Editorial, October 1998
Undoing the damage of a tax torpedo
If the words "Subpart F deferral" are a mystery to you, here are two simple questions:
a) Do you offer a product or service to shipowners?
b) Would you generally find it easier to sell those services to someone based in Greenwich or Houston than to someone based in Piraeus or Hong Kong?
If your answer to these questions is "yes," then you are one of the many members of the maritime community who has been damaged by U.S. shipowners" loss of deferral of taxation on earnings from foreign-registered vessels.
Duncan Smith, a partner in law firm Dyer Ellis and Joseph, gave a detailed explanation of the Subpart F issue at our Tanker & Maritime Legislation Conference in Washington, D.C. last month. Essentially, U.S. citizens and corporations are at a disadvantage compared with nationals of other shipowning countries. They must pay tax on earnings from foreign registered ships, regardless of whether those earnings are ever realized.
Up until 1975, taxation on earnings from ships could be fully deferred. Between 1975 and 1986, taxation on earnings that were reinvested in ships could be deferred under Subpart F of the tax code. Now, there is no deferral.
The results of the tax changes have been a disaster. The number of foreign registered ships owned by Americans has plunged from 739 in 1975 to 430 in 1986 and just 357 in 1997.
U.S. ownership of oceangoing merchant ships has plunged from 25% of the world fleet in 1975 to 5% in 1997.
And whereas the U.S. Treasury was supposed to have reaped a bonus of steadily rising receipts, taxes actually paid have dropped from an estimated $260 million in 1975 to an estimated $50 million in 1996.
Increased tax revenues, even though, of course, they never materialized, provided Congress with a fig leaf for its inequitable treatment of shipowners. Many believe that, in fact, removal of deferral was a response to the efforts of the U.S. maritime unions. The unions hoped that, somehow, U.S. corporations would be motivated to replace their foreign-flag ships with U.S.-flag vessels, employing U.S. maritime union members. That never happened and it was just plain silly to suppose that it ever would.
Not one U.S.-flag seagoing job has been created as a result of the loss of Subpart F deferral. Indeed, some may have been lost as shipowners have had less opportunity to subsidize U.S.-flag from non-U.S.-flag operations.
Not only have no seafaring jobs been created, but also a vast range of business opportunities for American companies and individuals has been destroyed.
Representatives E. Clay Shaw, Jr. (R.-Fla.) and William J. Jefferson (D. La.) have cosponsored legislation that would go somewhat towards rectifying this situation. The chances of it getting anywhere this session seem slight. But readers should be aware that this is an issue that is not dead for all time and where a minimal change in the tax code could have a very beneficial result for the American maritime community as a whole.
What's your opinion on this issue?
Nick Blenkey
Editor
