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Friday, September 21, 2018


INTERTANKO was represented by the maritime tax expert Derick W. Betts Jr. of Seward & Kissel at this public hearing, who has provided the following report:

This is to report on the public hearing held on June 8, 2000 in Washington, D.C. on the proposed Treasury Regulations published February 8, 2000 to implement Section 883 of the U.S. Internal Revenue Code. Section 883 is relied upon by many foreign shipping owners, operators and charterers to claim exemption from U.S. tax. INTERTANKO has participated inn a coalition consisting of associations and individual carriers led by CENSA to address this issue.

Representing the U.S. Treasury Department at the hearing was Patricia Brown, International Tax Counsel. Representing the Internal Revenue Service (“IRS”) at the hearing was Patricia Bray, principal drafter of the proposed Treasury Regulations, and Ms. Bray's International Branch Chief, Elizabeth Karzon. Also in attendance from the IRS, but not on the panel, was William Pfeil, Technical Advisor to the Shipping Industry Task Force. His role has historically been to oversee and coordinate U.S. tax audits of the shipping industry.

There were 9 listed speakers -- all attorneys representing various associations, organizations or clients in the shipping or airline industries.

In addition to the speakers, there was an overflow crowd of approximately 40 attendees.

The first speaker appeared on behalf of publicly traded shipping interests and commented on the "closely-held" rule of the publicly-traded test which, as currently proposed, could adversely impact the continuing eligibility of publicly-traded foreign shipping companies similarly situated) to claim exemption from tax under Section 883.

The next speaker appeared on behalf of a diverse umbrella group of shipping associations and organizations, which included INTERTANKO and the Council of European and Japanese National Shipowners' Associations ("Censa"). He provided an historical overview and perspective on how the scope of Section 883 has been traditionally construed to parallel analogous shipping exemptions contained in U.S. tax treaties and pointed out that the proposed Treasury Regulations interpreted the scope of Section 883 too narrowly and that such interpretations were in direct conflict with shipping exemptions in existing U.S. treaties. In addition, as previously coordinated with speakers appearing individually on behalf of INTERTANKO and Censa, he highlighted issues to be covered in the separate presentations for INTERTANKO and Censa.

Mr. Betts appearing on behalf of INTERTANKO commented on the following points:

  1. There was no legal basis for excluding income derived from the lightering trade in the U.S. Gulf from the scope of Section 883;
  2. There was no legal basis for denying a passive participant in a joint venture enterprise engaged in the international operation of ships the right to claim exemption under Section 883 for his pro rata share of joint venture profits;
  3. There was no statutory or legislative authority for imposing on a foreign corporation, which was claiming exemption under Section 883, additional "flag" or "limitation on benefits" requirements contained in an income tax treaty between the United States and a foreign country in which more than 50% of such corporation’s ultimate beneficial shareholders resided (this issue is only relevant where a foreign country’s "qualified" status under Section 883 is dependent solely on a treaty).

Censa commented on how the exclusion by the proposed Treasury Regulations of income attributable to the inland transportation of cargo (and related terminal/stevedore services) from the scope of Section 883 was totally inconsistent with shipping exemptions in existing U.S. tax treaties (and the OECD and U.S. Model treaties as well). He pointed out that this invited possible retaliation by foreign countries against U.S. shipping companies. He further commented that the inland transportation (and related terminal/stevedore services) were an integral part of the overall transportation service provided by a shipping company and therefore, should not be separated or broken out and treated differently from the exempt ocean portion of the transportation.

The International Air Transport Association ("IATA") -- Section 883 applies to the airline industry as well -- echoed complaints similar to those raised by Censa, namely the wrongful exclusion from the scope of Section 883 of:

  1. income attributable to U.S. domestic-legs of an international trip and
  2. incidental ground services typically performed by foreign airline companies (e.g. baggage handling, terminal and ticketing services).

Additional issues commented on by other speakers included:

  1. the burdensome nature of the disclosure/ substantiation requirements to prove ultimate beneficial ownership;
  2. the denial of qualified status to an individual resident in a qualified foreign country because such individual was not "fully liable" to tax in that country (e.g. a remittance taxpayer in the U.K.); and
  3. the unfairness of the retroactive effective date of the proposed Treasury Regulations.

Most of the queries directed by Treasury and IRS representatives at the speakers focused on the exclusion of inland transportation (shipping) and domestic-leg/ground transportation (aircraft) from the scope of Section 883.

At the hearing's conclusion, Patricia Bray thanked the speakers for their comments and mentioned, in particular, that the written comments submitted on the proposed Treasury Regulations were generally very thoughtful and raised issues that the IRS would carefully consider in issuing final Section 883 Regulations.

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