[Congressional Record Volume 143, Number 142 (Tuesday, October 21, 1997)]
[Extensions of Remarks]
[Page E2034]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




      RESTORING THE EXCLUSION FOR NON-OIL RELATED SHIPPING INCOME

                                 ______
                                 

                         HON. E. CLAY SHAW, JR.

                               of florida

                    in the house of representatives

                       Tuesday, October 21, 1997

  Mr. SHAW. Mr. Speaker, I am introducing legislation today to restore 
the exclusion of shipping income from subpart F of the Internal Revenue 
Code. When first enacted, subpart F did not tax the shipping income of 
foreign corporations owned by U.S. citizens. Shipping companies owned 
by U.S. citizens were allowed to compete on terms comparable with 
companies owned by foreign nationals. As a result, the U.S.-owned fleet 
represented over 25 percent of the total world fleet. The U.S.-
controlled fleet made significant contributions to the Nation's 
security and it promoted the development of major shipping centers in 
the United States. The U.S.-controlled fleet alone generated hundreds 
of millions of dollars in tax revenues as a result of the voluntary 
repatriation of earnings from the fleet and the associated 
infrastructure generated billions of additional dollars of taxable 
economic activity.
  In 1975, subpart F was amended to include shipping income that was 
not reinvested. As a result of the tax change, the U.S.-owned fleet 
began to decline and the centers of international shipping in the 
United States began their decline in prominence. As the once 
significant U.S.-owned fleet was forced to expatriate to remain 
competitive, related industries, including insurance brokers, ship 
management companies, surveyors, chartering brokers, technical 
consultants, and many others who provide services to the maritime 
industry followed. Tax revenues also declined. In 1986, this mistake 
was compounded with the imposition of taxes on reinvested shipping 
income. The U.S.-owned fleet now represents less than 5 percent of the 
world fleet.
  Our major trading partners, on the other hand, have taken a different 
approach. They have adopted tax policies to ensure that their 
international shipping is competitive in world markets. As a result, 
the economic leadership of the United States in this vastly important 
sector of the economy has been lost. We simply do not have the fleet or 
the infrastructure to support even a modest percentage of our own 
international trade. Subpart F has even contributed to the transfer 
foreign of the once significant U.S. flag fleet, which depends on 
foreign flag feeder vessels to be competitive. Recent transactions, 
including the agreement of Neptune Orient Lines to acquire APL, raise 
the troubling possibility of foreign control of the majority of the 
government supported U.S.-flag fleet. it makes little sense to spend 
scarce taxpayer dollars to support U.S.-flag shipping only to have our 
misguided tax policies undermine their competitive opportunities in 
international trade.
  Restoring this exclusion also reflects sound tax policy. The United 
States generally does not tax U.S. shareholders on income until that 
income is realized, that is, the shareholders have dominion and control 
over the income. Subpart F of the Internal Revenue Code creates an 
exception to this general rule by taxing a U.S. parent corporation, or 
significant individual U.S. investor, on the income earned by a foreign 
subsidiary whether or not that income is paid to the U.S. parent, for 
example, in the form of dividends. Shipping income of such a U.S.-
controlled foreign corporation [CFC] is subject to current taxation 
under subpart F, regardless of whether those earnings are distributed 
to its U.S. shareholders. But deferral properly remains the general 
rule, not the exception, under U.S. law.
  There is no evidence whatsoever that the tax policy justifications 
for the application of subpart F--that seek to prevent the tax 
motivated expatriation of economic activity--apply to international 
shipping.
  The U.S.-controlled fleet has declined from over 25 percent of the 
world fleet in 1975 to less than 5 percent today. This decline has in 
no way benefited U.S.-flag operations or U.S. employment. There has 
been no offsetting increase in the investment of U.S. persons in U.S.-
flag shipping operations. Thus, however viewed, the current law has 
been a losing proposition for all U.S. interests.
  Therefore, I am introducing legislation that will restore the 
exclusion of shipping income from subpart F of the Internal Revenue 
Code. While there has been disagreement on how to restore the American-
owned fleet in international shipping, this legislation represents the 
most up to date thinking on how to accomplish that objective. It is the 
result of many hours of thought and consideration, and has received 
broad support from important elements of the maritime industry.
  Specifically, the proposed amendment to the Code would restore the 
exclusion for non-oil related shipping income from subpart F. This 
deferral is available to U.S.-controlled groups, that is, groups under 
common control of the same ultimate owners, that maintain a U.S.-flag 
fleet of 4 or more ships of 10,000 deadweight tons or 2 or more cruise 
ships with at least 275 berths for passengers. The U.S.-flat fleet 
requirement will assure that groups benefiting from deferral will 
maintain at least a minimum U.S. investment, thereby bolstering the 
U.S. economy and providing U.S. jobs. It will also apply to shipping 
companies that operate in the Caribbean. This will serve the policy of 
fostering development in the Caribbean Basin as enunciated in the 
Caribbean Basin Economic Recovery Act. Finally, deferral is reinstated 
for companies that are not engaged in the carriage of the commerce of 
the United States. There is no conceivable justification for imposing 
U.S. taxes on the income of these foreign shipping companies controlled 
by U.S. citizens.
  To further make available funds for expansion of a U.S.-flag fleet, 
the proposed amendment permits a controlled foreign corporation to loan 
funds for acquisition, construction, or reconstruction of a U.S.-flag 
vessel without triggering U.S. taxation of the funds. Further, the 
proposed amendment exempts in certain cases interest paid or accrued on 
the loan from U.S. withholding taxes to further foster investment in, 
and promote the competitiveness of, the subsidized U.S.-flag fleet. 
Ultimately, the success of that fleet will depend on policies that will 
help make U.S. flag operators more competitive. This proposal would do 
just that.
  It was unfortunate that this legislation could not have been included 
in this year's tax reconciliation bill. Nevertheless, I urge my fellow 
members to support this proposal, which represents the current state of 
development of restoring America's presence in international shipping. 
I intend to include it in appropriate legislation at the earliest 
possible time.

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