New Tax Legislation Set to Make the U.S. a More Attractive Venue for Shippers

By James K. Wall and Jorge Pascual, Ernst & Young International Tax Services Group

On October 22, 2004, the U.S.A. passed the American Jobs Creation Act of 2004 (the “Act”), the largest and most significant tax reform since 1986. The Act contains hundreds of new or amended provisions which will affect practically every business. This tax alert summarizes the provisions that apply specifically to international transportation activities.

Repeal of Foreign Base Company Shipping Income

Current Law

Under current law, U.S. 10% voting shareholders of a controlled foreign corporation (“CFC”) must currently include in income as a deemed dividend their pro rata share of the CFC’s earnings from certain specified categories of “Subpart F” income. One such category, foreign base company shipping income, generally includes income derived from the use of an aircraft or vessel in foreign commerce, the performance of services directly related to the use of any such aircraft or vessel, the sale or other disposition of any such aircraft or vessel, and certain space or ocean activities. Foreign base company shipping income also includes dividends and interest that a CFC receives from certain foreign corporations and any gain from the disposition of stock in certain foreign corporations, if the dividends, interest or gains are attributable to foreign base company shipping income. In addition, incidental income derived in the course of active foreign base company shipping operations, foreign exchange gain or loss attributable to foreign base company shipping operations, and a CFC’s distributive share of income from a partnership or trust if the income would have been foreign base company shipping income had it been realized directly by the CFC also constitute foreign base company shipping income. Accordingly, U.S. 10% voting shareholders of a non-U.S. shipping company that is a CFC generally are subject to current tax on their share of the CFC’s shipping income. This generally has made operating a shipping company as a CFC unattractive.

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