The Tax Reform Act of 1986 repealed the tax deferral for shipping income earned outside the U.S. by U.S. controlled corporations which was reinvested in foreign shipping assets. After December 31, 1986, the shipping income of U.S. controlled, foreign corporations became subject to taxation in the year it was earned. The rationale advanced in Congress was that the deferral promoted U.S. investment in foreign flag vessels and shareholders may be able to escape taxation on foreign-earned income indefinitely. Contrary to the hopes of some of the proponents for repealing the tax deferral, the new provisions have not encouraged more U.S. flag ships, nor arguably, increased total tax collections. On the other hand, the U.S. owned, foreign flag fleet has contracted by one-third. In the extremely competitive international maritime shipping environment, the income taxes imposed on the U.S. owners have been higher than their competitors and a significant competitive disadvantage. For some U.S. companies, joint ventures have allowed tax avoidance until earnings have been remitted, but have created managerial and organizational complexities. These probably have had hidden costs, thus reducing the competitiveness of the U.S. companies. Leasing foreign flag vessels has been an option for the U.S. companies. To a different degree, leasing has similar negatives as joint ventures. Furthermore, as the U.S. owned, foreign flag fleet shrinks there are fewer shore-side support jobs available in the U.S. Moreover, assuming some validity to the availability of the effective U.S. controlled (EUSC) foreign flag fleet in a national emergency argument, a smaller fleet diminishes its value. Hence, removal of the tax deferral legislated in the Tax Reform Act of 1986 has turned out to be counter productive national policy.


  • English

Media Info

  • Features: References; Tables;
  • Pagination: p. 501-518

Subject/Index Terms

Filing Info

  • Accession Number: 00727085
  • Record Type: Publication
  • Report/Paper Numbers: Volume 2
  • Files: TRIS
  • Created Date: Oct 18 1996 12:00AM