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Marine Log

December 11, 2007

Sneak tax attack on U.S.-flag shipping

The U.S. Chamber of Commerce today denounced a measure hidden in the the Tax Technical Corrections Act of 2007 (introduced on November 15, 2007, in the House as H.R. 4195 and in the Senate as S. 2374) that would repeal the tonnage tax option for U.S. flagged ocean carriers hauling cargo between the mainland and Puerto Rico thus increasing shipping costs and making American ships less competitive in the global marketplace.

The bill includes technical corrections to recently enacted tax legislation. The amendments made by the technical corrections contained in the bill take effect as if included in the original legislation to which each relates.

Amendments in the bill related to the American Jobs Creation Act of 2004 include one related to the Tonnage tax (Act sec. 248).

According to a description of the Tax Technical Corrections Act by the staff of the Joint Committee on Taxation:

The Act added Code sections 1352-1359, which provide that an electing corporation is subject to tax on its notional shipping income rather than its taxable income, if the requirements under the tonnage tax regime are met. The tonnage tax regime does not apply with respect to United States domestic trade (defined in section 1355(a)(6)), which is intended generally to mean trade, such as trade between the United States and Puerto Rico, governed by the Jones Act and similar domestic maritime laws that restrict foreign competition. The provision clarifies that United States domestic trade for this purpose includes the transportation of goods or passengers between places in the United States and places in Puerto Rico, and between places in Puerto Rico.

The U.S, Chamber of Commerce points out that the tonnage tax option was originally enacted as part of the JOBS Act of 2004 to level the playing field for U.S. flagged ships that have to compete against heavily subsidized foreign carriers transporting products which are often produced at a reduced cost overseas --lowering their potential cargo tax liability. Those same carriers are traditionally allowed by their home countries to pay tax based on alternative tonnage regimes so the Chamber believes U.S. flagged carriers including those in the Puerto Rico trade lane should be allowed to use the tonnage regime also.

Most damaging in the current proposal is a provision to make the repeal retroactive. The Chamber says it consistently opposes retroactive tax increases because they are inherently unfair to businesses which follow the stated law, are detrimental to economic and job growth, and are a failure from a due process perspective.

"At the very moment we need to help make U.S. carriers more competitive in the global marketplace this tax plan is not only penalizing our own shipping companies it is doing so retroactively breaking the legal and financial arrangements the Congress put in place and making it harder for American companies to expand, grow and plan for the future," said Martin Regalia, vice president of economic policy and chief economist for the U.S. Chamber. "American jobs are on the line with every tax increase that is proposed and the Chamber intends to fight against every flawed plan like this one."

A detailed critique of the proposed amendment is provided in a statement filed with the House Ways and Means Committee by Horizon Lines. It warns that the amendment means that "a loss of hundreds of current and future jobs can be readily envisioned."

Among other things, Horizon Lines argues that the amendment is neither clarifying or technical, but new.

"The tonnage tax provisions were inserted into the Internal Revenue Code where a general definition has long provided that, where not otherwise 'distinctly expressed' or 'manifestly incompatible' to the intent thereof, 'the term "United States" when used in a geographical sense includes only the States and the District of Columbia.' Clearly, this does not include Puerto Rico. In short, the language of the tax code establishes that Puerto Rico is treated as a foreign place unless Congress takes express action to treat Puerto Rico as a domestic place for a particular tax purpose. In passing the tonnage tax provisions Congress did not include any such particular language. So, the general definition should be applied and Puerto Rico trade is properly treated as foreign trade under the tonnage tax. The actions of Congress that were actually reduced to writing in 2004, the only real measure of legislative intent, are to that effect. The provisions of section 7(a) are new and substantive, not clarifying or technical."