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Cayman registered but US sourced income..uh oh
kdhguard00
Posted: Tuesday, October 6, 2009 3:34 PM
Joined: 16/09/2008
Posts: 31


Hi everybody! I recently was asked this question: My crew contract is with a company in the Cayman Islands, but I have recently discovered that crew salaries are being paid from the US bank account of a US company. I am concerned about the tax implications for all crew (the whole crew is non-American). Does this make the crew liable for tax in the US as the income is from a US source? My friend is in a tricky situation. Please help.
Chief
Posted: Tuesday, October 6, 2009 4:09 PM
Joined: 02/06/2008
Posts: 341


Lots of good reading:  http://www.irs.gov/taxtopics/tc851.html
Marlin
Posted: Tuesday, October 6, 2009 5:17 PM
Joined: 04/03/2009
Posts: 12


Yes, you need to file US Income tax on all the income you received from the US souce. Your bigger problem is if you were phyically in the US at that time. It is in violation of your B1/B2 visa to do same. It means you were working in the US illegally.
Chief
Posted: Tuesday, October 6, 2009 7:29 PM
Joined: 02/06/2008
Posts: 341


I wonder if the ticking time bomb is onboard the yachts in US yards for which the captain hires dayworkers from the alien pool and pays them out of his own account or the boat's petty cash. Either way the paper trail of that money leads to a smoking gun. I wish I knew some more corney metaphors for deep doodoo ... the CBP and IRS could have a field day with this issue. 
Anonymous
Posted: Tuesday, October 6, 2009 9:24 PM
Back to the original question...if they are non us residents working outside the us, they should be okay. If the boat is in us waters, that's different. You said they are in the Cayman Islands...or Cayman flagged. Where do they cruise?
Tom
Posted: Tuesday, October 6, 2009 9:27 PM
Joined: 04/05/2008
Posts: 7


Dear Kdhguard00,

The Internal Revenue Code is a bit murky as to when non American crew members are responsible to pay US taxes.  Section 861a 3 states that "compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individuals temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States".  I say this is murky because some attorneys I have spoken to interpert this language to mean only commercial vessels and I have spoken to attorneys who interpert this language to mean all vessels.  If the foreign crewmembers are not working in the United States then their income is not US sourced, when they are working in the United States than depending on your interpertation of the above IRC section they would be repsonsible for paying tax on the amount of income they earn while working in the US.  Most crew members i prepare taxes for interpert the above section to exclude them from being reponsible for remitting tax and i have yet to see the IRS audit a non-resident crew member on this issue.  I wish i could give you a definite answer however the IRS has yet to fully address the issue of nonresident crewmembers. 

I hope this helps,

 

Tom Andrews CPA AvMar Accounting Services


Chief
Posted: Tuesday, October 6, 2009 10:25 PM
Joined: 02/06/2008
Posts: 341


"... regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States." 

So, when a privately owned yacht has entered US waters under a pleasure registry rather than the commercial registry used when chartering, how can any reasonable person claim that vessel is engaged in transportation between a foreign country and the US? In shipping, "engaged in transportation" generally refers to a common carrier does it not?

I don't believe you can't have it both ways. The boat is either a commercial vessel engaged in transportation or it's a pleasure vessel. There is a reason those yacht licenses are so easy to get, why passengers are called "guests" instead of passengers, and why they charter the boat rather than buy a ticket ... because a yacht is not a commercial vessel engaged in international transportation.  

In addition, if the boat is owned by an American, how can anyone make the argument that the source of the payroll is not "Effectively Connected Income (ECI)" since it derives from an American source? Even if the money was paid by an offshore bank is it not still ECI? Or is it simply laundered money?

As the government's lust for tax money grows I believe they will look much more closely at this little purse of gold dust that has been slipping through its fingers for so long.


Ben Franklin
Posted: Tuesday, October 6, 2009 11:13 PM
Joined: 04/10/2009
Posts: 19


Sounds like it is laundered money to me. I say, if it is owned by a citizen or resident of the US, with money earned in the US, out of a US bank account, then it should be flagged in the US, and crew by those eligible to work on it. I don't care where the person is from, only that the owner/crew agents/crew are not using these loopholes in various countries laws. Lets face it, none of the Marshall Island flagged vessels are owned by someone from the Marshall Islands neither are they crew by Marshallese. In all reality, the Marshall Islands part of the US and are receiving assistance in the form of defense, infrastructure, disaster relief, and the use of domestic postage to the US and payment of government services. The US pays for them to exist. Therefore, it should be that all persons working on Marshall Flagged vessels are working on essentialy on a US Flagged vessel, and should be required to pay US taxes, and have US work authorization. I think there is a loophole there that needs to be addressed. If your paycheck comes from a US company, regardless of the vessels flag, you need to pay taxes where that company is paying you from, your an employee of tht company and fall under the rules and laws of that country.


