Time to take stock and consider fiscal governance

The COVID-19 pandemic has effectively put many sectors of the superyacht industry on pause. Whilst there will, unfortunately, be casualties in the sense that some businesses may not recover and some owners may no longer be able to justify their engagement with the superyacht market, there is, perhaps, a silver lining for some owners in so far as this slowing down of activity also provides an unprecedented opportunity for owners to take stock of their yachting interests and safeguard their future engagement by taking a proactive approach to yacht governance.

“My experience of the COVID-19 crisis is, I’m sure, representative of the issues experienced by others within the industry, especially where it concerns projects being suspended and superyachts being stuck in various jurisdictions,” starts Nic Arnold, Tax Director in PwC’s Private Office. “The knock-on effects of this have been met with responses from clients ranging from owners being rather philosophical, to those for whom this crisis may prove to be the straw that breaks the camel’s back in terms of their engagement with the yachting market.

“I have one client who is engaged in a new build project that has ground to a halt who has accepted that there is nothing that can be done in light of government directives and yard operations. He can’t do anything about the project right now, so he isn’t going to worry about it. Whether he remains philosophical when the yard begins operation again remains to be seen. Another owner is just getting rather more annoyed because his experience with yachting has been one problem after another.”

Nic Arnold, Tax Director in PwC’s Private Office

According to Arnold, however, there may be a silver lining to the global pause on yachting activity. In many cases, the headaches associated with yachting can have less to do with the on-board superyacht experience and more to do with issues of tax governance and ownership management. What the COVID-19 pandemic has created is an unprecedented opportunity to take stock of a yacht’s tax governance and ownership structures.

“Looking at it from a different perspective, my superyacht work is often focussed on raising awareness of how one deals with the fiscal operation of the yacht,” continues Arnold. “Taking a more proactive approach to the yacht’s tax governance by really understanding how the asset ties in with the owner’s wider assets and liabilities increases the control a client has over their yacht and it’s tax status. It aids decision making and makes for an overall far more enjoyable yachting experience.

“Unfortunately, clients often receive and accept overly narrow advice sometimes without realising it. Reactionary advice, taken in bite size chunks, is rarely an effective long-term solution and can lead to a client growing tired of their yacht through difficulties arising from tax advice that isn’t flexible enough to work for their personal situations or doesn’t reflect global tax law well enough. In the instances where off-the-shelf advice has been taken on board in relation to specific jurisdictions where actually the full facts of a complex yacht operation is not considered, this can lead to increases the stress levels of the ownership journey.”

The fallout from the Global Financial Crisis in 2008 generated an unprecedented level of interest in the affairs of the world’s UHNWI population, a phenomenon that became exacerbated by the publication of the Panama and Paradise Papers, which highlighted the use of complex, opaque ownership structures and in some cases questioned the use of global funds across various jurisdictions.

“More questions are now being asked of UHNWIs than ever before and this has increased the need for effective governance across clients’ entire asset portfolios,” explains Arnold. “I have observed that problems are particularly being generated by a narrow jurisdictional view of VAT rules, or simply a fundamental misunderstanding of the relevant rules. Clients have many moving parts to their lives which cross jurisdictional boundaries and a proactive approach needs to be taken with superyachts to ensure that they move in sync with the various other asset classes in a broader and global sense.

“Without understanding why a yacht has a certain tax status, and the factors that will influence this status on a day to day basis, the structures in place for superyachts are not always robust enough to deal with the complexity of many UHNWI’s lives, especially in the event of a crisis. In the scenarios where my client’s superyachts are immobile, I am taking this time to engage with their various teams in order to make preparations for developing better understanding of the asset and apply superior governance,” concludes Arnold.

By adopting superior governance and empowering her clients to ask more sophisticated questions concerning the taxation of superyachts, Arnold hopes that by creating certainty and reducing the stress and anxiety associated with owning a poorly structured asset, future crises need not be the straw that breaks the camel’s back.

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