As informed in BIMCO Special Circular No. 8 of 25 May, it was decided by the Documentary Committee that one or more special charterparty clauses covering the problems created by the U.S. Tax Reform Act 1986 should be drafted as a matter of priority and announced as soon as possible.
It may be useful, just in short terms, to recapitulate what finally prompted the decision to draft a specific clause for the U.S. Tax purposes and not simply to stick to one of well-known tax clauses appearing in various BIMCO charterparties.
First of all, the new U.S. Tax Law defines the new tax as a Gross Transportation Income Tax and good arguments can be put forward in favour of the point of view that the new tax is not an ordinary freight tax but rather an income tax (personal or corporate). What is important to note is that the tax is not levied on the vessel or the cargo but is levied on the shipowner by reference to the monies received from the charterer.
Secondly, the tax is levied on transportation income which is not restricted to ordinary voyage revenues but also applies to time charter and bareboat charter hire.
After proper consultation with legal experts, it was found that one general clause should be sufficient to cover both voyage charter as well as time charter and bareboat charter income.
The following charterparty clause for use with voyage chartering as well as time – and bareboat chartering is, therefore, recommended for use forthwith:
BIMCO U.S. Tax Reform 1986 Clause
Any U.S. Gross Transportation Tax as enacted by the United States Public Law 99-514, (also referred to as The U.S. Tax Reform Act of 1986), including later changes or amendments, levied on income attributable to transportation under this charter party which begins or ends in the United States, and which income under the laws of the United States is treated as U.S. source transportation gross income, shall be reimbursed by the Charterers.
What seems to have been the general perception among members is that the only potential liable party for tax is the actual owner of a vessel. However, emphasis should be placed on the fact that in a chain of transactions involving, for instance, bareboat charter arrangements and also time charter agreements, the bareboat charter arrangements and also time charter agreements, the bareboat charterer and the time charterer may also be exposed to tax. Equally, it should be noted that the taxpayer should not be responsible for any other income than the actual income received under his own contract regardless of whether such tax will be applied to the various charterers in a chartering line.
A simple example may be illustrative of the problem.
A company incorporated in Singapore bareboat charters its vessel to a Filipino company which again time charters out the same vessel to a company based in Hong Kong. The company based in Hong Kong decides to undertake a voyage from Japan to the United States.
The various liable sources involved in this case will include the bareboat charter hire derived by the company incorporated in Singapore, the time charter hire derived by the company based in the Philippines and, finally, the freight revenues derived by the company incorporated in Hong Kong trading the vessel to the United States. Irrespective of whether the three companies are owned by residents of Singapore, Philippines or Hong Kong, respectively, they will be subject to U.S. Tax because, as the situation stands at the present, neither of these countries have so far entered into bilateral agreements with the United States.
Therefore, by inserting the above-mentioned Clause in the bareboat charter, the company based in Singapore transfers tax liability for bareboat hire derived to the Filipino company. Again, by inserting the tax clause in the time charter party, the Filipino company transfers tax liability for time charter hire to the company based in Hong Kong and finally by inserting the tax clause in the voyage charter party, the Hong Kong based company transfers tax liability for freight revenues to the actual voyage charterer.
In other words, this clause transfers tax liability from the Owner to the Charterer, be it the bareboat charterer, the time charterer or the voyage charterer, as the case may be.
It should be noted that tax will be transferred on a reimbursed basis according to the wording of the last two lines in the new U.S. Tax Clause, i.e., that “…U.S. source gross transportation income, shall be reimbursed by the Charterers”. Tax liability in the first instance rests with the taxpayer, be it the actual owner, bareboat charterer, or the time charterer, because they are the parties which have to file the tax return and thereby pay the tax in the first instance. As soon as the actual tax estimates have been calculated by the tax authorities, the taxpayer can seek reimbursement from the charterer.
Attention is drawn to the fact that when chartering has been made on bareboat basis, where the Owner has no control over the vessel’s trading pattern, the Owner should be notified of the voyages undertaken to and from the U.S. during a taxable year, so that he can complete his tax estimate accordingly. It is therefore recommended to insert in the bareboat charter a clause to that effect which may, for instance, read as follows:
The Charterers shall, within 45 days of the completion of any port-call by the vessel involving the carriage of cargo to or from a United States port provide the Owners with a report for each voyage on which U.S. cargo is carried stating (a) the port and date of commencement of the voyage and (b) the port and date of conclusion of the voyage.
Originally published in BIMCO Special Circular No. 9, 6 July 1988 - U.S. Tax Reform Act 1986 Clause