Domestic Shipping Development Act of 2004

Policy, purpose, and strategic objectives

The State recognizes that shipping is a necessary infrastructure vital to the economic development of the Philippines (Section 2).
The Philippines needs a strong and competitive domestic merchant fleet owned and controlled by Filipinos or by corporations with at least 60% Filipino capital, and manned by qualified Filipino officers and crew (Section 2).
The domestic merchant fleet must (a) bridge islands through safe, reliable, efficient, adequate, and economic passenger and cargo service; (b) support dispersal of industry and economic development of regional communities through regular, reliable, efficient shipping services; (c) ensure growth of exports through necessary competitive and economical domestic sea linkages; (d) serve as a naval and military auxiliary in times of war and other national emergencies; and (e) function as an employment support base for Filipino seafarers (Section 2).
The State’s policy is to: promote Filipino ownership of vessels under the Philippine flag; attract private capital through a healthy and competitive investment and operating environment; provide assistance and incentives for growth of the Philippine domestic merchant marine fleet; encourage upgrading to meet international standards; ensure continued viability of domestic shipping operations; and encourage development of a viable shipbuilding and ship repair industry supporting modernization and adherence to safety standards (Section 2).

Core definitions and key terms

“Domestic Shipping” means transport of passengers or cargo (or both) by ships duly registered and licensed under Philippine law for trade and commerce between Philippine ports and within Philippine territorial or internal waters, for hire or compensation, with general or limited clientele, whether permanent, occasional or incidental, with or without fixed routes, for contractual or commercial purposes (Section 3).
“Domestic Trade” means the sale, barter, or exchange of goods, materials, or products within the Philippines (Section 3).
“Domestic Ship Operator” or “Domestic Ship Owner” means a Philippine citizen, a commercial partnership wholly owned by Filipinos, or a corporation with at least 60% of its capital owned by Filipinos, duly authorized by MARINA to engage in domestic shipping (Section 3).
“Shipper” means any person, partnership, or corporation that procures domestic ship operator services for carriage of cargo in domestic trade upon payment of proper compensation (Section 3).
“MARINA” means the Maritime Industry Authority (Section 3).
“Ship” or “Vessel” means any kind, class, or type of craft or artificial contrivance capable of floating in water, designed to be used or capable of being used as water transport in the domestic trade for carriage of passengers or cargo (or both), utilizing its own motive power or that of another (Section 3).
“Importation” means direct purchase, lease, or charter of newly constructed or previously owned ships, or purchase of ship’s spare parts from foreign sources or from registered enterprises operating in special economic zones under Republic Act No. 7916 (Section 3).
“Spare Parts” means replacement parts or components of a vessel, including specified categories of vessel parts and materials installed aboard the ship necessary for safe and efficient navigation and operation (Section 3).
“Certificate of Public Convenience” means the license or authority issued by MARINA to a domestic ship operator to engage in domestic shipping (Section 3).
“Cargo Handling Equipment” means machinery, gear, or equipment used by the ship operator or a duly authorized and licensed port operator to service or handle cargo on board the vessel, at the pier, in the terminal or container yard, including specified equipment categories and their spare/replacement parts (Section 3).
“Shipbuilding” means design, construction, launching, and outfitting of all types of ships and watercraft (Section 3).
“Ship Repair” means overhaul, refurbishment, renovation, improvement, or alteration of the hull, machineries, equipment, outfits, and components of all types of ships (Section 3).
“Shipyard” means shipbuilding or repair facilities capable of lifting vessels above the waterline to effect ship work (Section 3).
“Shipbuilder” or “Ship Repairer” means a citizen of the Philippines, a partnership owned by majority Filipinos, or a Philippine-incorporated corporation with capital owned or controlled in any proportion by Filipinos or foreign nationals (or both), or by corporations whether Filipino or foreign-owned, duly authorized by MARINA to engage in shipbuilding or ship repair or to operate a shipyard, graving dock, or marine repair yard (Section 3).

Coverage, authorization, and regulation structure

Domestic shipping operations in the domestic trade require authorization; no franchise, certificate, or other authorization for domestic carriage shall be granted except to domestic ship owners or operators (Section 5).
No foreign vessel may transport passengers or cargo between ports or places within Philippine territorial waters except upon MARINA’s grant of a Special Permit when no domestic vessel is available or suitable and public interest warrants it (Section 6).
MARINA is authorized to issue Certificates of Public Convenience to qualified domestic ship operators considering the economic and beneficial effect of the proposed service and the operator’s financial capacity to provide and sustain safe, reliable, adequate, efficient, and economic service in accordance with government standards (Section 7).
Every domestic ship operator application must state the route proposed and the service proposed, and operators not intending to operate in a fixed route must still state the service they propose to offer (Section 7).
Domestic ship operators are authorized to establish their own domestic shipping rates, subject to fostering effective competition and serving the public interest (Section 8).
MARINA must monitor all shipping operations and exercise regulatory intervention where public interest needs protection and safeguarding after due process (Section 8).

