By David Foxwell
The Norwegian Shipowners Association has rejected claims by the Offshore Marine Services Association (OMSA) in the US that Norwegian owners of offshore construction vessels operating in the Gulf of Mexico are engaged in tax evasion.
As highlighted recently by OSJ, US Customs & Border Patrol (CBP) recently announced its intent to revoke several letter rulings that were said to be ‘inconsistent’ with the Jones Act. In documents provided to OSJ, OMSA claims earlier rulings “allowed foreign vessels using cheaper foreign labour” that pay “little or no taxes in the US or in their home jurisdictions” to stifle US maritime investment and job creation.
OMSA, which supports the proposed revocation of interpretation of the Jones Act, which effectively would ban international offshore construction vessels from the Gulf of Mexico, claims that inaction by CBP on the issue “will put foreign companies first and American companies last, discourage investment in US infrastructure, and proliferate tax evasion practices.”
OMSA also claims that if CBP does not take action, it will “create an uneven playing field for US companies, stifling future job growth and economic security and create a US Coast Guard immigration ‘free zone’ and put homeland security at risk.”
Sources say the issue arises because of the way Norwegian-flagged vessels are treated under the US/Norway tax treaty. Under this tax treaty, they claim, Norwegian-flagged vessels do not pay US income taxes when working in the US because they are paying the Norwegian tax.
“While that logic sounds fine, when closely examined, it is not a level playing field,” they claim. “The Norwegian tax is tonnage-based, not revenue-based, but since the merchandise these vessels transport isn’t heavy, but is very costly, and it isn’t transported very far relatively speaking, they don’t pay a tax here, and virtually no tax in their home country.”
Responding to the claims, Sturla Henriksen, chief executive of the Norwegian Shipowners Association, said: “Norway has a tonnage tax system for shipping companies. The scheme is similar to those found in several other European countries, as well as countries outside Europe, such as Singapore. A tonnage-taxed company pays a tonnage tax (calculated on the net tonnage of its ships), and not a tax on its income.
“If a Norwegian-owned vessel is engaged in work on the US continental shelf, the work will – as a rule – be done through a US-based subsidiary, or alternatively a permanent establishment (PE)/branch in the US, cf article 4A of the US/Norway tax treaty. The vessel will be chartered from the Norwegian company to the US subsidiary, and the charter payment will be determined in accordance with the arm’s length principle (which is the international transfer pricing standard that OECD member countries have agreed should be used for tax purposes).
“The US subsidiary will of course be subject to US tax – in the same way as other US companies,” said Mr Henriksen. “And the same will apply to a PE, cf article 5 of the US/Norway tax treaty.” Mr Henriksen said there are two exemptions in article 4A (2) and (3), but they will usually not apply due to the length and nature of the activities.
“When calculating the tax base in the US, the company will receive deductions for its costs, including the charter payment to the Norwegian company that owns the vessel. The profit (or loss) will be subject to ordinary US tax. Consequently, in our opinion, it is a fair playing field.”
Industry sources on both sides of the Atlantic have highlighted the fact that the recent revocation ruling by CBP has nothing to do with tax evasion, the use of non-US labour, immigration or national security, and only addresses interpretation of the Jones Act. For more information about the issue, see forthcoming features and comment on the OSJ website.