The Internal Revenue Service (IRS) has released new guidance specifying that foreign-flagged ships engaged in U.S. domestic trade, even when operating under a Jones Act waiver, cannot claim a particular income tax exemption. This exemption, outlined in Section 883 of the U.S. tax code, typically allows foreign shipping corporations from countries with reciprocal agreements to avoid U.S. income tax on international shipping income.
Historically, the interpretation of this exemption for vessels operating under Jones Act waivers was ambiguous. The Jones Act generally mandates that cargo transported between U.S. ports must be carried on U.S.-flagged, U.S.-built, U.S.-owned, and U.S.-crewed vessels. Waivers are occasionally granted for national security, emergency, or specific logistical needs when no suitable U.S.-flagged vessel is available.
For freight forwarders and shippers, this clarification means that foreign carriers utilizing Jones Act waivers for domestic U.S. movements will face increased operational costs due to new tax liabilities. These additional costs could potentially be passed on to customers through higher freight rates for specific domestic routes where waivers are employed. It also underscores the complexity of U.S. maritime regulations and their financial implications for international operators in the U.S. market.