Investment incentives and tax relief

Qualified domestic ship operators are granted value-added tax (VAT) exemption for importation and local purchase of passenger and/or cargo vessels of one hundred fifty (150) tons and above, including engines and spare parts of those vessels (Section 4(a)).
The imported vessels under Section 4(a) must comply with age limit requirements counted from the date of the vessel’s original commissioning: passenger and/or cargo vessels—fifteen (15) years old; tankers—ten (10) years old; high-speed passenger crafts—five (5) years old (Section 4(a)).
Qualified domestic ship operators are granted VAT exemption on importation of life-saving equipment, safety and rescue equipment, communication and navigational safety equipment, and specified steel plates and marine-grade aluminum plates used for transport operations (Section 4(b)).
VAT exemption for items under Section 4(a) and (b) is granted only if the items: are not manufactured domestically in sufficient quantity, of comparable quality, and at reasonable prices; are directly imported by a MARINA-registered domestic shipping operator; are reasonably needed and used exclusively by the registered operator in its transport operations; have MARINA approval prior to importation; and the exemption is granted to all domestic shipping operators within ten (10) years from the effectivity of this Act (Section 4).
Any sale, transfer, or disposition of items covered under Section 4(a) and (b) within ten (10) years from the effectivity to another registered shipping operator with similar incentives requires prior MARINA approval (Section 4).
If sale/transfer/disposition within ten (10) years occurs without MARINA prior approval, both vendor and transferee/assignee must pay twice the amount of the VAT exemption granted to them (Section 4).
If sale/transfer/disposition within ten (10) years is made to a nonexempt entity or a party other than a registered domestic ship operator, both vendor and transferee/assignee are solidarily liable to pay twice the amount of the VAT waived (Section 4).
If sale/transfer/disposition occurs after ten (10) years from effectivity, it must be made by informing MARINA in writing, and purchasers/transferees/recipients are treated as importers liable for internal revenue tax on the importation; the tax due constitutes a lien on the article superior to all charges or liens, and the Bureau of Internal Revenue (BIR) must be furnished with notice of MARINA actions (Section 4).
Domestic shipping operators may carry over net operating loss: a net operating loss in any taxable year immediately preceding the current taxable year, not previously offset as a deduction from gross income, may be carried over for the next three (3) consecutive taxable years following the loss year subject to the National Internal Revenue Code of 1997, as amended (Section 4(c)).
Fixed assets of domestic shipping operators may use accelerated depreciation: depreciation at not more than twice the normal rate if expected life is ten (10) years or less, or depreciation over a number of years between five (5) years and expected life if expected life is more than ten (10) years, with MARINA requiring operators to notify the BIR at the beginning of the depreciation period of the depreciation rate that will be used (Section 4(d)).

Deregulation, rates, safety standards, and MARINA powers

Domestic ship operators have the right to fix their own passenger and/or cargo rates (or both) (Section 11).
Domestic ship operators must carry mail on mutually agreed terms and conditions, and preferential negotiated conditions must be given for carriage of other government cargo (Section 12).
Monopolized routes: MARINA may draw rules and regulations to determine fairness of passenger and cargo rates needed to sustain service, considering specified factors such as economic and beneficial effect to the served locality, volume of passengers and cargo, level and quality of service, and port facilities and terminal handling services (Section 13).
All vessels operated by domestic ship operators must be in seaworthy condition at all times, properly equipped with adequate life-saving, communication, safety and other equipment, operated and maintained per MARINA standards, and manned by duly licensed and competent crew (Section 9).
MARINA may inspect vessels and all equipment on board to ensure compliance with safety standards (Section 9).
MARINA has authority to register vessels; issue Certificates of Public Convenience and any extensions or amendments, with a validity limit of not more than twenty-five (25) years; and modify, suspend, or revoke at any time upon notice and hearing any certificate, license, or accreditation issued (Section 10).
MARINA may establish and prescribe routes, zones, or areas of operations; require operators to provide shipping services to coastal areas, islands, or regions where services are necessary for development, to meet emergency sealift requirements, or when public interest requires (Section 10).
MARINA may set safety standards and require compliance with operational and safety standards and applicable conventions and regulations; require safe manning and safe, adequate, efficient, reliable, and proper service at all times (Section 10).
MARINA may inspect all vessels for safety compliance (Section 10).
MARINA may ensure domestic shipping operations have the financial capacity to provide and sustain safe, reliable, efficient, and economic service (Section 10).
MARINA may determine the impact of new service on the locality served, adopt and enforce rules ensuring compliance with safety standards and related regulations, and adopt rules ensuring reasonable stability of passenger and freight rates with intervention if necessary to protect public interest (Section 10).
MARINA may hear and adjudicate complaints made in writing involving violations of the Act or MARINA rules; impose fines and penalties (including revocation) for failures in safe and serviceable condition or safety regulation violations; and investigate written complaints involving domestic ship operators, shippers, or groups of shippers involving violations (Section 10).
After notice and hearing, MARINA may impose fines, suspend or revoke Certificates of Public Convenience or other licenses, or otherwise penalize ship operators, shippers, or shipper groups found violating the Act (Section 10).
MARINA may issue implementing rules, provided such rules cannot change, amend, or be contrary to the intent and purposes of the Act (Section 10).

