The Internal Revenue Service (IRS) has clarified that foreign-owned vessels that operate between US ports under a Jones Act waiver will be subject to US federal taxation.
The guidance came ahead of the latest 90-day Jones Act waiver extension that became effective on Aug. 17. The measure addresses the federal tax treatment of income earned by non-U.S. vessels engaged in domestic voyages under the waiver.
That IRS memo specifically separates these journeys from those in international shipping, which could potentially see foreign shipping companies receive certain tax exemptions.
The guidance says that income earned by a foreign corporation from carrying cargo between U.S. ports under a Jones Act waiver is not income from the international operation of ships. As a consequence, this type of earnings is not eligible for the gross-income exclusion under section 883 of the US tax code, nor for treaty benefits for vessels involved in international traffic.
Closing a tax gap
The clarification responds to concerns raised by opponents of Jones Act waivers, including US-based shipowners subject to federal taxation.
Those operators argued that allowing foreign vessels to engage in domestic voyages without similar tax treatment could create an uneven competitive playing field.
The issue has been further highlighted by the US government’s continuing issuance of temporary waivers allowing foreign-flagged vessels to haul cargo between American ports under certain conditions.
The latest 90-day waiver extension, therefore, provides a more definitive tax structure for the international operators involved. The waiver offers more flexibility for domestic maritime transport, but the IRS position is that foreign companies availing of the measure are not automatically entitled to exemptions intended for international shipping income.
The ruling could have financial implications for shipowners who are considering the use of foreign-flagged tonnage on US domestic routes during the waiver period, potentially impacting the economics of future voyages.
