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or attached to the seabed or subsoil. Although the meaning of the phrase "with respect to the exploration and exploitation of natural resources" is somewhat uncertain, the IRS has taken an expansive view of the scope of this provision. As a result, it is likely that even activities that are only tangentially related to the exploration and exploitation of natural resources (e.g., oil pipeline repairs, use of vessels for transportation or other construction support services, oil platform construction and engineering relating activities, etc.) may be caught in the tax net of the U.S. What are the tax consequences of USOCS activities being treated as having been conducted in the U.S.? In general, if a vessel is used in connection with purely U.S. domestic transport, bareboat charterers would generally have an obligation to withhold tax at a 30% rate on the gross amount of lease payments made to non-U.S. vessel owners (in the absence of an available Treaty reduction or exemption), and such bareboat charterers could be held liable for the tax in the event of a failure to withhold. Alternatively, in the case of a time charter, time charterers would be responsible to withhold U.S. income tax at the 30% rate on rental payments made to the vessel owner/operator (in which case the time charterer would be liable for a failure to withhold) unless such vessel owner/operator provides to the time charterer certain IRS Forms which evidence either (a) exemption from taxation under an applicable Treaty (IRS Form W-8BEN) or (b) exemption from withholding based on the fact that the income is "effectively connected with a U.S. trade or business" (IRS Form W-8ECI). If the vessel owner/operator claims an exemption from withholding based on having income effectively connected with a U.S. trade or business (ECI), then the foreign entity would be subject to tax in the U.S. and would be required to file income tax returns in the U.S. with respect to its U.S. operations. Provided that U.S. income tax returns are filed, the foreign entity would be taxed not on its gross rental income but on its net income after taking appropriate deductions for expenses related to the generation of that income (i.e., vessel depreciation and amortization deductions, operating expenses, etc.). However, in the case of a foreign corporation, a second level tax at a 30% rate would also generally be imposed upon the net income of the corporation in the U.S. (the so-called branch profits tax) which is not re-invested in assets in the U.S. This tax generally mirrors the dividend withholding tax that would otherwise be payable on dividends if the foreign corporation were operating through a U.S. subsidiary
About the Author
Joseph T. Gulant, Partner and Business Tax Practice Group Leader at Blank Rome LLP, counsels public and private corporations, partnerships, funds, real estate and maritime-related companies, tax-exempt organizations, and individuals in all aspects of United States and international tax law. He can be reached at 212.885.5304 or JGulant@BlankRome.com
(rather than a U.S. branch). In short, both time charterers and bareboat charterers must keep potential U.S. income taxes in mind when negotiating the terms of their charters. For example, it may be appropriate for such entities to negotiate tax gross-up provisions in their leasing arrangements to cover the potential incidence of U.S. taxation and thereby preserve their anticipated after-tax economic returns from the leases. Another important aspect of these rules is that wages of foreign employees with respect to services performed on the USOCS on behalf of vessel owners/operators may also become subject to tax in the U.S. In that case, the employees may unwittingly become subject to income and employment taxes in the U.S., and the employer may have an obligation to withhold such taxes from the employee's wages. Also note that other service-providing entities (e.g., construction and engineering companies) operating in the USOCS would generally also be subject to tax in the U.S. on their ECI, and their employees may become subject to U.S. tax on their wages as well. In conclusion, vessel owners and other entities operating on the USOCS should consult their tax advisors to determine the U.S. income tax implications of their operations.
StatoilHydro Starts Test Drilling in Arctic StatoilHydro began a two-year drilling program in Arctic waters to determine the potential of Norway's share of one of the world's few remaining unexplored oil prospects, Forbes reported. StatoilHydro last month started deliveries of LNG from an offshore field inside the Arctic circle with its Snohvit project. (Source: Forbes) Hanjin to Invest $2b More Hanjin Heavy Industries will reportedly invest $2b in a new shipyard complex in Mindanao, its second in the Philippines after putting up a similar facility in Subic last year, according to a report in the Philippines News. Hanjin's Subic project is expected to generate at least $3.6b in annual sales with a yearly construction capacity of 60 ships worth $60m each. The biggest shipping vessel in the world, a $150m floating mammoth, is currently being constructed in Subic. (Source: Philippines News)
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