Tax Policy

Pursuant to a congressional request, GAO reviewed the effects of repealing the tax deferral for foreign-earned shipping income, focusing on the: (1) generation of additional tax revenues; and (2) availability of merchant ships planned for use in national emergencies.

GAO found that: (1) since the passage of the Tax Reform Act of 1986, foreign-based shipping income had increasingly been subjected to immediate taxation; (2) it could not determine the amount of foreign-earned shipping income tax revenues; (3) from 1984 to 1987, tax revenues fell due to lower corporate tax rates and a decline in foreign-earned shipping profits; (4) the Department of Defense and the Maritime Administration believed that tax changes could accelerate the decline in the number of U.S.-owned foreign flag ships and adversely affect the military's war contingency plans for ship use; (5) some factors suggested that tax changes would not lead to a ship deficiency; (6) to date, the deferral's repeal had not affected the number of U.S.-owned foreign flag ships; (7) the military planned to use 124 of the 328 U.S.-owned foreign flag ships for wartime sealift, but there were unresolved issues regarding those ships' wartime availability; and (8) U.S. requisitioning authority may not extend to ships owned by U.S. corporations' foreign subsidiaries, since the flag state may have the right to control those ships.