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This is the first in a series of articles on the U.S. taxation of shipping income.\u00a0<\/strong>\u00a0The 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.\u00a0 This first article offers a general introduction to the history of the tax.<\/p>\n 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\u00a0 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.<\/p>\n Referred to by many in the shipping industry as \u201cU.S. Freight Tax\u201d, 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.\u00a0 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.\u00a0 Although it is not levied based on the volume of cargo loaded, the tax is similar to many of the taxes listed in BIMCO\u2019s annual Freight Taxes publication.\u00a0 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.<\/p>\n It was the Tax Reform Act of 1986 (\u201cTRA86\u201d) created the U.S. taxation of international shipping income as we know is today.\u00a0 Prior to TRA86, the U.S. not only did not tax the international shipping income of foreign corporations, it treated such income as 100% \u201cforeign\u201d source.\u00a0 Accordingly, foreign corporations that operated vessels to or from the United States did not have any \u201cU.S.\u201d source income on which the U.S. could levy tax.<\/p>\n TRA86 revised the \u201csource\u201d rule for international shipping income of foreign corporations by (1) deeming 50% of such income to be \u201cU.S.\u201d 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.\u00a0 TRA86 took effect for tax years beginning or after January 1st<\/sup>, 1987.<\/p>\n 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.\u00a0 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.<\/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\/\n\n\n\n
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