Compulsory insurance requirements

Every domestic ship operator must submit annually adequate insurance coverage to meet financial responsibility for liability arising from breach of the contract of carriage (Section 14).
Insurance for passengers must be computed per existing laws, rules, and regulations, and the total coverage must equal the total number of passenger accommodations offered (Section 14(1)).
Insurance for cargo must be computed per existing laws, rules, and regulations, and the total coverage must equal the total cargo capacity offered (Section 14(2)).
If a domestic ship operator offers both passenger and cargo service, total insurance must be the combined total equivalent to the passenger and cargo requirements (Section 14(3)).
If a domestic ship operator operates more than one vessel, the required insurance for proving financial capacity must be the amount equivalent to the passenger accommodations and/or cargo capacity of the largest operating vessel the operator may have (Section 14 proviso).
Total required insurance coverage must not exceed the value of the vessel (Section 14 proviso).
Adequate insurance coverage must be obtained from a duly licensed insurance company or an international protection and indemnity association (Section 14 proviso).
MARINA may require additional compulsory insurance coverage necessary to adequately cover claims for damages (Section 15).

Prohibited acts and operating violations

MARINA may impose fines and penalties against a domestic ship operator that operates without a valid Certificate of Public Convenience, accreditation, or other required form of authority (Section 16).
MARINA may fine a domestic ship operator that refuses to accept or carry any passenger or cargo without just cause (Section 16).
MARINA may fine a domestic ship operator that fails to maintain vessels in safe and serviceable condition or violates safety rules and regulations (Section 16).
MARINA may fine a domestic ship operator that fails to obtain or maintain adequate insurance coverage (Section 16).
MARINA may fine a domestic ship operator that fails to meet or maintain safe manning requirements (Section 16).
MARINA may penalize other acts it determines after due notice and hearing to be detrimental or prejudicial to the safety, stability, and integrity of domestic shipping (Section 16).

Fees, fines, and enforcement sanctions

MARINA may impose, fix, collect, and receive fees necessary for licensing, supervision, regulation, inspection, approval, and accreditation of domestic ship operators and promotion and development of maritime industry, using schedules approved by its Board, and MARINA may establish and manage a trust fund for this purpose (Section 17).
MARINA fees must recover the cost of services and must not be used to impose a penalty; excessive fees, multiple fees, and duplicative fees must be avoided (Section 17).
The supervision fee under Section 40(e) of Commonwealth Act No. 146, insofar as it applies to the operation, management, control and regulation of vessels and similar craft, is repealed (Section 17).
Upon notice and hearing and a determination of breach or violation, MARINA may suspend or revoke certificates of public convenience, licenses, permits, accreditation, or other authority for violations of the Act, MARINA rules, or certificate conditions (Section 18(a)(1)).
Upon notice and hearing, MARINA may impose a fine for operating without a valid certificate/license/permit/accreditation/authority (Section 18(a)(2)).
MARINA may impose a fine in an amount to be determined by MARINA for refusing to accept or carry passengers or cargo without just cause, or for engaging in prejudicial, discriminatory, or disadvantageous acts toward any class of passengers or shippers (Section 18(a)(3)).
MARINA may impose a fine in an amount to be determined by MARINA, or suspend or revoke the Certificate of Public Convenience, or both, for failure to meet safety standards, refusal to comply with safety regulations, or failure to maintain vessels in safe and serviceable condition (Section 18(a)(4)).
MARINA may impose a fine in an amount to be determined by MARINA, or impose other penalty including revocation of certificate or license, for failure to procure or renew required insurance policies (Section 18(a)(5)).
MARINA may impose a fine in an amount to be determined by MARINA, or impose other penalty including revocation of certificate or license, for failure to meet or maintain safe manning requirements (Section 18(a)(6)).
MARINA may impose other fines and penalties deemed necessary and appropriate to enforce the Act (Section 18(a)(7)).

