Article 3.3.1

149. As set out in Article 3.3.1, the income from the computation of a Constituent Entity’s International Shipping Income and Qualified Ancillary International Shipping Income shall be excluded from the computation of its GloBE Income or Loss, under the conditions provided in Article 3.3.

150. Any losses from the computation of a Constituent Entity’s International Shipping Income or Qualified Ancillary International Shipping Income shall also be excluded from the computation of a Constituent Entity’s GloBE Income or Loss for the jurisdiction in which that Constituent Entity is located.

Article 3.3.2

151. Article 3.3.2 defines International Shipping Income as the net income obtained by the Constituent Entity from the activities specified in paragraphs (a) to (f), except to the extent the net income is obtained from the transportation of passengers or cargo by ships via inland waterways within the same jurisdiction.

152. The primary exclusion is set out in paragraph (a). This paragraph excludes the profits or net income obtained by a Constituent Entity from the transportation of passengers or cargo by ships in international traffic in line with Article 8(1) of the OECD Model Tax Convention. For the purposes of the GloBE Rules, the term “international traffic” means any transport by a ship, except when the ship is operated solely between places within a single jurisdiction (regardless of whether such jurisdiction is the same jurisdiction as the one in which the Constituent Entity is located). This differs slightly from the definition in Article 3 of the OECD Model, which adds the qualification “and the enterprise that operates the ship or aircraft is not an enterprise of that State”. While these words are necessary for the proper operation of Article 8 of the OECD Model Tax Convention, the transport by a ship, when the ship is operated solely between places in a jurisdiction and the Constituent Entity that operates the ship is located in that jurisdiction, would also not be considered as international traffic for purposes of the GloBE Rules.

153. Consistent with paragraph 4 of the Commentary on Article 8 of the OECD Model Tax Convention, this exclusion applies whether a ship is owned, leased or otherwise at the disposal of the Constituent Entity. For example, the exclusion would include income from the transportation by a ship in international traffic where the Constituent Entity is the lessee of a ship under a bare boat-chartering-in arrangement. The exclusion does not apply to the profits from towing or dredging activities but it would apply to the profits from transportation of passengers or cargo in international traffic by offshore service vessels.

154. Paragraphs (b) to (e) make explicit the statements in the Commentary on Article 8 of the OECD Model Tax Convention that the category of profits that fall within Article 8(1) in respect of the operation of a ship also benefit from this exclusion.

155. Paragraph (b) provides that, consistent with paragraph 6 of the Commentary on Article 8 of the OECD Model Tax Convention, the exclusion also applies in respect of the transportation of passengers or cargo by ships operated in international traffic under slot-chartering arrangements. As explained in the example in paragraph 6 of the Commentary on Article 8 of the OECD Model Tax Convention, the net income derived by a Constituent Entity from the transportation of passengers or cargo otherwise than by ships that it operates is covered when that enterprise has some of its passengers or cargo transported under slot-chartering arrangements.

156. Paragraph (c) provides that, consistent with paragraph 5 of the Commentary on Article 8 of the OECD Model Tax Convention, the exclusion also applies to net income obtained by a Constituent Entity from leasing out a ship on charter fully equipped, crewed and supplied, for example a time or voyage charter under which a vessel and crew are hired for a voyage from a load port to a discharge port, provided the ship is to be used for the transportation of passengers or cargo in international traffic. To benefit from the exclusion, the lessor needs to demonstrate that the ship is expected to be used for the transportation of passengers or cargo in international traffic.

157. Paragraph (d) covers intragroup leasing of ships on a bare boat charter basis, for the use of transportation of passengers or cargo in international traffic, where the Constituent Entity is the lessor and leases out a ship to another shipping enterprise that is a Constituent Entity on charter without crew or master. This income is covered under Paragraph 5 of the Commentary on Article 8 of the OECD Model Tax Convention only if the leasing (whether or not intragroup) is an ancillary activity of an enterprise engaged in the international operation of ships. The leasing of ships on a bare boat charter basis is considered as international shipping income (instead of ancillary) for purposes of the GloBE Rules as an exception, under the condition that the lessee is also a Constituent Entity of the same MNE Group and has International Shipping income. Including this item of income ensures that the structure of intragroup transactions involving Constituent Entities of the same MNE Group does not affect the characterisation of International Shipping Income.

