By: Arthur "Alex" Perez
Many non-U.S. companies may owe Uncle Sam federal income taxes if they conduct business on the US Outer Continental Shelf ("OCS"). And the IRS has indicated that it is actively seeking non US companies or individuals who may be performing a variety of activities for the energy industry on the OCS such as: providing services as contractors including seismic testing, drilling, repair, salvage, etc.; owners or operators of non US registered vessels that bareboat or time charter to others; or operating vessels to transport supplies or personnel between US ports and locations on the OCS.
A key question in determining US tax liability is whether a non-US company is considered to be "engaged in a US trade or business" for tax purposes. The IRS applies a fairly low threshold in determining whether companies are "engaged in a US trade or business" and therefore subject to US taxation and reporting requirements. And since the Outer Continental Shelf is considered to be part of the territory of the United States, any non-US business that provides services on the OCS may be subject to US taxation if they are engaged in a trade or business there.
Take for example the case of Bahrain based Adams Offshore Services Ltd, which recently challenged an IRS tax deficiency determination amounting to USD $24 million. The case will be decided in US Tax Court, however, many more companies may be in the same position and can expect to be contacted by IRS.
Even payments for vessels that are chartered out on a bareboat or time charter basis in US waters may be subject to US taxation. US tax law provides that such charter payments for the use of a vessel in US waters are subject to a 30% withholding tax on the gross rental payment. A US payor who fails to properly withhold such payments may be subject to penalties as well.
Foreign companies that fail to properly file tax returns reporting income from their US trade or business may be subject to liability for the delinquent income tax payments, as well as interest and penalties. A significant trap for such companies may include taxation on the GROSS amount of revenue generated by the US trade or business. In other words, foreign companies that fail to properly report their US trade or business may be taxed on gross revenue from the business, without deduction for expenses.
There may be ways to avoid or minimize US income tax liability, but such efforts are generally much more successful if foreign companies engage in tax planning before they receive a call from the IRS.
