Freedom Ain’t Free
Why so few American megayachts fly the American flag.
Back in January, we printed a letter in Mail from reader Bob Stromberg entitled “Why Are They Flag-less?” which asked quite pointedly why so many American-owned megayachts are not registered in the United States and therefore do not fly the Stars and Stripes. The question is a fair one, as many of the precepts of the megayacht world lie firmly between the murky and the opaque. Mr. Stromberg conjectured that the megayacht owners lacked a certain patriotic zeal—not an awful guess considering how commonly end-of-days rhetoric has been ringing out from both ends of the U.S. political spectrum lately. But is there really a small fleet of American millionaires and billionaires out there, just cruising the Med in their high-falutin’ yachts, saluting the Cayman Islands’ flag each morning and raising their cognacs to Benedict Arnold each night? And if so, who’s to blame? Obama? Is Obama behind this? Or maybe it’s Sarah Palin? Can she see the Cayman Islands from her house? Or the terrorists? Have they finally won?
Happily, it’s none of the above. The answer is significantly less nefarious. The reason otherwise red-blooded American yachts fly non-American flags has little to do with political sentiment, and a whole lot to do with tax and employment laws, strict United States Coast Guard regulations, and plain old supply and demand.
Compared to any number of other popular flag states such as the Caymans, The Bahamas, or the Marshall Islands, the United States is a fairly difficult place to register a large yacht. A main reason for this is that all U.S.-registered yachts must be staffed by American citizens who have undergone rigorous training to obtain USCG certification. From a tax perspective, the U.S. government views an American working as a deckhand on a U.S.-flagged megayacht cruising off of St. Tropez no differently than it views an insurance salesman plying his trade in Topeka—that is to say, a yacht flying the American flag is, essentially, U.S. soil no matter where she is located. The financial consequences of this view can be major for owners who choose to register in America because they are constrained to account for U.S. taxes when paying the crewmember. With social security and unemployment taxes what they are, this often means paying an American crewmember twice as much as say, an equally qualified Australian who is exempt from U.S. taxes but who the owner could only hire were his boat registered in a more lenient, foreign-flag state.
But labyrinthine tax laws account for only a portion of the difficulties in hiring U.S. crew. Countries such as Australia and South Africa have a far greater presence numbers-wise in the world of megayacht labor. Brian Muston, Founder and CEO of Muston Group International, a yacht-management company based in Fort Lauderdale, estimates that fewer than 20 percent of yacht crewmembers worldwide are American. “Some of these countries have much more adventurous cultures, where people go out on their own at the age of 16 or 17 and kind of find their way in the world. And if they happen to have a friend working on a yacht, well, sometimes that’s where they end up,” he says. American crewmembers, of course, are well aware of their scarcity. They know that owners of U.S.-registered boats need them by law, and they charge for their services accordingly. Compounding this problem for owners is that Americans are, fairly or not, perceived as more “sue happy” than foreigners, which can spike insurance costs. Things certainly can— and often do—go wrong at sea, so having a litigiously inclined crewmember aboard the ship will no doubt put the owner, as well as his lawyer and financial planner, ill at ease. Muston himself has seen contracts drawn up with clauses expressly forbidding American crewmembers from suing yacht owners.
Another main reason the United States is considered a tough place to register a yacht is the stringent USCG regulations, which emphasize the yacht’s firefighting and safety equipment, as well as it manning requirements. When followed, these regulations ensure that a yacht is as safe as possible. However, they also significantly up the cost of ownership and operation. Oversized liferafts, emergency exits, flame-retardant everything—these kinds of things cost money, particularly if, as in the case of the exits, they involve structural modifications. Meanwhile, other flag states’ regulations often are not quite as black and white as the Coast Guard’s and offer more wiggle room. For example, a yacht that lacks two true exits for every cabin would not be able to register in the United States. However, another flag state might say that a door constitutes one exit, while a sufficiently sized porthole coupled with a hammer constitutes the second—just break the glass in case of an emergency. Another part of those regulations involves more rigorous crew training. More training typically means higher pay and another reason U.S. crew is more costly.
With all the regulations and hidden costs of registering a yacht in the United States, it’s little wonder so many American owners choose to fly the flags of foreign states, some of which—the Marshall Islands in particular—base a good chunk of their economy on the proceeds from yacht registration. They have offices all over the world and routinely solicit owners and their management companies for their business, knowing full well that they can offer advantages that the United States cannot.
In the end, choosing which flag to fly on a yacht is a function of an owner’s appetite for expenditures, as well as his proclivity towards (perhaps overly) strict rules and safety regulations. So next time you see a Yankee-owned yacht flying the Bahamian blue, gold, and black behind it, there’s no need to get worked into a fit of patriotic rage. The owner probably loves the red, white, and blue as much as you do—it’s the just red tape he doesn’t want to deal with.
This article originally appeared in the February 2011 issue of Power & Motoryacht magazine.