158. Paragraph (e) provides that the exclusion also applies to net income obtained by a Constituent Entity from the participation in a pool, a joint business or an international operating agency for the transportation of passengers or cargo by ships in international traffic, which falls under Article 8(2) of the OECD Model Tax Convention.

159. Paragraph (f) provides that the exclusion for international shipping also applies to capital gains (or losses) on the sale of qualifying ships used for the transportation of passengers or cargo in international traffic, which would normally fall under Article 13 of the OECD Model Tax Convention. A minimum holding period requirement of 1 year is applied for the purposes of the GloBE Rules to prevent ship trading activities from qualifying for the exclusion. Ships that have been purchased with a view to reselling are usually recorded as inventory in the financial accounts under IAS 2, and gains (or losses) on the sale of such ships when the holding period is not met do not qualify for the exclusion. Legally owned ships used for international shipping operations are recognized as Property, Plant & Equipment assets in the financial accounts under IAS 16 if they are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period (IFRS Foundation, 2022[2]). Capital gains (or losses) on the sale of such ships recognized as Property, Plant & Equipment assets in the financial accounts would qualify for the exclusion provided that they have been recorded as being held for use in the financial accounts of the Constituent Entity for 1 year or more.

160. Finally, the last sentence of Article 3.3.2 provides that the exclusion does not apply to net income obtained by a Constituent Entity from the transportation of passengers or cargo by ships via inland waterways within the same jurisdiction, such as rivers, canals and lakes.

Article 3.3.3

161. Article 3.3.1 excludes not only International Shipping Income from the computation of GloBE Income or Loss but also Qualified Ancillary International Shipping Income. This means that the exclusion for international shipping also applies to net income from certain ancillary activities.

162. Article 3.3.3 defines Qualified Ancillary International Shipping Income. The ancillary activities identified in this Article are limited to those explicitly mentioned in the Commentary on Article 8 of the OECD Model Tax Convention (OECD, 2017[1]). To qualify for the exclusion, the income must be obtained by a Constituent Entity from the activities listed in Article 3.3.3 that are performed primarily in connection with the transportation of passengers or cargo by ships in international traffic.

Leasing on a bare boat charter basis limited to 3 years

163. Paragraph (a) of Article 3.3.3 covers leasing arrangements on a bare boat charter basis (as mentioned in paragraph 5 of the Commentary on Article 8 of the OECD Model Tax Convention) where a Constituent Entity leases out a ship as an ancillary activity to another shipping enterprise that is not a Constituent Entity on charter without crew or master (i.e. where the Constituent Entity is the lessor and the vessel is operated by another party, the charterer). For this purpose, a shipping enterprise is an enterprise that operates ships. See above the Commentary on paragraph (d) of Article 3.3.2 where the lessee is a Constituent Entity.

164. Paragraph 5 of the Commentary on Article 8 of the OECD Model Tax Convention provides that Article 7, and not Article 8, applies to profits from leasing a ship on a bare boat charter basis except when it is an ancillary activity of an enterprise engaged in the international operation of ships. The Commentary on Article 8 of the OECD Model Tax Convention does not provide for a time limit for that activity to be considered as ancillary. The three year time-limit condition in Article 3.3.3(a) is intended to limit the eligibility of this exclusion to income from bare-boat chartering-out by a shipping company with short-term over-capacity, and to prevent the exclusion being applied to income from long-term leasing arrangements. However, the three-year time limit is not intended to encompass what would be considered an ancillary bare boat charter as referred to in paragraph 5 of the Commentary on Article 8 of the OECD Model Tax Convention. The three year time-limit condition would not be met when the contractual arrangement provides that the bare boat is available to the lessee for a time period that exceeds three years. For that purpose, other bare boat charters of the same ship, concluded with respect to prior or subsequent periods, would need to be taken into account. If a contractual arrangement is agreed for a shorter period than three years, the facts and circumstances would be analysed to determine whether the total period of the charter has exceeded three years. For instance, the renewal of a two-year bare boat charter for another period of two years would be considered as exceeding three years. Therefore, income earned after the date of the renewal would not qualify for the exclusion. Whether the income earned before the date of the renewal would qualify for the exclusion would depend on the facts and circumstances.

