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November 2, 2009

IRS to probe foreign-flag OCS operations

The U.S. Internal Revenue Service has established an "issue management team" after an analysis indicated that a significant number of foreign-flag vessels working in the U.S, offshore oil and gas industry are not complying with U.S. tax filing requirements.

OMSA, the Offshore Marine Service Association, says it applauds the move.

In a 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."

OMSA notes that the IRS identified three types of activity in its directive:

Contractors that perform services on the OCS (such as seismographic testing, drilling, repair and salvage work);

Vessel operators that transport supplies and personnel between U.S. ports and locations on the OCS; and

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.

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," said Wells. "Clearly if the foreign boats are able to start out with a 30 percent 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 $3.2 million 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 Jones Act rulings that have permitted foreign vessels to carry a substantial amount of cargo to offshore projects.

"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."


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