The OCS Tax Trap: Beware and Prepare!
If you are a U.S. or foreign company engaged in activities related to the exploration for, or exploitation of, natural resources on the OCS, be aware that you may unwittingly be subjecting your business to taxation in the U.S.
The IRS has identified the following categories of foreign taxpayers as engaged in activities related to the exploration for, or exploitation of, natural resources on the OCS (Covered Activities) that it believes fall into the U.S. tax net:
- Contractors that perform services on the OCS (such as testing, drilling, repair and salvage work);
- Vessel operators that transport supplies and personnel between U.S. ports and locations on the OCS; and
- Owners and/or operators of foreign-registered vessels that time or bareboat charter vessels to persons that are engaged in Covered Activities.
The IRS has applied an expansive view of the scope of international tax rules, and is likely to take the position that even activities that are only tangentially related to the exploration and exploitation of natural resources (e.g., oil pipeline repairs, use of vessels for transportation or other construction support services, oil platform construction and engineering-related activities, etc.) may be subject to U.S. tax.
The tax risks raised by the new international tax rules are likely to become much more than a hypothetical concern. In fact, the IRS has already begun contacting certain foreign companies with respect to these issues, and its activity is likely to increase as a result of the creation of an OCS Task Force.
U.S. and foreign companies engaged in activities related to the exploration for, or exploitation of, natural resources on the OCS would be well advised to have their operations reviewed to determine whether they are in compliance with these onerous and counter-intuitive tax provisions.
International Tax laws can be confusing and it is often better to have a professional to advise you in international tax matter. However, just being aware of the changes that are happening in the upcoming year can make big differences. If you have questions, talk to a tax professional to see where you will need to be considering paying taxes and where you could be receiving tax deductions. Understanding your tax matters will help you avoid IRS audits and other tax issues.