Ticket sales for domestic part of international voyage

165. Paragraph (b) of Article 3.3.3 covers the income obtained by a Constituent Entity from the sale of tickets issued by other shipping enterprises for the domestic leg of an international voyage (as mentioned in paragraph 8 of the Commentary on Article 8 of the OECD Model Tax Convention). For this purpose, a shipping enterprise is an enterprise that operates ships.

Container leasing

166. Paragraph (c) of Article 3.3.3 covers the income obtained by a Constituent Entity from the leasing and short-term storage of containers, for example where the enterprise charges a customer for keeping a loaded container in a warehouse pending delivery, or from detention charges for the late return of containers (as mentioned in paragraph 9 of the Commentary on Article 8 of the OECD Model Tax Convention). For instance, a period of 5 days or less could be presumed to be short-term for this purpose. Facts and circumstances would, however, need to be taken into account to determine whether the storage was short-term.

Engineering maintenance and other services

167. Paragraph (d) of Article 3.3.3 covers the income obtained by a Constituent Entity from the provision of services to other shipping enterprises by engineers, maintenance staff, cargo handlers, catering staff, and customer services personnel (as mentioned in paragraph 10 of the Commentary on Article 8 of the OECD Model Tax Convention). As mentioned above, a shipping enterprise is an enterprise that operates ships.

Ancillary investment income

168. Paragraph (e) of Article 3.3.3 covers investment income where the investment that generates the income is made as an integral part of carrying on the business of operating the ships in international traffic (as mentioned in paragraph 14 of the Commentary on Article 8 of the OECD Model Tax Convention). This would apply to interest income generated, for example, from cash deposits or other short-term working capital necessary for the carrying on of that business. This would also apply to interest income on bonds posted as security where this is required by law in order to carry on the business; in such cases, the investment is needed to allow the operation of the ships at that location.

169. Enterprises engaged in the operation of ships in international traffic may also be required to acquire and use emissions permits and credits. Income derived by such enterprises with respect to such permits and credits where such income is an integral part of carrying on the business of operating ships in international traffic would also be treated as Qualified Ancillary Income, for example, where permits are acquired for the purpose of operating ships or where permits acquired for that purpose are subsequently traded when it is determined that they will not be needed.

170. Paragraph (e) does not apply, however, to interest income derived in the course of the handling of cash-flow or other treasury activities for other Constituent Entities regardless of whether such Constituent Entities are located within or outside that jurisdiction (centralisation of treasury and investment activities). Nor would it apply to interest income generated by the short-term investment of the profits generated by a shipping operation where the funds invested are not required for that operation.

Treatment of inland transportation

171. Under specific circumstances, inland transportation could be considered as ancillary to an international shipping income for purposes of the OECD Model Tax Convention (see paragraph 7 of the Commentary on Article 8 of the OECD Model Tax Convention). Inland transportation is, however, not covered as a qualified ancillary activity under Article 3.3.3 for the purposes of the international shipping income exclusion. Excluding income from inland transportation from the scope of Qualified Ancillary International Shipping Income mitigates the risk of competitive distortions, which could otherwise arise from including such transportation as a qualified ancillary activity under the GloBE Rules, between shipping companies that have vertically integrated such services as part of their international shipping operation and independent freight forwarding and land-based logistics service providers.

Article 3.3.4

172. Article 3.3.4 provides a limitation on the amount of ancillary income that qualifies for the exclusion. The rationale for the limitation is that ancillary activities should only qualify for the exclusion where they are providing necessary support to the primary activity of the international shipping operation.