Shipbuilding and ship repair incentives

The Act grants incentives to encourage investment and develop a viable shipbuilding and ship repair industry (Section 19).
Shipbuilders and ship repairers are granted VAT exemption on importation of capital equipment, machinery, spare parts, life-saving and navigational equipment, steel plates, and other metal plates including marine-grade aluminum plates to be used in construction, repair, renovation, or alteration of merchant marine vessels operated or to be operated in domestic trade (Section 19(a)).
The VAT exemption applies only if: articles are not manufactured domestically in sufficient quantity, of comparable quality, and at reasonable prices; imported directly by a MARINA-registered shipbuilder and ship repairer; reasonably needed and used exclusively by the registered shipbuilder and ship repairer; MARINA approval was obtained prior to importation; and shipbuilders and ship repairers may avail within ten (10) years from approval of the Act (Section 19(a)).
Sale, transfer, or disposition of VAT-exempt articles under Section 19(a) within ten (10) years from effectivity to another registered shipbuilder or repairer enjoying similar incentive requires prior MARINA approval (Section 19(a)).
Without MARINA prior approval within ten (10) years, both vendor and transferee/assignee must pay twice the amount of the VAT exemption given to them (Section 19(a)).
If made to a nonexempt entity or a party other than a registered shipbuilder or repairer within ten (10) years from effectivity, both vendor and transferee/assignee are solidarily liable to pay twice the amount of the VAT waived (Section 19(a)).
If sale/transfer/disposition occurs after ten (10) years from effectivity, it must be made by informing MARINA in writing; purchasers/transferees/recipients are treated as importers liable for internal revenue tax on importation; the tax due constitutes a lien on the goods superior to all charges or liens; and the BIR is furnished with notice of MARINA actions (Section 19(a)).
Shipbuilders and ship repairers may carry over net operating losses for three (3) consecutive taxable years, subject to the National Internal Revenue Code of 1997, as amended (Section 19(b)).
Fixed assets used by registered shipbuilders and ship repairers may use accelerated depreciation under rules matching domestic shipping: not more than twice normal rate if expected life is ten (10) years or less, or depreciation over a number of years between five (5) years and expected life if expected life exceeds ten (10) years; the shipbuilder/ship repairer must notify the BIR at the beginning of the depreciation period of the depreciation rate to be used (Section 19(c)).

Restrictions on vessel importations

MARINA must evaluate and determine the progressive capability of MARINA-registered shipyards to build new vessels for domestic trade ten (10) years from the effective date of this Act and every year thereafter (Section 20).
In the first year of evaluation, MARINA must determine capability to build classed vessels below 500 GRT (Section 20).
If evaluation shows that MARINA-registered shipyards can build classed vessels below 500 GRT in quantities sufficient to meet domestic demand, all domestic ship operators must be discouraged from importing new or previously owned vessels less than 500 GRT for domestic trade, and vessels built in MARINA-registered shipyards must be given priority for entry in the Philippine Registry and allowed to operate in the domestic trade (Section 20).
MARINA must undertake yearly evaluations of progressive capabilities to build larger classed vessels in sufficient quantities to meet demand, and must adjust correspondingly the size of vessels that may be sourced from MARINA-registered shipyards (Section 20).

Transitory and emergency provisions

Existing liner operators must continue to operate in their approved routes upon approval of the Act (Section 21).
All vessels acquired on or after the Act’s effectivity must be classed by a government-recognized classification society on the date of acquisition prior to operation in the domestic trade (Section 22).
Immediately upon approval of the Act, MARINA must prepare and implement a mandatory vessel retirement program for all unclassed vessels that fail to meet classification standards of a government-recognized classification society (Section 23).
Vessels that have attained the maximum vessel age stipulated by MARINA under the retirement program and that do not carry a class certificate issued by a government-recognized classification society are not allowed to operate in the domestic trade and are automatically de-listed from the Philippine Registry (Section 23).
In times of national emergency when public interest requires, the State may temporarily take over or direct operations of any vessel engaged in domestic trade and commerce or prescribe its rates or routes of operation under reasonable terms it prescribes (Section 24).
Immediately upon cessation of the emergency, the State must reinstate the domestic ship operator’s vessel operation under the same terms and conditions existing prior to the emergency (Section 24).

Separability, repeals, and implementation limits

The Act’s invalidity of any section, subsection, sentence, clause, or term does not affect the remainder, which remains in full force and effect (Section 25).
Provisions of Commonwealth Act No. 146 (insofar as it applies to the operation, management, control and regulation of domestic shipping-type vessels), Presidential Decree No. 474, Executive Order Nos. 125 and 125-A, and inconsistent laws, presidential decrees, executive orders, issuances, rules, and regulations or parts are repealed, amended, or modified accordingly (Section 26).