SERVICE ISSUES PROCEDURES FOR COMPUTING AND PAYING FOREIGN FIRM TRANSPORTATION INCOME TAX.

Rev. Proc. 91-12

SECTION 1. PURPOSE

01. Nonresident aliens and foreign corporations are subject to a four percent tax on their United States source gross transportation income under section 887 of the Internal Revenue Code for taxable years beginning after December 31, 1986. This revenue procedure advises such foreign persons on the proper procedure for computing, reporting, and paying the four percent tax under section 887, and for claiming exemption from the four percent tax under an income tax convention or under section 872(b) or 883 of the Code.

02. This revenue procedure addresses the following matters:

(1) The types of transportation income subject to the four percent tax on gross transportation income and related definitions (Section 2 -- UNITED STATES SOURCE GROSS TRANSPORTATION INCOME AND RELATED DEFINITIONS);

(2) The rules for determining whether transportation income is from sources within the United States under section 863(c)(2) (Section 3 -- U.S. SOURCE GROSS TRANSPORTATION INCOME ("USSGTI"));

(3) Whether U.S. source gross transportation income is effectively connected with a U.S. trade or business and related definitions (Section 4 -- USSGTI EFFECTIVELY CONNECTED WITH A BUSINESS IN THE UNITED STATES);

(4) How to calculate the amount of U.S. source gross transportation income (Section 5 -- CALCULATING THE AMOUNT OF INCOME TAXABLE UNDER SECTION 887);

(5) How to report and pay the tax (Section 6 -- REPORTING AND PAYING THE TAX);

(6) Information to be included in the return (Section 7 -- SCHEDULES REQUIRED TO BE ATTACHED TO THE RETURN);

(7) How to claim exemption from the four percent tax (Section 8 -- HOW TO CLAIM EXEMPTION FROM TAX); and

(8) The effective date of this revenue procedure (Section 9 -- EFFECTIVE DATE).

SEC. 2. UNITED STATES SOURCE GROSS TRANSPORTATION INCOME AND RELATED DEFINITIONS

01. IN GENERAL. Section 887 of the Code imposes a tax of four percent on the "United States source gross transportation income" (USSGTI) of any nonresident alien individual or foreign corporation, for each taxable year beginning after December 31, 1986. USSGTI does not include income which is "effectively connected with the conduct of a trade or business" within the United States, as that term is defined in section 887. Foreign persons may derive USSGTI directly; from participation in a pool, joint venture, or joint service arrangement; as a partner in a partnership; or as the beneficiary of a trust or estate.

02. "UNITED STATES SOURCE GROSS TRANSPORTATION INCOME" DEFINED. The term "United States source gross transportation income" means any gross income (without reduction by any deductions or losses) that is transportation income (as defined in section 863(c)(3)) to the extent such income is treated as from sources within the United States under section 863(c)(2)(A). The term does not include transportation income which is:

(1) not sourced under section 863(c)(2);

(2) derived by individuals from personal services which they perform, unless such income is attributable to transportation which begins in the United States and ends in a possession of the United States, or begins in a possession of the United States and ends in the United States, pursuant to section 863(c)(2)(B);

(3) taxable as effectively connected with the taxpayer's trade or business in the United States pursuant to section 887(b)(4) (as explained in Section 4 of this revenue procedure); or

(4) taxable in a possession of the United States under a provision of the Code, as made applicable in such possession (i.e., under a "mirror" code).

03. "TRANSPORTATION INCOME" DEFINED. The term "transportation income" (as defined in section 863(c)(3)) means any income derived from, or in connection with, (1) the use (or hiring or leasing for use) of any vessel or aircraft, or (2) the performance of services directly related to the use of any vessel or aircraft. The term "vessel or aircraft" includes any container used in connection with a vessel or aircraft. However, the term "transportation income" does not include income from the disposition of vessels, containers, or aircraft.

04. "INCOME DERIVED FROM OR IN CONNECTION WITH THE USE (OR HIRING OR LEASING FOR USE) OF A VESSEL OR AIRCRAFT" DEFINED. The term "income derived from or in connection with, the use (or hiring or leasing for use) of any vessel or aircraft" means: (1) income derived from transporting passengers or property by vessel or aircraft; (2) income derived from hiring or leasing a vessel or aircraft for use in the transportation of passengers or property on the vessel or aircraft; and (3) income derived by an operator of vessels or aircraft (as defined in Section 2.06 below) from the rental or use of containers and related equipment (container related income) in connection with, or incidental to, the transportation of cargo on such vessels or aircraft by the operator. Persons other than an operator of a vessel or aircraft do not derive container related income. Such income is treated as rental income, not transportation income.

