{"id":105,"date":"2012-01-16T18:48:21","date_gmt":"2012-01-16T18:48:21","guid":{"rendered":"http:\/\/www.doingbusinessacrossborders.com\/?p=105"},"modified":"2015-12-15T16:33:10","modified_gmt":"2015-12-15T21:33:10","slug":"us-taxation-of-international-shipping-income-tra86-and-treaty-exemptions","status":"publish","type":"post","link":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/us-taxation-of-international-shipping-income-tra86-and-treaty-exemptions\/","title":{"rendered":"US Taxation of International Shipping Income: TRA86 and Treaty Exemptions"},"content":{"rendered":"

\"USThis is the third in a series of articles on the US taxation of shipping income, and explains treaty exemptions from the tax, what they are, how companies qualify and what must be done to comply with the filing requirements associated with the treaty exemption.<\/strong><\/p>\n

As the first<\/a> two articles<\/a> in this series explained, the Tax Reform Act of 1986 (\u201cTRA86\u201d) substantially altered the US taxation of international shipping income.\u00a0 It changed the \u201csource\u201d rules for international shipping income, (1) deeming 50% of such income to be \u201cUS source\u201d; (2) imposing a 4% tax<\/a> on that income; and (3) creating an exemption regime that permits foreign corporations that meet certain criteria to claim exemption from tax.<\/p>\n

As a result of TRA86, every foreign corporation that has US source gross transportation income (\u201cUSSGTI\u201d) in any tax year has a US tax\u00a0filing obligation, even if the foreign corporation qualifies for exemption from the tax.\u00a0 Thus, any foreign corporation that received USSGTI income during 2011 must file a US tax return on Form 1120-F by 15 June 2012.\u00a0 There are no exceptions to this rule<\/strong>.<\/p>\n

Foreign companies earn USSGTI when they receive any form of hire (bareboat, time charter, voyage charter\/freight) for the use of a vessel, which transports cargo to or from theUnited States.\u00a0 The only parties not subject to the US tax are those who pay the ultimate freight bill.<\/p>\n

The tax imposed by Section 887 on USSGTI may be avoided, using one of two avenues: the reciprocal exemption provided for in Section 883 of the US Internal Revenue Code or the provisions of a US tax treaty.<\/strong>\u00a0 These articles will deal solely with exemptions available under US tax treaties.\u00a0 A list of countries which have tax treaties with the United States can be found in IRS Revenue Ruling 2008-17. Only those countries which are listed in Part II of Revenue Ruling 2008-17 \u00a0have treaties that can be used to claim exemption from the Section 887 tax.\u00a0 There are other international agreements that exist between the United States and foreign countries, but only those that are considered \u201ccomprehensive tax treaties\u201d qualify.\u00a0 Diplomatic notes exchanged between the United States and other countries or agreements regarding information exchanges are not treaties.<\/p>\n

Treaties contain different requirements depending upon the specific negotiations between the United States and the partner country.<\/strong>\u00a0 For example, the US-Greece tax treaty requires that a Greek company seeking to use Article 5 (Transportation Income) to escape the Section 887 tax must be organized in Greece and its vessel must fly the Greek flag.\u00a0 A Greek corporation that owns a vessel that does not fly the Greek flag does not qualify for treaty benefits.\u00a0 Non-Greek companies, owned by Greek nationals resident in Greece, whose vessels fly the Greek flag, do not qualify for treaty benefits because they are not organized in Greece.<\/p>\n

\u00a0<\/strong>Each tax treaty is the product of a bilateral negotiation between the United States and its treaty partner, and is intended to benefit persons who are subjects of the contracting countries, not those of third countries.<\/strong>\u00a0 Individual citizens and residents of a country are generally easy to identify and separate from citizens and residents of third countries.\u00a0 In a globalized word, it is far less straightforward to identify the \u201ctrue identity\u201d of legal persons.\u00a0 Thus, one of the primary objectives of modern treaty negotiators is to prevent \u201ctreaty shopping\u201d, that is, the use of a treaty by persons who are residents of third countries.<\/p>\n

IMPORTANT NOTICE TO READERS<\/strong><\/p>\n

The information contained on this blog is not legal advice. \u00a0It is provided only as general information, and may or may not reflect the most up-to-date legal developments. \u00a0This information is not provided in the course of, and receipt of it does not constitute, an attorney-client relationship.\u00a0 It certainly does not substitute for obtaining legal advice from a licensed attorney. \u00a0Legal advice should take into account the specific facts and circumstances applicable to each individual situation. \u00a0Viewing this site and reading this blog does not create an attorney-client relationship between you and our firm.\u00a0 Likewise, sending us an email does not create an attorney-client relationship between you and the firm.\u00a0\u00a0 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. \u00a0The only way for you to initiate legal representation with the firm is to call us at\u00a0(703) 525-5110. \u00a0If 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.<\/p>\n

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\u00a0http:\/\/www.flottco.com\/emailnotice.pdf<\/a>.<\/strong><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

This is the third in a series of articles on the US taxation of shipping income, and explains treaty exemptions from the tax, what they are, how companies qualify and what must be done to comply with the filing requirements associated with the treaty exemption. As the first two articles in this series explained, the…<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14,17],"tags":[15],"class_list":["post-105","post","type-post","status-publish","format-standard","hentry","category-shiptax","category-us-taxation","tag-the-associates-at-flott-co-pc"],"_links":{"self":[{"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/posts\/105","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/comments?post=105"}],"version-history":[{"count":2,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/posts\/105\/revisions"}],"predecessor-version":[{"id":1790,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/posts\/105\/revisions\/1790"}],"wp:attachment":[{"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/media?parent=105"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/categories?post=105"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/tags?post=105"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}