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Boat Owners Alerted To US Tax Liability Risks

by Mike Godfrey, Tax-News.com, Washington

26 September 2012


Following a recent ruling from the High Court of Justice in London, shipping association BIMCO has underscored the importance for ship owners and intermediaries to incorporate the BIMCO US Tax Reform 1986 Clause into legal documentation when agreeing to charter a vessel for a US voyage to prevent unintended liability to the United States' Gross Transportation Tax.

Under the United States Tax Reform Act 1986, owners who trade in the United States are liable to Gross Transportation Tax on income derived from transport that begins or ends in the United States. The tax is payable on an individual basis by each of the parties in a contractual chain who derive transport related income, including, for instance, income from the charter of a vessel directly or indirectly to another party. When the provisions were introduced, back in 1986, BIMCO developed a standard charter party clause which provided a legal assurance that any liability to Gross Transportation Tax should be reimbursed by the charterers. The inclusion of the clause in practice exempts owners or intermediary agents from any Gross Transportation Tax burden incurred by the use of a vessel in US waters.

The Clause was drafted to provide owners and intermediaries with the legal certainty that the income they have agreed to receive from chartering a vessel will not be reduced as a result of liability to the tax. The clause is particularly pertinent when there are three or more parties within the transaction chain, for example in cases where an owner charters a vessel to an intermediary who then re-charters the craft to another entity.

Under such an example, BIMCO underscored that all parties liable to the tax must claim exemption. BIMCO explained for instance, if an owner fails to claim the exemption, the intermediary agent may face Gross Transportation Tax liability even if the clause is incorporated into the next legal agreement in the transaction chain.

BIMCO has published the reminder following a recent case in which the US taxation scheme was subject to scrutiny at the High Court of Justice in London. An appeal plea relating to tax reimbursement on the basis of the BIMCO US Tax Reform 1986 Clause was considered, and the court confirmed that the Clause offers sufficient protection to owners in enabling them to secure reimbursement from charterers of any Gross Transportation Tax in connection with transportation to or from the United States.

"This is a timely reminder to members of the importance of incorporating the BIMCO US Tax Reform 1986 Clause into charter parties, where relevant, and to ensure that any tax exemptions to which owners are entitled are claimed," BIMCO said.

TAGS: court | tax | marine | law | United States

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