improve conditions.
The ITF has identified 34 open registered or Flags of Convenience. In brackets, number of ships registered followed by how many of those ships are foreign-owned. These numbers only refer to larger vessels and should be seen as indicative only, since they rely on aged sources (via CIA Factbook) and fail to take into account the full scope of open registries. The real numbers are higher.
|Antigua and Barbuda||1,257||1,215||97%|
|Faroe Islands (FAS)||37||28||76%|
|France (French International Ship Register)||162||151||93%|
|Germany (German International Ship Register)||142||95||67%|
|São Tomé and Príncipe||3||2||67%|
|Saint Vincent and the Grenadines||412||325||79%|