Concept of Ship Registration

Yi-Chih Yang Associate Professor, Department of Shipping and Transportation Management, National Kaoshiung Marine University, Taiwan Content

„ Identification of Flag „ Concept of National Flag „ Classification of Ship Registration „ Features and Advantages of FOC „ Features and disadvantages of Flagging out „ Current Status of National Flag & FOC 1. Identification of Flag

„ A flag demonstrates the allocation of a nationality to a vessel, and the assumption of exclusive jurisdiction and control by a state over the vessel (Ready, 1994). „ Each state shall fix the conditions for the grant of nationality to ships for the registration of ships in its territory, and for the right to fly its flag. „ There must exist a genuine link between the State and the Ship, hence the State must effectively exercise its jurisdiction and control in administrative, technical and social matters over ships flying its flag. (High Seas Convention, 1958) Elements of Genuine link between Ship and State

„ The merchant fleet contribute to the national economy of the country; „ Revenues and expenditure of shipping, as well as purchases and sales of vessels, are treated in the national balance of payments accounts; „ The employment of nationals on vessels; „ The beneficial ownership of the ship. (UNCTAD, 1978) 2. Concept of National flag

„ According to Greek Shipping Law, for a vessel to obtain Greek nationality and at the same time be recognized as Greek, she has to have to Two elements: 1. She should owned by Greek nationals or a Greek legal entity to a percentage exceeding 50% 2. She should be registered to a Greek ship registry. China’ s Registration

1. Ships owned by citizens of the PRC whose residences or principal places of business are located within Chinese territory; 2. Ships owned by enterprises with legal person status established under Chinese laws and whose principal places of business are located within Chinese territory; if foreign investment is involved, the proportion of the registered capital contributed by the Chinese investors shall not be less than 50 percent; 3. Ships owned by Chinese Government and public organization; 4. Other ships for which the Bureau of Harbor Superintendence deems that registration is necessary. USA registration

1. An individual who is a citizen of the United States; 2. An association , trust, joint venture, other entity; 3. A partnership whose general partners are citizens of the United States, and the controlling interest in the partnership is owned by citizens of the United States; 4. A corporation establised under the laws of the United States or of a State, whose president or other chief executive officer and chairman of its board of directors and citizens of the United States and no more of its directors are non citizens than a minority of the number necessary to constitute a quorum; 5. The United States Government; or 6. The Government of a States. 3. Classification of Ship Registration

1. Traditional registration or Restricted registration are those where there are direct economic, administrative and jurisdictional links between the ship and the state of register. 2. Open registration are those where there is no economic links and the administrative/ jurisdictional links are much looser. 3. Offshore or dependency registration where ships are registered in territories whose general administration rests with the parent state, but the detailed regulations may be established by the location legislators (Bermuda, Cayman islands, Hong Kong, Isle of Man, Kerguelen island. „ Ship registries fall into three broad categories: closed and open registers. 1. Closed registers restrict flagging only to nationals, in that a German cannot register his ships under the Russian flag. Closed registers set requirements on ownership, management and manning of a vessel to be registered. 2. Open registers are accessible to any shipowner regardless of nationality. For example, the United Kingdom is an open register in that an American shipowner can register his vessels under the British flag. 3. Alternative or international registration where economic links between ship and state of registry continue to exist the jurisdictional and supervisory role of the registry state is maintained. -- Goulieloms(1998). 4. Features and Advantages of FOC

„ 4.1 Features of FOC „ United Nations has characterized flags of convenience as shipping "under which there exists no genuine link between the State and the ships and, in particular, under which the State does not effectively exercise its jurisdiction and control in administrative, technical, and social matters over ships flying its flag." „ Dr. Boczek (1962) argued that A “flag of convenience” can be defined as the flag of any country allowing the registration of foreign-owned and foreign-controlled Vessels under conditions which for whatever the reasons are convenient and opportune for the persons who are registering the vessels „ FOCs were designed to provide adequate flexibility in legal matters, in finance structure, in crew nationality and qualifications, in manning requirements and tax regimes (Spruyt, 1994). „ The country of registry allows non-citizens to own and control its merchant ships. 1. Access to the registry is easy, as well as the transfer from it. Both transactions can usually be handled by the country’s consulate abroad. 2. A ship’s income is taxed at low rates or its tax exempt. A registry fee and an annual tonnage fee are normally the only charge made. 3. Manning by non-nations is freely permitted. (Abrahamsson, 1980) FOC countries