173. The Qualified Ancillary Shipping Income for the jurisdiction that exceeds 50% of International Shipping Income does not qualify for the exclusion; the excess is included in the GloBE Income. The limitation applies on a jurisdictional basis. The Qualified Ancillary Shipping Income for the jurisdiction is the lesser of the total net income from qualified ancillary activities of all Constituent Entities located in the jurisdiction or half of the total International Shipping Income of such Constituent Entities. Applying the limitation thus requires that the net income of a Constituent Entity from its international shipping activities under Article 3.3.2 be computed separately from its net income from qualified ancillary activities under Article 3.3.3. The Qualified Ancillary Shipping Income for the jurisdiction in excess of the limitation must be allocated among Constituent Entities in the jurisdiction in proportion to the Qualified Ancillary Shipping Income of each of those Constituent Entities.

Article 3.3.5

174. Article 3.3.5 relates to the deduction and allocation of costs related to International Shipping Income and Qualified Ancillary International Shipping Income. Costs directly incurred by a Constituent Entity from the operation of an international shipping business should be allocated on a facts and circumstances basis to compute the net income of a Constituent Entity from its international shipping activities. Such directly attributable costs include items such as but not limited to:

a) The costs of operating the vessel:

• Employee costs (e.g. ship crew and management);
• Bunker (fuel) expense;
• Maintenance and upgrades (dry-docking);
• Terminal, stevedoring and port expenses;

b) The costs related to the use of the vessel:

• Depreciation expense for ships and other maritime equipment and infrastructure;
• Ship charter expenses;
• Leasing of shipping containers, cargo handling.

175. The list of costs provided above is provided for illustration purposes and does not affect the characterisation of the income generated by the Constituent Entity related to these cost items as International Shipping Income or Qualified Ancillary International Shipping Income.

176. Indirect costs (i.e. all costs that are not direct costs) should be allocated between a Constituent Entity’s international shipping income and other income on a formulaic basis in proportion to its revenues from international shipping over its total revenues. For example, assume a Constituent Entity accrues 80 of revenue from international shipping activities, 20 of revenue from qualified ancillary activities and 20 of revenue from non- qualified activities and incurs 30 of indirect costs for the Fiscal Year. The Constituent Entity should allocate 20 (= 30 x [80 / 120]) of indirect costs to international shipping activities, 5 (= 30 x [20 / 120]) to qualified ancillary activities and 5 (= 30 x [20 / 120]) to non- qualified activities.

177. International Shipping Income and Qualified Ancillary International Shipping Income are net income or loss amounts under Article 3.3.2 and Article 3.3.3 and are excluded from the computation of a Constituent Entity’s GloBE Income or Loss for purposes of Article 3.2, as provided under Article 3.3.1. Pursuant to Article 3.3.5, all direct and indirect costs attributed to a Constituent Entity’s International Shipping Income and Qualified Ancillary International Shipping Income that are deducted in the computation of such excluded income cannot be deducted in the computation of its GloBE Income or Loss. Read together, these provisions require a single adjustment to the Financial Accounting Net Income or Loss equal to the net income or net loss that is excluded from the GloBE Income or Loss computation. In other words, by separately computing the International Shipping Income and Qualified Ancillary International Shipping Income and then removing that net amount from the GloBE Income or Loss computation, the Constituent Entity already meets the requirements of Article 3.3.5 notwithstanding that the gross revenues and expenses from shipping activities were included in the computation of the Financial Accounting Net Income or Loss. For example, if a Constituent Entity receives 1,000 in fees for the transportation of cargo in international traffic and incurs 700 of costs in connection with those fees, its Financial Accounting Net Income or Loss would be 300 and its International Shipping Income would be 300. The Constituent Entity is not required to adjust the expenses taken into account in computing its Financial Accounting Net Income or Loss, but instead subtracts the amount of its International Shipping Income (300) from the Financial Accounting Net Income or Loss (300) to arrive at the GloBE Income (300 – 300 = 0).

178. To the extent that direct or indirect costs are attributable to income from qualified ancillary activities in excess of the 50% limitation under Article 3.3.4, those costs are taken into account in the computation of a Constituent Entity’s GloBE Income or Loss because the related income is included in the computation as well.