05. "INCOME DERIVED FROM OR IN CONNECTION WITH THE PERFORMANCE OF SERVICES DIRECTLY RELATED TO THE USE OF A VESSEL OR AIRCRAFT" DEFINED. The term includes the following categories of income.

(1) ON BOARD SERVICES. Income in this category is derived from services performed on board a vessel or aircraft by the operator (or person related to the operator within the meaning of section 954(d)(3)), in the course of the actual transportation of passengers or property aboard vessels or aircraft. Examples of income in this category include income from renting state rooms, berths, or living accommodations; furnishing meals and entertainment; operating shops and casinos; providing excess baggage storage; and income from the performance of personal services by individuals. The term also includes income derived from demurrage, dispatch, and dead freight.

(2) OFF BOARD SERVICES. Income in this category is derived from services performed off board any vessel or aircraft by an operator of a vessel or aircraft, provided such services are incidental to the operation of vessels or aircraft by such operator. The term does not include income from services performed by persons other than an operator. Examples of off board services include: terminal services such as dockage, wharfage, storage, lights, water, refrigeration, refueling and similar services; stevedoring and other cargo handling services; maintenance and repairs; and services performed as a travel or booking agent.

06. "OPERATOR" DEFINED. For purposes of these rules, the term "operator" includes the actual operator of a vessel or aircraft, as well as a time or voyage charterer of such vessel or aircraft.

SEC. 3. U.S. SOURCE GROSS TRANSPORTATION INCOME (USSGTI)

01. SECTION 887 TAXES USSGTI. The only income subject to the four percent tax on gross transportation income under section 887 of the Code is USSGTI, which is any gross income that is transportation income, as defined in section 863(c)(3), to the extent it is treated as from sources within the United States under section 863(c)(2). Such income is not subject to tax under section 887 if it is effectively connected with a United States trade or business under section 887(b)(4). See Section 4 below.

02. TRANSPORTATION INCOME TREATED AS U.S. SOURCE INCOME UNDER SECTION 863(c)(2). Income from transportation that begins or ends in the United States is treated as derived 50 percent from sources within the United States and 50 percent from sources without the United States under section 863(c)(2)(A). The portion of such income from sources within the United States is subject to the four percent tax under section 887. Special rules, discussed in Section 3.03 below, are applicable to income from the performance of personal services by individuals.

03. PERSONAL SERVICES INCOME UNDER SECTION 863(c)(2)(B). Transportation income derived by an individual from the performance of personal services attributable to transportation beginning in the United States and ending in a possession, or beginning in a possession and ending in the United States, is sourced under section 863(c)(2)(A). Therefore, such income is subject to the four percent tax under section 887, to the extent it is not taxable in the possession under a "mirror" code.

04. CERTAIN INCOME SUBJECT TO THE TRANSITION RULE. Any income from the lease of a vessel or aircraft held by the taxpayer on January 1, 1986, and first leased before that date, in a lease to which section 863(c)(2)(B) or 861(e) (as in effect before January 1, 1987) applied is 100 percent from sources within the United States. The fifty percent source rule of section 863(c)(2) does not apply to such income. Therefore, such income is not subject to the four percent tax under section 887.

SEC. 4. USSGTI EFFECTIVELY CONNECTED WITH A BUSINESS IN THE UNITED STATES

01. IN GENERAL. If a nonresident alien or foreign corporation is engaged in a trade or business in the United States and has transportation income which is effectively connected with that trade or business, the foreign person must file a federal income tax return and pay tax on the basis of its net income under section 871(b) or 882 of the Code, in lieu of paying the four percent gross basis tax. If the foreign person is a corporation, such income could also be subject to the branch profits tax under section 884 of the Code.

02. SPECIAL RULES FOR DETERMINING EFFECTIVELY CONNECTED USSGTI. As a result of the Tax Reform Act of 1986, a determination whether USSGTI is effectively connected with a trade or business within the United States must be made under the rules provided in section 887(b)(4) (described in Sections 4.03 and 4.04 below), rather than under section 864(c). Thus, transportation income which was effectively connected with a trade or business within the United States during pre-1987 years under the rules of section 864(c), may not be effectively connected USSGTI in post-1986 years under the rules of section 887.