„ The Organization for Economic Cooperation and Development (OECD) identified the following as FOC countries: The Panlibhon group (Panama, Liberia, and Honduras), Costa Rica, Lebanon, Cyprus, Malta, Somalia, Morocco, San Marino, Haiti, and Sierra Leone. „ The International Transport Workers' Federation added Antigua and Barbuda, Gibraltar, Sri Lanka, and Vanuatu to the list „ International Trade Federation also considers the Cayman Islands, Seychelles, and Oman as flags of convenience. 4.2 Advantages of FOC

1. No restriction on capital flow, shipowner is easy to raise money with low interest for ship investment activities. 2. Tax exemption on corporate earning and seafarer personal income. 3. Business earning remittance back to Mother Company freely. 4. Enjoy cheaper seaman expense and vessel maintaining expense. „ Farrell (1984) insisted that three reasons are commonly put forward for the registration of vessels under FOC[5]:

‰ Acceptance of substandard vessels

‰ Fiscal advantages

‰ Avoidance of labor legislation „ Chen (2000) revealed the main factors of national fleet transferred into FOC stated as a following: ‰ Tax factor ‰ Operating cost factor ‰ Capital raising factor ‰ Operating navigation route and regional factors: including political factor, national defense needs, domestic river sailing, Cabot age and cargo, reserved system, operating route and regional factor, administrative efficiency factor and other factors. Six features common to flag of convenience countries

1. Allow ownership and/or control of their flag ships by non-citizens. 2. Permit access to and unrestricted transfer of ship registration. 3. Levy no or low local taxes on income. 4. Are usually small countries that depend on registration and annual tonnage fees for a substantial portion of their national incomes. 5. Permit manning of their flag ships by non-nationals. 6. Have neither the power nor the administrative machinery to effectively impose any government or international regulations or to control the shipping companies. Cost Expense comparison after ship acquisition for 1 year Unit: 1000 USD

Tax Crew Total Remark Expense Expense Korea 187 853 1022 Korea crew Liberia 11 542 544 Philippine crew NIS 18 542 560 Philippine crew 5. Features and Disadvantages of Flagging out 5.1 Features and Disadvantages of Flagging out „ Flagging out typically is an act by which the national flag registration of a vessel is cancelled/terminated, and a re-registration is effected under an FOC. (Sullivan, 1996) „ Flagging out is an operational decision of certain shipowners aimed at streamlining operational costs and other conditions to those prevailing in competing third countries.(Haralambides, 1997) 5.2 Disadvantages of Flagging out for maritime countries

„ Flagging out diminishes number of ship or tonnage, marine labor employment, shipowning know-how, foreign exchange inflow and number of shipping companies located in a maritime countries (Goulieloms, 1998). 6.Current Status of National Flag & FOC

„ The 35 economics with the largest fleets registered under their flag accounted for 1033 million dwt corresponding to 92.42 percent of the world fleet. An increase of 0.4 % points. The top 5 registries together account for 49.3 %. and the top 10 registries account for 69.5 % of the world’s dwt. „ The largest flag of registration continues to be Panama, with 252.6 million dwt( 22.6% of the world), followed by Liberia(117.5 million dwt, 10.5 %). „ These two leading registries are followed by five flags with between 55 and 61 million dwt(close to 5 percent of the world fleet)each; they are Greece, Bahamas, Marshall Islands, Hong Kong and Singapore. „ Nationally flagged number of ships, the largest fleets belong to Japan(6447 ships), United States(6419), Indonesia(4477), China(3816) and Russian Federation(3461). „ The 10 largest open and international registries that cater almost exclusively to foreign-controlled ships are Panama, Liberia, Bahamas, Marshal Islands, Malta, Cyprus, Isle of Man, Antigua and Barbuda, Bermuda, and Saint Vincent and Grendaines.

Top 35 Fleets by Flag, January 2006

Gross tonnage GT (m) 1 anuary Average age No. of ships (millions) 2005 (ships) Panama* 6,838 141.8 131.5 18 Liberia* 1,653 59.6 53.9 12 Bahamas* 1,361 38.4 35.4 15 Singapore 1,977 31.0 26.3 11 Greece 1,491 30.1 32.0 23 Hong Kong (China) 1,128 29.8 26.1 12 Marshall Islands* 853 29.2 22.5 11 Malta* 1,220 23.0 22.4 17 China 3,590 22.2 20.4 23 Cyprus* 992 19.0 21.3 15 Norway (NIS second register) 629 14.2 15.4 16 Japan 6,842 12.8 13.2 15 11.0 Italy 1,539 11.6 22

Germany 894 11.5 8.2 20 United Kingdom 1,563 11.2 11.1 20 United States 6,472 11.1 10.7 25 South Korea 2,778 9.3 7.8 24 Isle of Man (United Kingdom 362 8.4 7.2 9