Is there no limit to the subsidies E.U. states will pay to bolster their merchant marines?
(Article originally published in Mar/Apr 2023 edition.)
A wise commercial once understood that “There are some things money can’t buy.” It turns out one of them is convincing German shipowners to hire German sailors.
Vast subsidies have been paid to German shipowners over the past 24 years encouraging them to keep their vessels flagged in Germany and crewed by Germans. But there are fewer German sailors (and ships) today than ever before. Plus, what began as a trickle is now a wide-open spigot.
Together with the German tonnage tax, introduced in 1999, German shipowners were given an additional, quite peculiar benefit. As in many other European countries, employers in Germany must withhold income tax owed by the employee on earned wages. These taxes are deducted from the employee’s paycheck and transferred each month to German inland revenue.
For German sailors on board German-flagged vessels, the money withheld for income tax does indeed come out of the sailor’s paycheck – but then it reappears back in the shipowner’s pocket.
The subsidy doubled every few years from 20 percent to 40 percent to 80 percent and then plateaued in 2016 with 100 percent of the otherwise-to-be-withheld-and-remitted income tax rebated to the shipowner. What does this look like practically? The money comes out of the sailor’s paycheck; German inland revenue behaves as if it received that money, but the money never leaves the bank account of the shipowner.
Follow the Money
Economically, the income tax withholding subsidy addresses the supply side. The idea is that shipowners would love to hire German sailors, and German sailors would love to work for German shipowners, but German shipowners just can’t offer jobs to German sailors because they have to follow the money out of the country.
A July 17, 2003 article from the German broadsheet Die Zeit noted that a “subsidy fight has broken out across the E.U.” and since “shipping is being promoted in other E.U. states, Germany has to join in so that German shipowners can remain competitive.” Otherwise, they’d save money by flagging their ships out and hiring foreign officers and ratings to serve on board. With the subsidy, German shipowners only needed to pay German sailors their net (i.e., take home) wages.
Indeed, other European countries use this (or a similar) subsidy as well. They’ve been allowed to do so for years by the European Commission via special waivers. While E.U. law ordinarily prohibits national subsidies that distort international trade, rebating withheld income tax to shipowners has long been a go-to for Member States trying to prop up seafarers’ employment and their respective flags.
In 1996, for example, Denmark led the way with a 100 percent rebate on withheld income tax. The Netherlands, another major European flag, uses a “wage tax facility” for any Dutch resident sailors that rebates “40 percent of the salary” to shipowners. All this life support was turned on almost 30 years ago, and Germany’s not the only one to discover it can’t be turned off without killing the patient.
Germany extended its income tax withholding rebates in 2016 and in 2021. They won’t sunset until 2027. The German Taxpayer’s Association determined that for the eight years between 2012 and 2020, German shipowners earned €390 million from the rebates; for the six years starting from 2021 through the anticipated end in 2027, estimates are that an additional €450 million will be rebated to German shipowners.
German shipowners are, as of recently, also entitled to pocket other non-wage labor costs worth an extra €58 million per year – like contributions to public health insurance, old age care insurance, the public pension system and public unemployment insurance. Quitting is hard.
New Rationale, Same Result
Over time, the rationale underlying this support changed from counterbalancing the even higher subsidies on sailors’ wages being paid by other E.U. states to, today, helping German sailors against their lower-wage-earning, harder-working competition from outside the EU.
In a December 14, 2016 interview with German broadcaster NTV, Professor Klaus Holocher of Germany’s Jade College, a technical school that has a program to train sailors, expressed this change of approach. He postulated that “the German flag is attractive again because of the subsidies and tax benefits,” even though, he alleged, “German sailors have different ideas of fair pay compared to Ukrainians and Filipinos.”
Still, the number of German sailors continues to shrink as does the number of German-flagged vessels for them to find work on. In 1999, there were 717 German-flagged vessels. Last year, there were 273.
This was predictable. In 1996, the European Commission offered mixed feedback to the European Parliament in a white paper titled Towards a New Maritime Strategy: “The measures of the European Community and the Member States to strengthen the competitiveness of EC flags have so far not been sufficient to stop the trend of flagging out and or reverse the loss of employment….”