03. EFFECTIVELY CONNECTED INCOME -- OTHER THAN LEASING INCOME. The USSGTI (other than leasing income as defined in section 4.08 of this revenue procedure) of any nonresident alien or foreign corporation will not be effectively connected with the conduct of a trade or business within the United States, unless:

(1) The foreign person maintains a fixed place of business in the United States involved in the earning of USSGTI; and

(2) Substantially all of the foreign person's USSGTI is attributable to regularly scheduled transportation. See section 4.07 below.

04. EFFECTIVELY CONNECTED INCOME -- LEASING INCOME. If the USSGTI is derived from the leasing of a vessel or aircraft, it will not be treated as effectively connected with the conduct of a trade or business within the United States, unless:

(1) The foreign person maintains a fixed place of business in the United States involved in the earning of USSGTI; and

(2) Substantially all of the person's USSGTI from leasing is attributable to that fixed place of business.

05. FIXED PLACE OF BUSINESS DEFINED. For purposes of section 887, the term "fixed place of business" has the same meaning as in section 1.864-7 of the Income Tax Regulations.

06. SUBSTANTIALLY ALL DEFINED. For purposes of section 887, the term "substantially all" means at least 90 percent.

07. REGULARLY SCHEDULED TRANSPORTATION DEFINED. In general, transportation is "regularly scheduled" when a ship or aircraft follows a published schedule with repeated sailings or flights, as the case may be, at regular intervals between the same points for voyages or flights which begin or end in the United States. With respect to air transportation, this rule includes both scheduled and chartered air carriers. Thus, for example, if a foreign charter air carrier flies to or from the United States on a regular basis, as advertised in a published schedule (which is effective over an extended period of time), then, even if the flights are infrequent, the transportation income will be derived from "regularly scheduled transportation". Liner shipping involves sailing as a member of a fleet or fleets, or an association of fleets, providing continuous and organized service on a particular route. Liner operations tend to be regularly scheduled. Tramp shipping, on the other hand, is arranged by a contract which is unique as to the combination of vessel, cargo, and charges, and typically involves a vessel which has no fixed route and no regular time of sailing and which travels from port to port in search of cargo to transport. Vessels engaged in tramp operations will usually not provide regularly scheduled transportation.

08. LEASING INCOME. For purposes of applying the special rule for determining effectively connected USSGTI in section 887(b)(4), the term "leasing" means the bareboat charter of a vessel or aircraft. Time or voyage charter income is not considered income from leasing for this purpose. It is considered income from the use (or operation) of a vessel or aircraft.

09. ATTRIBUTABLE TO A FIXED PLACE OF BUSINESS DEFINED. Transportation income derived from the bareboat lease of aircraft or vessels will be considered attributable to a fixed place of business in the United States if it would be treated as effectively connected with a fixed place of business in the United States under the principles of section 1.864-6. Such income will not be considered to be attributable to a fixed place of business in the United States merely because the fixed place of business performs clerical functions incident to the lease, or exercises final approval over the execution of a lease. The fact that a lease is made subject to the final approval of a foreign office of the foreign taxpayer will not prevent the income from the lease from being considered attributable to a fixed place of business in the United States where the United States office actively participated in negotiating the lease.

SEC. 5. CALCULATING THE AMOUNT OF INCOME TAXABLE UNDER SECTION 887

01. DETERMINING THE USSGTI: IN GENERAL. Sections 2.03, 2.04, and 2.05 of this revenue procedure explain the types of income which are considered transportation income. The rules set forth in Sections 3 and 4 explain the extent to which transportation income is treated as USSGTI and subject to the four percent gross basis tax.

02. DETERMINING THE AMOUNT OF USSGTI FROM RENTAL (CHARTER) INCOME. Nonresident alien or foreign corporate lessors must establish the actual amount of USSGTI derived from a charter under a reasonable method and disclose that method with their return in the manner described in section 7.01 of this revenue procedure. Where a vessel or aircraft is under charter, one reasonable method of determining the portion of such charter income which is USSGTI is to apply to such charter income the ratio of (a) the number of days of uninterrupted travel on voyages or flights between the United States and the farthest point(s) where cargo or passengers are loaded en route to, or discharged en route from, the United States, to (b) the number of days in the smaller of the taxable year or the particular charter period. When determining USSGTI, the number of days the vessel is located in United States waters for repairs or maintenance should not be included in either the numerator or in the denominator of the ratio. Another reasonable method would be to use a ratio based on the USSGTI earned from the operation of the vessel or aircraft by the lessee-operator, compared with the total gross income of the lessee-operator from the operation of the vessel or aircraft during the smaller of the taxable year or the term of the charter. However, an allocation based on the net income of the lessee-operator will not be considered reasonable for this purpose.

