Firm Examines Withholding Rates for Work on U.S. OCS

More specifically, the method used to arrive at those rates is as follows:

1) Calculate total annual income for an average service provider on the U.S. OCS. Average annual income was calculated in two steps. In Step 1, we calculated an average bareboat charter rate offered by the U.S. companies for vessels used in subsea construction services -- the services where the U.S. and Norwegian companies compete directly. A bareboat charter is the rental of the vessel only and does not include charges associated with providing crew or management services. A bareboat rental is the type of transaction the Norwegian subsidiary executes with its parent company for the rental of the vessel. The Norwegian companies engage in this type of transaction because the bareboat rental does not trigger PE status.

The U.S. companies reported a range of bareboat charter rates depending on the size of the vessel and the type of equipment (primarily size and technological sophistication of the crane on the vessel). An average bareboat charter rate was calculated based on the range provided by the U.S. companies. The least expensive charter rate was equal to 70 percent of the average rate used in the calculation. The most expensive charter rate was equal to 122 percent of the average charter rate used in the calculations.

In Step2, total annual income was calculated by multiplying the average, daily charter rate by 365 days.

2) Calculate net income for an average service provider on the U.S. OCS. Because a bareboat rental involves only the rental of the vessel and does not include the crew, management or other services provided by the vessel owner, there are limited expenses associated with the transaction that are deductible by the vessel owner. Therefore, only depreciation and interest expense were deducted from the income calculated in (1) above. Five years of data on depreciation expenses were provided by the U.S. companies. Depending on the specific company, the data covered the five year period of 2010-14 or 2011-15. The data provided by the U.S. companies was compared to data on nine Norwegian companies that operate in the maritime sector. Specifically we accessed data from two databases (Global Vantage, and Orbis) to obtain these data. The data for the Norwegian companies covered the period 2010-14.

The U.S. companies reported a range of annual depreciation expenses because of different depreciation methods used for individual vessels. For example, in some circumstances the U.S. company was able to take bonus depreciation for a particular vessel while in others five-year MACRS was applied. As a percentage of annual revenue, annual depreciation expenses reported by the U.S. companies ranged between 15 and 52 percent. We compared these ratios to the nine Norwegian companies for which data were available and the results for the Norwegian companies were generally consistent with the results reported by the U.S. companies. For the nine Norwegian firms, depreciation expense ranged between 12 and 36 percent of revenue.

Interest expense was also provided by the U.S. companies for the same time periods as depreciation expenses. As a percent of annual revenue, interest expense ranged between 14.5 and 17.4 percent. We again compared these ratios to the data available from the nine Norwegian companies and again the ratios were generally consistent with data reported by the U.S. companies. Interest expense as a percentage of revenue for the nine Norwegian companies ranged between 11 and 26 percent. A range of taxable income was calculated using the range of depreciation and interest expense deductions reported by the U.S. companies.

Applying these averages to the calculated annual income resulted in annual net income of between 30 percent and 71 percent of total income.

3) Calculate Norwegian tonnage tax liability: The purpose of the proposed withholding rate is to level the playing field between U.S. companies and their Norwegian competitors by ensuring that they pay generally similar amounts of tax on the income earned from providing services on the U.S. OCS. Therefore, it is appropriate to include in these calculations any tax paid to the Norwegian government. As noted, this income is exempt from Norwegian income tax but is subject to Norwegian tonnage tax. Tax liability under the Norwegian tonnage tax is calculated as 18 Krone per thousand deadweight tons less the first 1,000 tons of the vessel. Deadweight tons is a measure of the total weight a vessel can safely carry.

Average deadweight tonnage for the vessel was calculated as the total deadweight tonnage of the vessels in the fleet of vessels of the U.S. companies divided by the number of vessels. The vessels used in this calculation were limited to only those vessels that compete directly with vessels used by the Norwegian companies. This resulted in an average deadweight tonnage of approximately 38,000 tons of the vessel. Thus, the tonnage tax liability used in the calculation was approximately (((38,000 - 1,000)/1,000) *18)*365 days. This tax liability was converted to U.S. dollars using an average USD/Krone exchange rate of 8.2. This tax liability is equivalent to less than 0.1 percent of total annual income reported by the U.S. companies

4) Calculate U.S. tax liability of the Norwegian company as if it were subject to U.S. sax: A tax rate of 35 percent was applied to the taxable income calculated under (2) and (3) above. This income tax liability was then divided by the total income calculated in (1) to determine a gross withholding rate equivalent. This resulted in withholding rates of between 10.5 and 25 percent.

The following table shows the calculations for the estimates that result in the bottom and top end of the range of withholding rates calculated. It is necessary to present the data in index form to avoid disclosing business proprietary data for each U.S. company to their respective U.S. counterparts.

 Annual Income:                             100             100