Since October we have been writing a series of articles for Global Tax Weekly on the subject of the US Shipping Tax. Below is the full text of the second article. You may also download the article here.
US Taxation of Income from International Shipping – Sourcing Rules
This is the second in a series of articles on US taxation of income from the transportation of cargo or passengers to or from the United States or from the provision of services on the US Outer Continental Shelf, and the compliance regimes that apply to companies that receive such income.
Section 887 of the US Internal Revenue Code (the “Code”) imposes a 4 percent gross tax on US source gross transportation income (“USSGTI”) determined in accordance with Section 863(c). Section 863(c) deems 50 percent of the gross income from the international transportation of cargo to or from the United States to be “US source.”
The first issue to be determined is whether a foreign corporation has engaged in international transportation. Clearly, a vessel that lifts or discharges cargo at a US port that is destined to, or originated at, a non-US port is engaged in international transportation. However, a vessel that calls at the US solely to take on bunkers, to get medical assistance for a crewmember or for repair is not engaged in transportation. Thus, those calls do not generate USSGTI. There is no tax unless the shipping company receives USSGTI.
Ballast legs are less clear. A vessel that arrives in, or leaves, the US in ballast condition while on time charter is certainly earning hire but the hire is in respect of the charterer’s use of the vessel, not the transportation of cargo. The same is true for ballast bonuses. If the shipping company is exempt from tax, the inclusion of the hire of ballast voyages is not an issue in that the entire amount of USSGTI generated by the shipping company from its laden US voyages will be exempt from tax. Whether it is USD1m or USD1.25m is immaterial as all of its USSGTI is exempt. If the shipping company does not qualify for exemption, calculation of USSGTI dictates the amount of tax to be paid. The regulations that cover calculation of USSGTI differ depending upon whether an exemption is being claimed or tax is to be paid. The differences will be explored in the next article.
A second threshold issue in dealing with calculation of USSGTI is whether the vessel has called at a US port. For purposes of the US Shipping Tax, the United States is defined as the 50 states, the District of Columbia, and the 12 mile statutory limit, otherwise known as US territorial waters. The jurisdictional limits of the United States are distinguished from its exclusive economic zone (“EEZ”), which extends 200 miles from the shoreline. It should be noted that the US outer continental shelf (“OCS”) may extend beyond the EEZ in some instances.1
Ports in the US territories of Puerto Rico, Guam and the US Virgin Islands are excluded from the definition of the United States for purposes of the US Shipping Tax. Thus, lifting and discharging cargo at ports such as San Juan and St. Croix do not generate USSGTI.
With the exception of the Louisiana Offshore Oil Port (“LOOP”), which is considered a US port for purposes of the US Shipping Tax, activities such as ship-to-ship lightering operations outside the 12 mile statutory limit of US jurisdiction can be excluded from the calculation of USSGTI. A vessel, which offloads cargo in ship-to-ship transfer outside the statutory limits of the United States and delivers it to a US port, is engaged in international transportation and must include the hire for such operations in its USSGTI. The vessel which is offloaded outside the US territorial limits has not “called at a US port” and thus has not generated USSGTI.
1 Outer Continental Shelf, Bureau of Ocean Energy Management, available at www.boem.gov/Oil-and-Gas-Energy-Program/Leasing/Outer-Continental-Shelf/ Index.aspx (last visited October 3, 2014).