By: Tom Andrews, CPA
My columns normally address the tax topics of Americans working in the yachting industry. In this month’s column, I will address the topic of non-residents who are having taxes withheld from their pay. Since it is becoming more common for nonresident crewmembers to have taxes withheld while the vessel is cruising in US territorial waters I believe it is important that this topic be discussed as it also affects the American Captains who run the program.
If you have kept a close eye on the news over the past several years you may have noticed that the Internal Revenue Service is becoming more aggressive in pursuing taxes they feel are attributed to offshore transactions. As the IRS has applied a more increasingly narrow interpretation of US tax law, accountants, attorneys and management companies have been taking notice and are re-evaluating their advice to clients to insure their clients are in compliance with US payroll tax law as it applies to international transactions.
One consequence of these developments is that foreign flagged vessels are now withholding taxes from nonresident crewmembers while those vessels are cruising in US territorial waters. At first glance many nonresident crewmembers feel their wages are not taxable as long as they are not cruising in US territorial waters for more than 183 days. In some cases they may be correct however in a vast majority of the cases they are incorrect. The exception to not having taxes withheld from your pay revolves around whether or not you qualify for tax treaty benefits with your home country. In many cases the United States extends tax treaty benefits with many nations that provide nonresident crewmembers, these tax treaties often (but not in all cases) allow nonresident crewmembers to not have taxes withheld if the vessel is cruising in US territorial waters for less than 183 days. The problem is that in order to qualify for tax treaty benefits you must in most cases be a resident filer and pay taxes in your own country.
If you are a nonresident and happen to be working on a vessel that is withholding taxes from your pay while the vessel is cruising in US territorial waters you should confirm if you do qualify for tax treaty benefits, if you do qualify for tax treaty benefits notify the owner of the vessel and they will provide you the forms necessary to stop that withholding.
Despite what you may feel about having taxes withheld from your pay, when it comes to yacht crew payroll, the days of working without filing or paying taxes anywhere is coming to an end. The reason many countries allow their citizens to file as “nonresidents” is they assume that you are filing and paying taxes in another country.