IRS Focuses on Foreign Vessels Evaiding Taxes

The Offshore Marine Service Association (OMSA) applauded the Internal Revenue Service’s (IRS) recently posted directive to field officers establishing an issue management team in the wake of an IRS analysis indicating that a significant number of foreign vessels permitted to work in the U.S. offshore oil and gas industry aren’t complying with U.S. filing requirements.

In the directive, posted last week on the IRS web site, Keith M. Jones, the IRS industry director of  Natural Resources and Construction (NRC), noted that, “In recent years, an increased number of foreign vessels have applied to enter and work in the OCS (Outer Continental Shelf).  Our analysis indicates that a significant number of foreign vessels permitted to work in the OCS do not comply with U.S. filing requirements.”

OMSA President Ken Wells said, “This is a bad time for anyone to be seen as a tax cheat in America, let alone a foreign corporation.  There have been a lot of news stories recently about shortfalls in tax revenues because of the recession.  It is more important than ever for the IRS to close in on foreign companies that have been sidestepping their U.S. tax obligations.”

The IRS identified three types of activity in its directive:
1. Contractors that perform services on the OCS (such as seismographic testing, drilling, repair and salvage work)
2. Vessel operators that transport supplies and personnel between U.S. ports and locations on the OCS
3. Owners and/or operators of foreign-registered vessels that bareboat or time charter to persons that are engaged in activities related to the offshore exploration or exploitation

OMSA represents the owners and operators of U.S. flag offshore service vessels and the shipyards and other businesses that support that industry.  reacted to the announcement saying, “This confirms something we have suspected for a long time – that many of the foreign vessels that work off the U.S. coast on mineral leases granted by the U.S. government and reap the benefits of America’s offshore oil and gas sector have not been paying U.S. taxes."

Wells noted that, under the IRS guidance, if a foreign vessel doesn’t pay taxes on work done here in the United States, the charterer of the vessel must pay the IRS a 30% withholding to cover taxes that should have been paid.  “There have simply been too many instances in which foreign vessels were able to significantly undercut the rates offered by U.S. vessels.  Clearly if the foreign boats are able to start out with a 30% beneficial cost differential that makes it hard for Americans to compete.”

He cited one example in which a company publically reported that it had to pay the IRS $3.2m because foreign vessels it chartered had not paid U.S. taxes.  He urged the IRS to also look at whether the foreign vessels are making the proper income tax withholdings for foreign laborers who work in offshore sector.

According to Wells, this announcement comes at a time when the Customs and Border Protection Agency is reviewing a number of its rulings which have permitted foreign vessels to carry a substantial amount of cargo to offshore projects.  The review by Customs of the foreign vessel activity falls under a law called the Jones Act that prohibits foreign vessels from transporting cargo between U.S points.  “We see the two initiatives as linked,” Wells said, “not only do we believe these vessels have been carrying cargo that only U.S. vessels should carry, but now we find out they are cheating our country out of tax revenue as well.”

The full text of the IRS field guidance may be accessed at:www.irs.gov/businesses/article/0,,id=214906,00.html