It would be even worse for Germany’s numbers if the definition of a “German” sailor had not broadened significantly on account of the E.U.’s expansive understanding of the right to freedom of movement (Art. 45 EU Treaty). Today, sailors who are citizens of any E.U. Member State serving on board a German ship must be afforded equal treatment. They count as Germans – even in terms of taxes and subsidies.
Ironically, 2,670 of the 7,558 sailors (38 percent!) on board German ships in 2022 were European foreigners. A twist on the old adage: If you can’t beat ‘em, have ‘em join you.
[Ed.: After this article was published, the EU agreed to continue to recognize Philippine mariner certification and training.]
In lieu of the low-earning, hard-working, non-German threat from other Europeans, the crosshairs have now shifted to non-European foreigners such as Russians, Ukrainians or, even more prominently as of late, Filipinos.
That animus is expressing itself in a bureaucratic, anxiety-soaked concern that Filipinos don’t meet the requirements, as understood by the E.U., of the Standards of Training, Certification and Watchkeeping for Seafarers (STCW Convention). A recommendation to ban them from working on European-flagged vessels may be handed down soon by the European Maritime Safety Agency (EMSA).
Nevermind that some 50,000 Filipinos work on European vessels right now! Or that EMSA has been saber-rattling about Filipino seafarers since 2006. Many grievances here are more than 17 years old.
Among the deficiencies identified by EMSA are a lack of facilities such as simulators in the Republic of the Philippines as well as “inconsistencies … identified in relation to the competencies covered by the education and training programs leading to the issuing of officers’ certificates.” If confusing report cards seem overly nitpicky, it’s small fry in comparison to teachers straying from the book (!) or, as EMSA puts it, “education and training” not being “structured in accordance with written programmes.”
The Philippine Maritime Industry Authority (MARINA) responded with a 232-page corrective action plan. This was pooh-poohed as a “Band-Aid” by European labor groups, according to German government news agency Deutsche Welle.
Jorel Ramirez of the Philippine Commission on Higher Education (CHED) saw it differently: “Every time that EMSA identifies [issues], we come up with revisions to address the findings of the European Maritime Safety Agency.” Cindy Benitez-Jaro, executive director of CHED, was similarly defensive: “We have taken considerable efforts to show the country's compliance with international standards, such as policy revisions and issuing standards and guidelines…."
One in every five sailors on board European-flagged ships is from the Philippines. A recommendation by EMSA to ban Filipinos should be at the top of the list of self-inflicted wounds for the European Commission to avoid. Many livelihoods hang in the balance, and not just of Filipinos. Cecilia Dejond, speaking for the European Commission, said that “the latest audit was very extensive” and that it was being analyzed “carefully with the intention of announcing [a] final decision” by mid-2023.
In 2019, not long before the COVID-19 lockdowns, FVW interviewed several Filipino ratings who had hired on to work at German cruise line AIDA, which had announced plans to hire 50 percent more Filipino crew or 5,000 new employees. “Of course, I am grateful to AIDA,” said Martin Yon Aubrey, who began working for AIDA after the double impact of his own father dying and becoming a father himself. “I was a poor loser,” he said, “but now I can feed my family.”
Leonarda Cay, who worked in housekeeping, shared a similar emotion: “The crew is my family, the ship is my home.” Both individuals were happy earning just under $1,000 per month, but Filipinos working as deckhands or mechanics on board other vessels will typically earn far more than that – often just as much as Europeans. For Filipinos, it’s hard work, but it’s also prestigious and a pathway out of poverty and into a meaningful career.
On the other end of the spectrum, I’ve spoken to perhaps half a dozen of my former students from the Cuxhaven Maritime College who decided to become harbor pilots. “There’s nothing else on the market,” said one. “It’s the only game in town.”
Another raved about time off, lavish paid vacations and high wages – more than €4,000 per month. Meanwhile, down the road, one of my oldest German clients ended his struggle to crew his ships in the only way he knew how: hiring Filipinos.
As many in the maritime industry would agree, going to sea, living on board, wanting those challenges is as much a question of attitude as it is of training. And you can’t buy attitude. – MarEx
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.