Senate bill would tax cruise line income

A little-noticed provision of the Senate’s tax reform
legislation introduced last week would partly repeal an exemption from U.S.
income tax that the cruise industry has enjoyed for decades.

The Senate’s Tax Cuts and Jobs Act addresses sections 873
and 883 of the tax code that provides for reciprocal exemption from income
taxes for foreign corporations in the ocean shipping business.

All of the major cruise lines are legally incorporated in
foreign nations such as Panama, although they maintain their principal
headquarters in the United States.

The bill “creates a category of income defined as
passenger cruise gross income,” according to a summary by the
Congressional Joint Committee on Taxation. “As a result, effectively connected
passenger cruise income is subject to net basis taxation,” the analysis
said.

“Effectively connected passenger cruise income” is
defined as the part of a voyage that occurs in U.S. territorial waters 12 miles
from shore. It essentially applies to the embarkation and disembarkation days
of cruises that leave from U.S. ports on ships owned by foreign corporations.

Cruise lines currently pay income taxes on land-based
activities that occur in the U.S., such as excursions in Alaska, but it is a
minor share of their overall income.

The cruise tax provision is detailed on the second-to-last
page of the 247-page analysis under the heading “Other Provisions.”

Stock analysts attributed a swoon in cruise shares on Friday
to investor discovery of the provision. Shares of Carnival Corp. closed down
2.3% on Friday, while shares of Royal Caribbean Cruises Ltd. fell 1.9% and
shares of Norwegian Cruise Line Holdings sank 2.9%.

Analysts pointed out that the shape of a final tax bill in
the Senate is far from set, and the House tax bill currently does not change
the tax treatment of cruise shipping income for foreign corporations or nonresident
owners.