Since the 1980s, flag states have taken various measures to maintain the number of ships in their fleets. At the forefront of those measures, the International Ship Registry has been formed to provide partial tax exemption to shipowners.  In Turkey, the Turkish International Ship Registry (TUGS) was formed in 1999. Despite such measures taken by the continental states, ship owners have established offshore companies and registered their ships under the registries of the island states called “Flags of Convenience".  Turkish shipowners, who thought that they had lost their competitiveness by operating ships in the TUGS registry, also quickly hopped in the bandwagon of those fleeing from the national flag after the 2008 crisis.  As of 2022, 82 percent of Turkish-owned ships are registered under foreign flags on the basis of tonnage.

Yet nowadays can we mention about complete absence of challenges to operate a ship that is owned by an offshore company and under Flags of Convenience?  Of course we can not but despite all the difficulties, offshore companies and Flags of Convenience are still an effective tool for reducing the tax burden, freely managing the shipowner's assets, protecting them and running a full-fledged international business. When a ship operator buys a ship, he wants to register and operate it through a simple procedure. He needs a bank account to collect freight. He pays his debts, expenses arising from the operation of the ship, to seafarers, bunker suppliers, ship suppliers, agents, insurers and other suppliers from this bank account.  This is where the real challenge begins.

The G-7 countries have founded the Financial Action Task Force (FATF), an OECD-based intergovernmental organization, to fight the laundering of criminal asset values and the financing of terrorism. In addition, the international tax reform efforts of the OECD to ensure that multinational companies pay a fair share of taxes wherever they operate, seems to turn into a contract in 2023 for the G20 countries.

Under pressures from the OECD, the US and the EU to prevent asset laundering and tax evasion, it has become harder for offshore-based businesses to run day-to-day banking operations. Shipping companies have also been affected and continue to be affected by these pressures. Banks in continental states do not want to bear the risk of opening accounts with offshore companies due to political pressures and severe penalties imposed by regulatory agencies. Today, it is very difficult to open an account with a European or an American bank without revealing the company's corporate structure, partners, source of capital.  For individuals and companies in offshore and foreign jurisdictions, it is almost impossible because the ideal option for banks is to open an account in the jurisdiction in which the company is registered. 

On the other hand, Turkish Banks, easily open a bank account if an offshore shipping company with Turkish partners do not have a significant trust issue. No other condition is required other than knowing the company's shareholding structure, having a correspondence address in Turkey and having a potential tax number given to the company by the Turkish Finance. In this respect, Turkish Banks provide in valuable banking support in practice for a Turkish ship operator headquartered in the offshore jurisdiction. The ship operator deposits the freight he has earned to his account in the Turkish bank and can send his expenses to his suppliers from the same account. What reason is there for ship operators to keep trying to register accounts in other countries or to form businesses in the jurisdiction of those countries?  Although there are many answers to such a question, the most important reason is the fear of a potential tax levy on these earnings withdrawn by real stake-holders from the accounts in Turkey.

In line with the general approach of legislation and finance, let us examine whether the reason for this fear is justified or not. A Turkish-owned offshore shipping company that has opened a bank account in Turkey has no bookkeeping obligation according to the Tax Procedural Code (Number 213) and is not a corporate taxpayer. However, if this company obtains a part of its revenues from Turkey, it is considered a limited taxpayer in terms of these revenues and will be subject to tax. For this reason, a potential tax number is given to foreign companies that makes open a bank account in Turkey. The Turkish natural person partners of an offshore company are unlimited taxpayer for income tax in Turkey and must pay income tax if they withdraw a portion of the freight earnings to their personal accounts. The income tax rate varies between 15-40 percent according to income brackets in Turkey. Ship operators, on the other hand, prefer a predictable, consistent and generally low-tax expense, as in offshore jurisdictions and the tonnage tax system of Malta or Greece, and do not want to face a possible income tax threat in Turkey. Although the Turkish Finance Ministry has not carried out such an audit to date, the natural person partners of offshore companies take advantage of the existing "Cash Repatriation" practice and move their personal earnings out of the possible income tax follow-up. Implementation of Cash Repatriation is a temporary practice and not a permanent protection.

Turkish-owned foreign-flagged shipowners want a protection shield that will grant total freedom from the threat of taxation of the social security rights of Turkish seafarers they employ, the corporate tax of offshore companies and the income tax obligations of their natural person partners.  The proposal of the Turkish Shipowners Association is to introduce a tonnage monitoring tax system if the ship is managed from Turkey, regardless of its flag and registration, as in Greece, Malta and partly the UK.  At this point, it should be noted that; tonnage tax systems are often the solution to the people and companies that own ships. However, ship owners are not the only element of international maritime transport. For instance, ship operating contractors and brokers are also transport service providers without owning ships, and many of them are still registered in offshore countries. For this reason, all elements of maritime transport will have to be taken into account when creating taxation solutions. On the other hand, the state bureaucracy, is reluctant to develop a system that will be more advantageous than TUGS with the application of tonnage monitoring tax on foreign-flagged ships.

Operating as registered to offshore countries in the world maritime transport has become so common that approximately 70 percent of the global fleet is registered in the low tonnage tax system on the basis of tonnage. There is no unfair competition between the players of maritime transport involved in this system. On the other hand, there is no tax benefit for those who remain outside the system other than the concession of cabotage. Ship owners can limit their tax burdens by the income tax that their partners must pay, taking advantage of the international second registry practices of continental states such as TUGS. However, maritime transportation companies that do not own ships and are registered in the Turkish Trade Registry are subject to income tax in terms of both corporations and partners due to the transportation services they provide abroad and the earnings they obtain. Unfair competition against offshore registrants for such companies is multiplied. The risk is even greater if a company registered in the Turkish Trade Register enters into a maritime transport relationship with an offshore registered company. Fortunately; the list of countries which are considered as tax heavens designated by the OECD has not been published by the Turkish authorities since 2006. If this list had been published, a tax deduction of 30 percent would have been required on payments and remittances made to those countries.

Today, the registry records of companies operating in the world maritime transport, whether or not they own ships, are mostly in offshore jurisdictions. The principle in taxation is, essentially,in which country the legal center or business center (also called the managing center) of the company is located. It is certain that the legal center in the tonnage tax system and in the offshore system that provides convenient tax opportunity is not Turkey and no tax can be applied to such a company by Turkey.  On the other hand, whether the business (management) center, which is one of the necessary conditions for applying taxes, is in Turkey can be proven by a financial research and investigation. In a new tax regulation to be made for offshore maritime transportation companies in Turkey, it should be compulsory for the business (management) center to be in Turkey, so that maritime capacities and capabilities should not be allowed to shift out of the country. Such offshore registered shipping companies, headquartered in Turkey, should be given the same advantage of the taxation capacity created by the Turkish tax system as the favorable tax system of the country in which the company is registered. The only exception would be the fixed income tax at the rate of 15 percent, which is also recommended by the OECD, at the stage of distribution of profits to unlimited taxpayer (Turkish) partners. It will not be difficult for Turkish Banks to open accounts for such companies whose headquarters are located in Turkey and whose final beneficiary is transparent. Thus, maritime transportation earnings, which are entirely in foreign currency, will be proliferated in Turkish banks and will be collected public revenue from the new tonnage monitoring tax system.