By Tom Andrews, CPA
Tax treaties can make the difference between a nonresident crewmember paying tax while working in the United States and not having to pay tax. The United States has income tax treaties with a number of foreign countries. Under these treaties citizens of foreign countries are taxed at a reduced rate or their income is exempt from US income taxes all together.
In order for a nonresident crewmember to enjoy tax treaty benefits they generally must be a resident filer in their own country, complete the proper forms and submit those forms to their employer. The employer then may rely on those forms to not withhold tax while that crewmember is cruising in US territorial waters. It should be noted that not all tax treaties were created equal, the United States negotiates their tax treaties with foreign countries on an individual basis. While most tax treaties allow a nonresident crewmember to be in the United States for up 183 days in a twelve month period there are subtle differences that should not be ignored.
For example most crewmembers are residents of the following countries, Australia, Canada, France, England, New Zealand, and South Africa. While all of these countries have tax treaties with the United States and most of these tax treaties permit nonresidents to be in the United States for no more than 183 days in a twelve month period, only the Australian tax treaty resets on January 1st. For example if both a tax resident of Australia and New Zealand are working on the same foreign flagged vessel from October 1st 2015 until May 31st 2016, the employer would not be required to withhold tax from the Australian after March 31st and would be required to withhold income tax from the salary of the New Zealand resident starting March 31st.
In the above example both crewmembers are working in the United States for 243 days, the reason the employer is not required to withhold tax from the Australian is that the Australian tax treaty states that income is exempt if the Australian residents “are in the United States for no more than 183 days during the tax year”. The key words are “tax year”, the US tax year runs from January 1st through December 31st. The Australian was present in the United States for 92 days in 2015 and then the running calendar of days inside the United States is reset starting January 1st and the Australian is only considered in the United States for 151 days in 2016. The nonresident from New Zealand is required to have tax withheld from their salary starting March 31st because the New Zealand tax treaty states that the a citizen of NZ “may not be present in the United States no more than 183 days in any consecutive 12 month period”, in the above example the New Zealand citizen crossed the threshold of 183 days on March 31st, October 1st through March 31st is 183 days.
As you can see it is important to review your respective tax treaties as they can make all the difference in the world whether or not you will be required to pay tax on US source income.