Copyright Journal of Commerce, Inc.
Journal of
Commerce - JoC Week
September 18, 2000, Monday
SECTION: OCEAN TRANSPORTATION and PORTS/INTERMODAL;
Pg. 14
LENGTH: 933 words
HEADLINE: A taxing issue for carriers
BYLINE: By Joseph Bonney
BODY:
Most shipping people have never heard of Section 883 of the Internal Revenue
Code. But the relatively obscure legal provision is suddenly getting lots of
attention from ship operators, airlines and their attorneys and accountants.
Section 883 exempts foreign corporations from having to
pay income tax on U. S. domestic transportation operations that
are part of international services. The provision has been in U.S.
tax law since 1921, when Congress enacted it to discourage
other nations from subjecting U.S. shipping companies to double taxation in
foreign countries. Other nations provide U.S. carriers with
reciprocal tax exemptions, either through laws or treaties.
This year the Internal Revenue Service proposed a new legal interpretation that
would force foreign carriers to separate the accounting of their domestic and
international activities, and to pay U.S. tax on the domestic part.
Ship
and aircraft operators have reacted vehemently. They say the change would create
an accounting nightmare, invite retaliation by other nations, and discourage
efficiencies such as the sharing of vessels, terminals and airport ground
services.
""The whole idea of 883 is pretty simple, and it's certainly
logical: If you're operating a ship to numerous countries, you shouldn't have to
pay taxes to every one,'' said Marc Fink, an attorney with Sher & Blackwell,
a Washington firm that represents numerous carriers.
Fink said the IRS
proposal would conflict with that objective and ""would be a significant
administrative burden'' for carriers. ""It would force carriers to allocate
income and expense in a way that they don't do today,'' he said.
The
change would apply to operators in all modes, but container shipping lines say
they would be hit especially hard. Intermodal transportation treats
international and domestic operations as a unified activity, and the IRS plan
""seeks to divide a product which is not divisible in the manner that is
proposed,'' Fink said.
""It doesn't address what shippers and carriers
are doing, and what shippers really want,'' he said. ""This would create serious
problems.''
Container lines say the proposed reinterpretation would
raise questions about how to allocate income and expenses from inland
transportation that is offered not as a stand-alone product but as part of an
end-to-end service. They also note that many exchanges between container lines,
such as swapping of equipment, are done without an exchange of cash.
Tanker operators say they would have to separate costs and expenses for
lightering of imported oil between supertankers and U.S. refinery docks. Cruise
lines say they'd have to separate inland airline transportation from
passenger-ship services that are sold as a package.
Airlines worry that
they'd have to figure out how to account for ground services that are provided
for multiple carriers. And they say that because foreign carriers can't operate
domestic services except as part of international services, they don't account
for domestic income separately.
The IRS says its proposed changes were
based on its interpretation of the 1986 Tax Reform Act. In proposing the new tax
rules, the agency said Congress ""was concerned that U.S.-based transportation
companies were at a competitive disadvantage.''
That interpretation has
gotten no support from ocean carriers or airlines, either U.S.-based or foreign.
Comments at a June 8 IRS hearing and in written statements to the agency were
unanimous in opposition.
The list of opponents reads like a directory of
air and ocean carriers and their industry organizations. It in-cludes scores of
companies and groups ranging from the Air Transport Association to the
International Association of Independent Tanker Owners.
The Section 883
exemption on shipping income tax was expanded in the late 1940s to cover
aircraft earnings. When the U.S. began signing income tax treaties with other
nations, the exemption was included in the treaties.
In its proposed
rule, and in questions at the recent hearing, IRS and Treasury Department
officials ap-peared to be concerned that by unilaterally exempting foreign
companies from taxes, the U.S. was undermining its position in negotiation of
tax treaties.
Kenneth Klein, an attorney with Cadwalader, Wichersham
& Taft in Washington, said that hasn't been a problem. ""While Section 883
and income tax treaties are identical in purpose, they are not necessarily of
exactly the same scope, '' he said. ""However, the gaps in scope have been
few.''
The IRS's reinterpretation of Section 883 would not only require
separate accounting for domestic and international revenue and expense, but
would tighten the standards under which foreign companies could qualify for
exemption from U.S. income tax.
Klein said that the Treasury Department
""has always interpreted Section 883 broadly, as it has the shipping articles of
U.S. income tax treaties.'' He said making the U.S. income tax exemptions too
specific would invite retaliatory nitpicking by other nations.
In
comments to the IRS on behalf of carriers, Klein said that ""the legislative
history of Section 883 indicates that its purpose is to result in U.S. companies
being exempt from tax abroad and for U.S. companies not to be burdened with the
administrative complexity of determining and interpreting the tax laws of
multiple countries.''
He said a narrow interpretation of Section 883
""would defeat congressional intent and would subject U.S. companies to multiple
taxation abroad and to substantial administrative complexity.''
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