By: CHALOS & Co, P.C. – International Law Firm
Briton P. Sparkman, Esq. & George M. Chalos, Esq.,
As Senator Russell Long, former chairman of the U.S. Senate Finance Committee, famously remarked, everyone’s concept of tax reform is “Don’t tax you, don’t tax me, tax that fellow behind the tree!” And so it came to pass, when the U.S. Congress passed the Tax Reform Act of 1986, foreign ship owners, charterers and operators, by definition no part of any Representatives’ or Senators’ voting constituency, turned out to be the “fellow behind the tree.”
U.S. law requires that for each taxable year transportation income from transportation that begins or ends in the United States is taxed at the rate of 4% on ½ of the freight or other income of voyages that include loading or discharging cargo in the U.S.A. (26 USC § 887 in conjunction with 26 USC § 863(c)(2) and (c)(3)). Transportation income includes any income derived from, or in connection with the use (or hiring or leasing for use) of a vessel or aircraft, or the performance of services directly related to the use of a vessel or aircraft. This includes income from the participation in a bareboat charter, a time charter, a voyage charter and a revenue pool. Charter hire, freight, demurrage, etc. are also subject to the tax. When a vessel is chartered-out everyone along the line starting with the vessel owner, down to a bareboat charterer, the disponent owner, the voyage charterer, are responsible for payments of the tax on their own respective earnings of U.S. Source Gross Transportation Income. It doesn’t matter how many intermediary sub-charterers are interposed between the registered owner and the last charterer down the chain. Each must pay the tax on its own earnings. The tax is payable annually together with the filing of the taxpayer’s annual tax return.
Notwithstanding, income derived by a corporation organized in a foreign country from the international operation of a ship is exempt from the tax if such foreign country grants an equivalent exemption to corporations organized in the United States. 26 U.S.C. § 883(a)(1). The exemption may be based on domestic law of the foreign country, an exchange of diplomatic notes, or a tax treaty and on such a basis the exemption is widely available. However, it is imperative in order to claim the exemption, for the company concerned to file an annual corporate tax return for the year the income was earned, and show that it is qualified for the exemption. Accordingly, to either pay the tax or claim the exemption, it is necessary for the taxpayer who has earned U.S. Source Gross Transportation Income during the tax year to file the required tax return. Foreign companies based overseas have until June 15 of each year to file for income earned in the previous year. That deadline can be extended to December 15 with the filing of an application for an automatic extension by June 15. Failure to file a tax return for any given year for which a company has earned U.S. Source Gross Transportation Income could result in exposure to payment of a fine of up to $ 10,000 and penalties. Thus there are very good reasons for charterers who earn income from the U.S. trade to file each year to claim the exemption or pay the tax, and to file amended tax returns for years missed to bring themselves into compliance.
For more information about U.S. Source Gross Transportation Income and how it may apply to specific facts and circumstances, please do not hesitate to contact the authors George M. Chalos (gmc@chaloslaw.com) or Briton P. Sparkman (bsparkman@chaloslaw.com).