SEC. 6. REPORTING AND PAYING THE TAX

01. IN GENERAL. A nonresident alien individual or a foreign corporation subject to the four percent tax on USSGTI in a taxable year beginning after December 31, 1986, must file a federal income tax return annually, report the tax liability in United States dollars, and pay the tax in United States dollars by check or money order attached to the return. The return and tax payment should be mailed to the Internal Revenue Service Center, Philadelphia, PA 19255. Under sections 1.6012-1(b)(1) and 1.6012-2(g)(1) of the regulations, every nonresident alien individual or foreign corporation which has income subject to tax under subtitle A of the Code must file a return, even if the income is eligible for exemption from taxation under an income tax convention or if it is excluded from gross income under section 872(b) or section 883 of the Code. If the foreign taxpayer takes the position that an income tax convention provides an exemption from the four percent tax imposed by section 887, that taxpayer must also comply with filing requirements in regulations under section 6114 of the Code. If the foreign taxpayer takes the position that the income is exempt from federal income tax under section 872(b) or 883 of the Code, the taxpayer must file a return to claim the exemption. See Section 8 of this revenue procedure for instructions on how to claim an exemption.

02. FORMS AND FILING DATES. A nonresident alien who is subject to federal income tax on transportation income must file Form 1040NR, U.S. Nonresident Alien Income Tax Return. A foreign corporation which is subject to federal income tax on its transportation income must File Form 1120F, U.S. Income Tax Return of a Foreign Corporation. The instructions for these forms set forth the date the return is due.

03. WHERE TO OBTAIN FORMS. Copies of the necessary forms may be obtained from many U.S. embassies or consulates, or by writing to the Forms Distribution Center at P.O. Box 25866, Richmond, VA 23260.

SEC. 7. INFORMATION TO BE INCLUDED IN THE RETURN

01. IN GENERAL. Nonresident alien individuals and foreign corporations who have USSGTI (and who do not claim exemption from tax) must attach a schedule to the tax return setting forth the taxpayer's name, taxpayer identification number, and taxable year. The schedule must also include the following information:

(1) FOR BAREBOAT LESSORS OF VESSELS OR AIRCRAFT:

(a) Names and Lloyd's register number of vessels or registration numbers of aircraft that were bareboat leased out by the taxpayer, and that made voyages or flights that began or ended in the United States during the tax year for which the operator derived USSGTI;

(b) The country of registration of each such vessel or aircraft;

(c) Name and address of each lessee or person chartering each such vessel or aircraft from the taxpayer, the term of each lease, and the number of days during the taxable year the vessel or aircraft was under lease;

(d) A description of the method used to determine the USSGTI from the leases for each vessel or aircraft listed in (a), and the calculations used to apply this method (see the examples under section 5.02 above); and

(e) Total amounts of gross rents for the taxable year for each such vessel or aircraft, and for all such vessels or aircraft.

(2) FOR TAXPAYERS EARNING INCOME FROM THE OPERATION OF VESSELS OR AIRCRAFT INCLUDING TIME OR VOYAGE CHARTER HIRE:

(a) U.S. Customs Service International Carrier's Bond Number (if any);

(b) Names and Lloyd's register number of each vessel or registration number of each aircraft operated by the taxpayer during the tax year that made a voyage or flight to or from the United States during the taxable year from which the operator derived USSGTI; and

(c) Total USSGTI earned from the operation of each vessel or aircraft listed under item (b), and for all such vessels or aircraft for the taxable year.

In addition, if the taxpayer operates a vessel or aircraft which is under a bareboat lease or sublease to the taxpayer, the following items must also be included in the return:

(d) The name and address of the lessor of each vessel or aircraft under bareboat lease to the taxpayer; and

(e) The term of the bareboat lease or charter and the method for calculating the rental portion of the payment.

(3) FOR PERSONS PROVIDING SERVICES DIRECTLY RELATED TO THE USE OF VESSELS OR AIRCRAFT;

(a) Description of the types of services performed (see Section 2.05 of this revenue procedure);

(b) Names of vessels or registration numbers of aircraft on which such services were performed;

(c) Amount of USSGTI derived from each type of service for each vessel or aircraft for the calendar year; and

(d) Total amount of USSGTI derived from all types of services for the calendar year.

