IRS Begins Crackdown on Foreign Vessels Working in the Outer Continental Shelf
An important warning to those businesses servicing the U.S. offshore oil and gas industry. Operating Income derived from activities in the Outer Continental Shelf (OCS) is generally taxable and Keith M. Jones, the IRS’s Industry Director, Natural Resources and Construction has directed his field staff toward activities of foreign taxpayers engaged in activities related to the exploration for, or exploitation of, natural resources on OCS.
Jones noted that in recent years, an increased number of foreign vessels have applied to enter and work in the OCS. The IRS has determined that a significant number of foreign vessels permitted to work in the OCS do not comply with U.S. filing requirements. These include 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 exploration for, or exploitation of, natural resources on the OCS. All of these operations may be subject to US tax liability.
Section 638(1) provides that the OCS is geographically within the United States for purposes of applying Chapter 1 of the Code, which includes all the rules for sourcing income. Thus, foreign contractors that provide services on the OCS are generally considered to perform those services in the United States and derive U.S. source income. They are also engaged in a U.S. trade or business for purposes of section 864 and therefore are subject to tax on a net basis at graduated rates.
The Offshore Marine Service Association (OMSA) in the US says it "applauds" the Internal Revenue Service’s 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 US offshore oil and gas industry are not complying with US 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 represents the owners and operators of US flag offshore service vessels and the shipyards and other businesses that support that industry.
