Many Members may not be aware that they must file a US tax return for any year in which one of their vessels earns hire from carrying cargo to or from the United States. 

The tax does not apply only to charterers who collect freight. That is a widespread misunderstanding, in part accounted for by the use of the term “US Freight Tax” to describe the tax levied under Section 887 of the US Internal Revenue Code. 

The Section 887 tax, which was enacted as part of the Tax Reform Act of 1986, is a gross income tax and applies to all participants in a chartering chain from the registered owner up to the last entity that receives hire from any cargo movement to or from the US.

There is a further widespread misunderstanding that corporations that are exempt from the tax as a result of an international tax treaty with the US or otherwise under Section 883 of the US Internal Revenue Code do not have to file a US tax return. That is not the case.  Every entity that earns hire from the transportation of cargo to or from the United States is required to file a Form 1120F tax return every year it earns such income whether it is exempt or not.

The IRS has access to a variety of data sources from the US Coast Guard (eNOAD, COFRs) and US Customs and Border Protection (Forms 1302 and 1302A for cargo, Form 5129 for crew) to enable it to identify at least the owner of the vessel and the entity that files the cargo declaration to see if a Form 1120F has been filed by those companies.

That data indicates that many foreign companies are not meeting their US filing obligations and as a result, the IRS is now conducting a campaign targeting those companies that have failed to file Form 1120F where appropriate.

The campaign is only just getting underway but, to date, there has been no indication whether any amnesty will be offered to non-compliant foreign corporations for their failure to file. The campaign will be adjusted as reactions from those contacted are processed and considered.

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Thank you to Stephen Flott of Flott & Co.PC, who prepared and review this information.