Marlin
Posted: Wednesday, October 7, 2009 12:26 AM
Joined: 04/03/2009
Posts: 12


If you received your crew salary from a US Company through a US bank them you are required to pay US income tax, period.Your employer is required to deduct income tax withholding and Social Security payments also. Your employer will not do that because you are not able to work legally in the US.
Chief
Posted: Wednesday, October 7, 2009 12:41 AM
Joined: 02/06/2008
Posts: 341


Chief wrote: "I don't believe you can't have it both ways. " When he meant to write; I don't believe you CAN have it both ways.
Anonymous
Posted: Wednesday, October 7, 2009 1:09 AM
One issue here (back to the original question) is that the crew salary is actually meant to be paid by an offshore company. It sounds like the crew signed contracts with an offshore company, but are being paid out of a US bank account... I imagine the contacts don't hold up to much against the tax law?
Doug
Posted: Wednesday, October 7, 2009 1:11 AM
Joined: 05/10/2009
Posts: 2


Marlin is right- you really need to address the working in the U.S. side of this before going to the IRS. The IRS WILL give you a SS number to pay the taxes, which ARE due but it will change your status in the U.S. There is no gray area in this matter it is just looks that way when people try to justify what they are doing. I will tell you what I tell all foreign crew working for american owners (notice I didn't say American flaged yachts) be careful, and know your true status in the U.S. I spoke at boat shows on this matter and have wrote about it you should look up "Foreign crew from the other side" in the Triton, it might clear things up concerning your friends status in the U.S.
kdhguard00
Posted: Wednesday, October 7, 2009 2:05 AM
Joined: 16/09/2008
Posts: 31


Allow me to be devil's advocate for a moment: If the crew member is not American and the boat is not in US waters, what can the IRS really do? From the crew member's point of view and not Uncle Sam's, with a non-US flagged vessel in foreign waters, if the employer's bank account were to be moved offshore, it seems the IRS would have even less claim on the wage.
Anonymous
Posted: Wednesday, October 7, 2009 3:06 AM
so many strong opiinions in this forum yet only one certified public accountant who deals with the IRS on a daily basis. Read what Tom wrote. He's the expert. "If the foreign crewmembers are not working in the United States then their income is not US sourced,"
Marlin
Posted: Wednesday, October 7, 2009 3:39 AM
Joined: 04/03/2009
Posts: 12


The US company has to account for the deduction in there books.They are probably calling you an independent contractor.
Chief
Posted: Wednesday, October 7, 2009 3:51 AM
Joined: 02/06/2008
Posts: 341


"If the crew member is not American and the boat is not in US waters ..." http://www.irs.gov/pub/irs-pdf/p515.pdf includes the following on page 24: "Services performed outside the United States. Compensation paid to a nonresident alien (other than a resident of Puerto Rico, dis cussed later) for services performed outside the United States is not considered wages and is not subject to withholding." I read that as meaning as soon as the boat enters US waters the wages paid to the crew while in the US are subject to withholding if they are paid from a US source ... which is how a US owner and a US bank might be described by most of those who would sit on a jury. "... if the employer's bank account were to be moved offshore ..." That's when the lawyers start making real money. Where does the money to fund that account come from? I'm no lawyer but I would call it a source and if the source was in the US then maybe those jurors might also call it a US source, others might call it something else ... but what do I know, I'm just a mechanic. "They are probably calling you an independent contractor ..." The IRS publication linked above addresses that little ploy.
14Freedom
Posted: Wednesday, October 7, 2009 7:50 AM
Joined: 16/04/2009
Posts: 155


I Love KDHGUARDOO...but I just got married to my best friend, Patricia, last Sunday.

macbethcraig
Posted: Wednesday, October 7, 2009 4:09 PM
Joined: 07/08/2009
Posts: 3


I work on a well known Cayman Flagged yacht, i'm a British Citizen and i'm payed by from an American company. I've never had problems with taxes although in the UK i have registered with a company called Seatax who look after all my UK tax issues. All i'm required to show to the UK tax guys is copies of my seamans discharge book and i keep my airline ticket stubs as extra evidence of being out of the UK. If i go on holiday i do the same and also send highlighted bank statements to show transactions outside the UK. As long as i'm out of the country for something like half the year it's all good. Been doing it for 7 years.
rodsteel
Posted: Wednesday, October 7, 2009 6:19 PM
Joined: 25/06/2009
Posts: 277


US Multinational corporations also have to address this issue for local employees in foreign states - I believe the same rules apply - taxation of foreign nationals depends on their residence, not the source of funds (the same goes for US nationals stationed overseas - except, even though they don't have to pay income tax on the first $80K or so, they still have to file a return in the US - and pay social security tax). Foreign workers can visit headquarters in the US for limited periods without tax consequences (as long as their visa is correct). Rod
Marlin
Posted: Thursday, October 8, 2009 12:59 AM
Joined: 04/03/2009
Posts: 12


If you look at the requirements of your B1/B2 Visa you will see that you are in violation of it. You must be paid by the foreign company that you are suppose to be working for. If you are being paid by an American company then you are working illegally. You still owe US tax and S.S.
 
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