Will the Cruise Industry Navigate Around the Minimum Tax?—Part 2

Part 1 of this article concluded that the US corporate alternative minimum tax might be avoidable by Royal Caribbean Cruises Ltd. and other foreign-parented cruise lines even if they have cruises between US and foreign ports, due to Section 56A(c)(4)’s application of the principles of Section 882. However, the pending OECD Pillar Two rules, which are designed to apply to a multinational corporate group whose annual revenues exceed 750 million euros, present these cruise lines with other challenges.

Royal Caribbean operates ships on various voyages between two foreign ports, and between US ports and foreign ports, with approximately 1,000 destinations on all seven continents. In addition to its Miami headquarters, Royal Caribbean has offices throughout the world to administer its operations. Its annualized financial accounting revenue in the first half of 2022 was $6 billion.

Article 3.3 of OECD Pillar Two generally excludes the international shipping income of constituent entities from the Pillar Two tax base. However, this exclusion doesn’t apply unless the entity demonstrates that the strategic or commercial management of all ships concerned is effectively carried on from within the country where the constituent entity is located. The Cruise Line Industry Association, of which Royal Caribbean is a member, has noted that the strategic or commercial management test is subjective and possibly difficult to satisfy and has requested that the OECD provide some safe harbors.

On behalf of those cruise lines that envision possibly being unable to achieve exemption under the strategic or commercial management test, the CLIA has also requested the OECD to interpret the computation of Pillar Two income in a favorable way. Pillar Two allows a corporation’s financial accounting tax base to be reduced by a substance-based factor of 8%, phasing down to 5%, of net fixed assets located in its jurisdiction. The CLIA has requested that fixed assets include ships, as well as terminals, headquarters, and other facilities owned by a shipping company, wherever such assets are located. Royal Caribbean’s June 2022 10-Q lists approximately $28 billion of fixed assets.

Pillar Two also allows a corporation’s financial accounting tax base to be reduced by a substance-based factor of 10%, phasing down to 5%, of payroll for services performed in its jurisdiction. The CLIA has requested an interpretation from the OECD that the payroll factor includes the payroll of the ships’ crew, and the payroll incurred for employees working in terminal facilities and headquarters building and elsewhere, irrespective of where the employees are located. Royal Caribbean’s second-quarter 2022 10-Q reports approximately $1 billion of annualized payroll costs. Noting the Covid-19 epidemic, the CLIA has also requested that cumulative financial net operating losses incurred in years incurred before the effective date of Pillar Two be available to offset Pillar Two income.

Conclusion

The IRS hasn’t yet issued guidance on whether it views US cruise line income, when exempt from corporate income tax under Section 883 or a tax treaty, as exempt from the $100 million threshold and CAMT tax base.

The response of the OECD to the Pillar Two concerns of the cruise industry is pending. Thus, the feasibility of Royal Caribbean and other cruise ship operators from making any required modifications of their legal and commercial strategy to avoid Pillar Two tax by satisfying Pillar Two’s international shipping exception—and their potential Pillar Two tax exposure if unable to do so—is unknown. However, the effective date of Pillar Two itself is uncertain.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan S. Lederman is a shareholder at Gunster, Yoakley & Stewart, P.A. in Fort Lauderdale, Fla.

We’d love to hear your smart, original take: Write for Us