Foreign Tax Payments

2
by on October 22, 2010 at 3:40 pm

Do Mariners write off Foreign taxes?

In these tight times we’re looking for any avenue available to rub two dimes together. I remember when I started shipping there were plenty of decent jobs available. Over the years, work has become tighter. More and more I see clients seeking employment under foreign flags, and or on foreign rigs.

Some Countries require that you pay income taxes

I’ll use Brazil as an example – Under the Brazilian tax law, foreigners working with offshore work visas only have to pay personal income tax (imposto de renda )after having physically been more than 184 days in Brazil. For employees working offshore this takes roughly 1 year, 6 months (=184 days) in Brazil and 6 months outside.

This means if you’re working offshore past that time period you owe Brazil. How does that affect you as a US taxpayer? Are you simply going to be taxes by two countries and not be able to offset either return? Let’s run a few what ifs…

You are required to pay and have paid Brazil $20,000 in income taxes

Section 901 of the Internal Revenue Code states -

(a) Allowance of credit

If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26 (b).
You’ll probably be able to take a foreign tax credit for the taxes paid. The biggest restriction is that the credit cannot exceed how much you would have owed on the same income in the US.
Things you’ll need -
  • Proof you were working
  • Proof you owed the tax
  • Proof showing how much income was taxed (important and I have seen this overlooked)

You were required to pay and have not paid Brazil $20,000 in income taxes

This is something I am seeing quite a bit of. It isn’t that mariners aren’t paying the taxes due to the foreign country. It’s that the employer is paying the foreign taxes on behalf of the employee. There are two instances of this that appear to be most prominent.

  • Company pays foreign tax due on behalf of the mariner and requires no compensation
  • Company pays foreign tax due on behalf of the mariner and includes it as income on their W-2

What are the requirements for the credit?

The magic language in the Code is “Paid or Accrued”… The internal revenue service states that -

  1. The tax must be imposed on you
  2. You must have paid or accrued the tax
  3. The tax must be the legal and actual foreign tax liability
  4. The tax must be an income tax (or a tax in lieu of an income tax)

http://www.irs.gov/businesses/article/0,,id=183263,00.html

Generally speaking, we’re not encountering issues with parts 1, 3, and 4. It’s the paid or accrued concept… If we don’t pay the amount due personally, can we still be eligible for the foreign tax credit? If it is included as income on our W-2 can we still take the foreign tax credit?

Disclaimer!

A little CYA… Just because a tax position holds water doesn’t mean that you won’t be audited. It also doesn’t mean you will win an audit. Many tax positions, though valid, are dismissed in audit and appeals. The taxpayer is forced to litigate the issue. This can be a costly venture.

Where were we…

The courts have historically shown a strong emphasis on the “liable” portion. There have been many cases over the years where the courts have restated that the taxpayer need be “legally liable” to the tax in question to be eligible for the foreign tax credit. (Riggs v. Comm, Amoco v. Comm, Guardian v. US, Gleason Works v. Comm, Nissho Iwai American Corp v. Comm) The courts also demonstrate the requirement to document liability for the actual tax in question (Wilcox v. Comm)

It seems from the common law that it is irrelevant who pays the tax due… What is relevant is who was liable. That said, taxes paid reported as income may make the transaction seem more concrete but do not seem to be a requirement. The fact that you owed the tax and it was paid has generally been the test from the Court’s perspective….

See Disclaimer above again. There are no guarantees. This is a risky position. Not because of law. Because of the amount of possible revenues that could be collected on audit. A $20,000 credit is a sizable amount. I would assume it would not go overlooked…

Aren’t I even if it’s on my W-2 and I take the credit?

No, you’re way ahead of the game. W-2 income is taxed at your Marginal Tax Rate, say 25%. So $20,000 in income would cost $5,000 in taxes. With the credit you’re still up by $15,000.

That doesn’t seem right… Does this happen elsewhere?

Yes… If you own stocks and receive dividend statements you may have noticed foreign taxes paid as a reporting line. Some mutual funds pass on the proportionate tax payment to you as the shareholder although you never physically paid the tax due.

The most common instance is with mortgages and interest deductions. It doesn’t matter who paid the interest. It matters who is liable (who is on the deed). That is the person who gets the deduction for interest paid. Even though Auntie Sally made the payments.

Summary – plan for rain

This is a fair and valuable tax position. It should be carefully considered. You should make sure to have all necessary documentation before taking this position (especially the amount of income that the foreign taxes were paid on)…. You should try to get it on a corporate report. How many times have we left a company and needed documentation down the line, only to discover they were not very accommodating? And remember, no guarantees. If you’re audited, plan on losing. Remember attorney’s fees generally start at around $5,000 for this type of venture.

2 Comments

  • Mike T.

    25/01/2012

    I am working onboard a U.S. flagged vessel from ports in Norway and the Uk. My company assurecd the crews they would cover the taxes for the Norway & UK. But, if we do not use their CPA’s to prep our taxes and recover the taxes paid on our behalf: they wil deduct the foreign taxes from our paychecks. Would like your thoughts on the matter……thanks Mike T.

    • admin

      31/01/2012

      Probably the same thoughts you’re having :) Generally they add the foreign taxes paid on behalf to the w2 as income. Not necessarily the right way. (technically don’t have to reflect at all)…

      My first question is “is this in writing on company letterhead signed by the COO?”

      There was some very sketchy stuff happening in the offshore industry with this. If you’re audited you will need to demonstrate that there was a tax due and it was indeed paid.

      The accounting firm KPMG required their clients to sign non disclosures and refused to disclose tax shelters to the IRS…. This was before the Senate Hearings :)

      Bottom line, I’d need to know all the particulars, but it’s sketchy when a company penalizes you for not letting them PAY to do your tax return….

Leave a Reply

Your email address will not be published. Required fields are marked *