U.S. International Maritime Income Tax Collection

Although the U.S. maritime tax has a history of 25 years, many in the shipping industry are not very familiar with how this tax operates, who is subject to it, exemption requirements, or the recent exemption policies and application procedures of the U.S. Treasury. Therefore, as the 2010 U.S. tax filing deadline approaches, we have decided to publish several articles: briefly introducing the U.S. maritime tax, the exemption system, and the requirements for applying for an exemption. With increasingly frequent trade between China and the U.S., we hope these articles will help the Chinese shipping industry gain a better understanding of the U.S. ocean transportation tax, thereby avoiding potential troubles caused by violations of this tax law.

The U.S. maritime tax is often referred to by industry professionals as the "freight tax" and is a single-rate tax. It applies to foreign companies that do not have an office or place of business in the U.S. but have U.S. income. The tax amount is based on the total income of the company from bareboat charters and time charters, including demurrage and dead freight, but excluding dispatch money. Although the tax is not levied based on the volume of cargo loaded, it is similar to many types of taxes listed in the Baltic and International Maritime Council (BIMCO) annual publication Freight Taxes. However, unlike other taxes, even if a taxpayer is eligible for an exemption, the IRS requires the foreign company to submit a tax return.

History of the U.S. Maritime Tax

Before the U.S. Tax Reform Act of 1986 (hereinafter referred to as the "86 Tax Reform"), the U.S. did not tax income from international shipping derived by foreign companies, considering such income to be 100% from foreign sources. Therefore, even if a foreign company's vessels frequently operated to and from the U.S., they were not deemed to have any income derived from the U.S.

The introduction of the 86 Tax Reform changed U.S. policy on taxing international shipping income. The 86 Tax Reform amended the source rules for shipping income of foreign companies and systematically established an ocean transportation tax mechanism. The 86 Tax Reform primarily involved three aspects: (1) Fifty percent of the ocean transportation income of a foreign company is treated as U.S.-source income; (2) This U.S.-source income is subject to a 4% tax; (3) An exemption system was established, allowing eligible foreign companies to apply for exemption. The 86 Tax Reform took effect on January 1, 1987.

In summary, the 86 Tax Reform increased the tax filing obligations for foreign companies. Even if a foreign company qualifies for an exemption, they must file Form 1120-F to declare the exemption with the IRS.

Source Rules and the 4% Tax Rate

Section 887 of the U.S. Internal Revenue Code establishes the source rules for ocean transportation income. According to these rules, if a voyage begins or ends in the U.S., whether in the form of a bareboat charter, time charter, or voyage charter, fifty percent of the gross income from that voyage is treated as derived from the U.S. This U.S.-source income is then subject to a 4% transportation tax. When calculating this tax, the taxpayer must use gross income, not net profits after deducting costs or even commissions. 

Additionally, Section 887 applies to owners (including registered owners and chartering owners) and all charterers, including sub-charterers. Therefore, anyone in the transportation chain who receives income from U.S. transportation is subject to the transportation tax. Thus, all parties receiving hire in a voyage that begins or ends in the U.S. must declare and pay tax on their income. However, the conditions and eligibility for exemption for any party are independent and unaffected by the exemption status of other participants in the transportation chain.

Who Must File a Tax Return?

In a tax year, if a foreign company owns, co-owns, charters in, or operates a vessel that calls at a U.S. port for loading or unloading cargo, the company must file Form 1120-F to make a tax declaration. The IRS updates Form 1120-F each tax year. In this form, foreign companies claiming exemption must state the basis for their exemption. Even if a foreign company includes a BIMCO-recommended U.S. Transportation Tax Clause or a general tax clause in their charter party, it must still file a tax return according to federal tax law. Of course, if the foreign company had no vessels calling at U.S. ports or had no U.S.-source transportation income during the tax year, they are not required to file.

Filing Deadline

If a foreign company uses the calendar year and has no office or place of business in the U.S., they must file Form 1120-F for the previous tax year by June 15th of each year. For a foreign company on a fiscal year basis, the return must be filed by the 15th day of the 6th month following the close of the fiscal year. For example, if a foreign company's fiscal year ends on March 31, 2011, the filing deadline is September 15, 2011 (the 15th day of the 6th month following March 31).

If an extension is needed, the foreign company can file IRS Form 7004 before June 15th to request a six-month filing extension. However, requesting a filing extension does not extend the time for paying the tax due. If a company cannot qualify for exemption, they must pay the full tax amount by the prescribed date (by June 15th or the date determined based on their fiscal year method). If a company files Form 7004 to request an extension but does not pay the tax due, not only may the extension be invalid, but the IRS may also impose penalties for late payment of the tax. Finally, it warrants reiteration that the information above applies only to foreign companies with no office or place of business in the U.S. If the company has an office or place of business in the U.S., the filing deadlines may differ from those described above.

Bofeng Logistics specializes in providing one-stop logistics services including domestic container sea freight, international sea freight (FCL/LCL), Hong Kong and Macau logistics lines, and trucking, customs clearance, and warehousing. Contact: 130-7567-8958 (Manager Huang), call now for your customized quotation!