SEC. 8. HOW TO CLAIM EXEMPTION FROM TAX

01. IN GENERAL. Foreign persons may be entitled to exclude certain United States source transportation income from gross income for U.S. tax purposes. See section 872(b) of the Code for the exclusion available to nonresident aliens who are residents of a foreign country which provides an equivalent exemption to individual residents of the United States for income from the international operation of ships or aircraft. See section 883 for the exclusion that is available to a foreign corporation for income from the international operation of ships and aircraft if the corporation is organized in a country which grants such an equivalent exemption to corporations organized in the United States. (The fact that a foreign country fails to grant an exemption if such corporation is also a resident for tax purposes in that foreign country will not be taken into account.) The exemption under section 883 is available to such foreign corporations only if they also satisfy one of the following rules:

(1) The foreign corporation can show that more than 50 percent of the value of its stock is owned by individual residents of the foreign country where the corporation was organized or of another foreign country which grants such an equivalent exemption to corporations organized in the United States; or

(2) The foreign corporation is a controlled foreign corporation, as defined in section 957(a); or

(3) The stock of the foreign corporation is primarily and regularly traded on an established securities market in the foreign country where the corporation is organized, in another foreign country which grants such an equivalent exemption to domestic corporations (i.e., corporations organized in the United States), or in the United States. For purposes of this exception, any stock of another corporation, which is owned (directly or indirectly) by a corporation meeting the publicly-traded corporation requirement, is treated as owned by individuals who are residents of the foreign country where the publicly-traded corporation is organized.

A foreign country may grant an equivalent exemption through an income tax convention, or by domestic law. On occasion, an exemption based on the domestic law of a foreign country is confirmed by an exchange of diplomatic notes or by a letter issued to the foreign government by the Internal Revenue Service. See Rev. Rul. 89-42, 1989-1 C.B. 234, for examples of countries which grant equivalent exemptions for certain types of transportation income. Where a foreign country has provided more than one means of exemption, for example both an income tax convention and a diplomatic note, the foreign person may choose either one as a basis for the exemption. However, the foreign person resident in such a foreign country must be eligible for the benefits claimed under the terms of the income tax convention, note, or domestic law. If the foreign person is not eligible for such benefits, the foreign person is not entitled to an exemption under section 872(b) or 883.

02. TO CLAIM EXEMPTION. The foreign person may claim an exemption under the terms of an income tax convention, section 872(b), or section 883. In order to claim an exemption, however, the foreign person must file a return and specifically claim the exemption.

(1) INCOME TAX CONVENTION. To claim exemption under an income tax convention, attach a statement to the Form 1040NR or Form 1120F setting forth the information required under section 301.6114-1(a)(1) and (d) of the regulations.

(2) SECTION 872(b). To claim exemption under section 872(b), a nonresident alien must attach a statement to the Form 1040NR for the taxable year setting forth the following information: taxpayer name; taxpayer identification number (if any); name of country of residence; and a statement that the exemption is based on the domestic law of the country. If the exemption is based upon domestic law, cite the applicable authority or diplomatic note between the country of residence and the United States confirming the exemption. Include the statement required in section 8.03 below.

(3) SECTION 883. To claim exemption under section 883, the foreign corporation must attach a statement to the Form 1120F for the taxable year setting forth the following information: the name of the corporation; employer identification number (if any); the country of incorporation; a statement that the foreign country of incorporation provides an equivalent exemption through domestic law and citing the applicable authority or diplomatic note between the country of residence and the United States confirming the exemption; a statement that more than 50% of the value of the outstanding shares is owned by shareholders which are residents of countries which provide an equivalent exemption for the type of transportation income applicable; and the statement required in section 8.03 of this revenue procedure. Upon examination, the foreign corporation must have documentation available to support the statements required herein. In the absence of such documentation, bearer shares will be deemed to be owned by individual residents of a foreign country which does not provide an equivalent exemption, for purposes of section 883(c).

03. STATEMENT OF AMOUNT EXCLUDED FROM GROSS INCOME. Under section l.6012-1(b)(i) and 1.6012-2(g)(i) of the regulations, if the foreign person has no gross income for the taxable year by reason of an income tax convention or any section of the Code, the return schedules need not be completed. However, the person must attach a statement to the return indicating the nature of any exclusions claimed (the types of USSGTI excluded) and the amounts of such exclusion(s) to the extent readily determinable.

SEC. 9. EFFECTIVE DATE

All sections of this revenue procedure (except section 7) are effective for taxable years beginning after December 31, 1986. Section 7 is effective for returns filed thirty days after February 11, 1991.

DRAFTING INFORMATION

Questions concerning this revenue procedure may be directed to its principal author, Patricia C. Bray, Office of Associate Chief Counsel (International), either by writing to CC:INTL: Br2, Room 4712, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, or by calling (202) 566-6645 (not a toll-free number).