This is the first in a series of articles on the U.S. taxation of shipping income. The series will present a brief refresher course on the U.S. tax, what it is and what it covers, how the exemptions work, and the compliance and filing requirements. This first article offers a general introduction to the history of the tax.
Although the U.S. shipping tax has been in place for almost twenty-five years, it is clear that many in the shipping industry are only vaguely familiar with the basics of how the tax works; to whom and to what it applies, what is required to claim exemption, and how recent U.S. Treasury regulations impact qualification for exemption and the filing requirements to properly claim an exemption.
Referred to by many in the shipping industry as “U.S. Freight Tax”, this U.S. tax is levied on the gross income earned for the use of a vessel that lifts or discharges cargo in the U.S. It is a flat percentage tax assessed on subtracting dispatch costs from the gross income derived from bareboat and time charter hire and freight, including demurrage and deadfreight. Although it is not levied based on the volume of cargo loaded, the tax is similar to many of the taxes listed in BIMCO’s annual Freight Taxes publication. Unlike other such taxes, however, U.S. law requires companies to file an annual tax return even if they can claim exemption from the tax.
It was the Tax Reform Act of 1986 (“TRA86”) created the U.S. taxation of international shipping income as we know is today. Prior to TRA86, the U.S. not only did not tax the international shipping income of foreign corporations, it treated such income as 100% “foreign” source. Accordingly, foreign corporations that operated vessels to or from the United States did not have any “U.S.” source income on which the U.S. could levy tax.
TRA86 revised the “source” rule for international shipping income of foreign corporations by (1) deeming 50% of such income to be “U.S.” source; (2) imposing a 4% tax on that income; and (3) creating an exemption regime that permits foreign corporations that meet certain criteria to claim exemption from the 4% tax. TRA86 took effect for tax years beginning or after January 1st, 1987.
The TRA86 changes created a U.S. tax filing obligation for every foreign corporation that has U.S. source transportation income in any tax year, even if the foreign corporation qualifies for exemption from the tax. Thus, all foreign corporations are required by law to file a U.S. tax return on Form 1120-F for each year in which they receive U.S. source transportation income.
IMPORTANT NOTICE TO READERS
The information contained on this blog is not legal advice. It is provided only as general information, and may or may not reflect the most up-to-date legal developments. This information is not provided in the course of, and receipt of it does not constitute, an attorney-client relationship. It certainly does not substitute for obtaining legal advice from a licensed attorney. Legal advice should take into account the specific facts and circumstances applicable to each individual situation. Viewing this site and reading this blog does not create an attorney-client relationship between you and our firm. Likewise, sending us an email does not create an attorney-client relationship between you and the firm. While we would be happy to hear from you, Flott & Co. PC cannot represent you until we have determined that doing so will not be a conflict of interest. The only way for you to initiate legal representation with the firm is to call us at (703) 525-5110. If and when Flott & Co. PC enters into an engagement agreement with you, you will be a client of the firm, at which time we will be able to exchange information freely.
Unless otherwise indicated by Flott & Co. PC in writing, any US federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for either (i) avoiding penalties under the US Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matter addressed within. For further information regarding this notice, please see http://www.flottco.com/