179. For example, assume a Constituent Entity engaged in international shipping has 200 of revenue from international shipping activities and 130 of direct and indirect costs related thereto, and thus 70 of International Shipping Income and 100 of revenue from qualified ancillary activities and 60 of direct and indirect costs related thereto and thus 40 of Qualified Ancillary International Shipping Income. The net income from Qualified Ancillary International Shipping Income exceeds 50% of the International Shipping Income by 5 (= 40 – [70 x 50%]) and therefore is not excluded from the computation of GloBE Income or Loss. The Constituent Entity reduces its Financial Accounting Net Income or Loss of 110 (= 300 revenues – 190 expenses) by (i) the International Shipping Income of 70 and (ii) the allowable Qualified Ancillary International Shipping Income of 35, for the purposes of computing its GloBE Income.

Article 3.3.6

180. Article 3.3.6 imposes a substance criterion in order to qualify for the exclusion. Article 3.3.6 is aimed at ensuring that the strategic or commercial management of all ships deployed in earning International Shipping Income is effectively carried on from within the jurisdiction where the Constituent Entity is located. This condition is consistent with how many shipping tax regimes are designed in order to establish an economic link between the shipping company and the jurisdiction of the shipping tax regime.

181. The strategic or commercial management of the ships concerned is limited to those deployed in earning International Shipping Income and must be effectively carried out in the jurisdiction where the Constituent Entity is located in order to qualify for the exclusion. For this purpose, the ships deployed in earning International Shipping income are those that are engaged in the transportation of passengers or cargo in international traffic, whether owned, leased or otherwise at the disposal of the Constituent Entity.

182. Whether the strategic or commercial management is effectively carried on from within the jurisdiction where the Constituent Entity is located should be determined on the basis of the relevant facts and circumstances, and taking into account all relevant factors depending on the item of income. The relevant factors take into account not only the strategic or commercial management activities of the ships concerned that are conducted inside the jurisdiction but also the strategic or commercial management activities of the ships concerned that are conducted outside the jurisdiction. The mere fact that a vessel is flagged in a particular jurisdiction is not a relevant factor in the determination of whether strategic or commercial management is effectively carried on from within that jurisdiction. However, as discussed below, the requirements imposed by a flag jurisdiction may be relevant to such determination in respect of the jurisdiction where the requisite activities are performed.

183. Strategic management includes making decisions on significant capital expenditure and asset disposals (e.g. purchase and sale of ships), award of major contracts, agreements on strategic alliances and vessel pooling, and the direction of foreign establishments. Relevant factors that demonstrate strategic management include location of decision-makers, including senior management staff, location of company board meetings, location of operational board meetings and residence of directors and key employees.

184. Commercial management includes route planning, taking bookings for cargo or passengers, insurance, financing, personnel management, provisioning and training. Relevant factors that demonstrate commercial management include the number of employees engaged in these activities in the jurisdiction, the nature and extent of the accommodation occupied in the jurisdiction, and the country of residence of key management staff, including company directors.

185. Under some shipping tax regimes, a management requirement is often applied in conjunction with a flag link, which means that ships and their owners have to abide by the conditions of the flag jurisdiction’s shipping register. Generally, the flag jurisdiction is responsible for making sure that ships flying their flag abide by the international conventions of the International Maritime Organisation and the International Labour Organisation that the flag jurisdiction has ratified, including maritime safety, pollution and other environmental impacts, as well as working conditions. Depending on these requirements a flag link may entail specific duties on the Constituent Entity to ensure that flagged vessels abide by such requirements. Where these responsibilities are imposed on and managed by a Constituent Entity, this may result in that Constituent Entity having a sufficient level of strategic management that is effectively carried on from within the jurisdiction where it is located. Similarly, where these responsibilities are imposed on and managed by another Constituent Entity located in the same jurisdiction as the Constituent Entity that derives International Shipping Income or Qualified Ancillary International Shipping Income, this may result in the Constituent Entity having a sufficient level of strategic management that is effectively carried on from within the jurisdiction where the Constituent Entity is located.