Under Section 883, the United States generally does not tax a foreign unit on the revenues of ships when the foreign entity is organized in a jurisdiction that grants U.S. companies an “equivalent exemption” from taxation. An equivalent exemption can be obtained in one of three ways: with the abrogation of the agreement, many of the foreign shipowners who have benefited from the exemption under the I. A.C Section 883 may be subject to U.S. Transportation Income Tax and subject to net property tax for foreign companies operating in the United States. As a result, these companies may now be subject to U.S. income tax on their shipping income and may have assessed tax obligations they had never had before, as well as other reporting and payment obligations in the United States. “Hong Kong companies may already be subject to U.S. taxes on U.S. shipping revenue (and U.S. companies may already be subject to Hong Kong tax).” This disclosure can have a significant impact on U.S. income tax on shipping companies that had previously relied on the agreement to grant an exemption from U.S.
income tax, as well as on Hong Kong income tax for U.S. companies that also relied on the exemption agreement for these taxes, as indicated in the Hong Kong government press release. In some cases, third-country shipping companies with Hong Kong owners or pools, hong Kong-related alliances and joint ventures may also be affected by the termination. The maritime agreement was adopted through the exchange of diplomatic notes and provides that Hong Kong enjoys an “equivalent exemption” under Section 883 bis (1) of the Code, which exempts certain gross revenues from international shipping from U.S. income tax.  As a result of the termination or suspension of the shipping contract, Hong Kong residents and Hong Kong businesses are subject to U.S. income tax to the extent that these revenues come from U.S. sources pursuant to Section 863 (c) (2). SHIPPING TAX TREATY The maritime tax agreement specifically refers to Section 883 and effectively cooperates with Section 883. Unlike a comprehensive, independent income tax agreement, the Shipping Tax Convention is only one way to comply with section 883 (from a U.S. tax perspective).