Tonnage Regime

In lieu of the U.S. corporate income tax on taxable income from international shipping activities, corporations may elect to be taxed under an alternative ‘tonnage tax regime’. Under this tonnage tax regime, an electing corporation's gross income does not include its income from qualifying shipping activities. Instead, an electing corporation is subject to tax on qualifying shipping activities only at the maximum corporate income tax rate on its notional shipping income, which is based on the net tonnage of the corporation's vessels.

Specifically, for an electing corporation, the tax imposed under the alternative tonnage tax regime is the amount equal to the sum of:

The normal corporate income tax, but determined after the application of the tonnage tax regime; and
A tax equal to:

the highest corporate rate of tax multiplied by;
the notional shipping income for the tax year.

Interest Charge Domestic International Sales Corporation (IC-DISC)

Over the years, the U.S. has tried many different incentives for U.S. exporters, all but one of which has failed to meet the World Trade Organization’s (WTO) anti-competitive requirements. This last remaining incentive is called the Interest Charge Domestic International Sales Corporation (IC-DISC) and works to reduce taxable income to U.S. taxpayers based on the export sales of U.S. manufactured tangible property.

The IC-DISC will earn a commission of the greater of 50% of net export income or 4% of gross foreign income. The exporter receives a deduction for this commission, but due to the special incentive, the IC-DISC will not pay any income tax on the receipt of the commission income. There will, however, be an interest charge on the deferral of tax. This interest is minimal in relation to the amount of tax savings that can be generated by a medium to a large exporter.

The export property that qualifies for the commission must be manufactured, produced, grown, or extracted in the U.S. by someone other than the IC-DISC. It must be held for sale, lease, or rent for direct use, consumption, or disposition outside the U.S. The export property can be sold to an intermediate party provided the ultimate and first use, consumption or disposition is outside the U.S.

In addition to the deferral of tax, the IC-DISC can then pay out the dividends to its shareholders or loan money to the exporter (reducing the cost of capital). If the IC-DISC pays dividends and the U.S. qualified dividend rate remains at 15%, the corporate group has benefited from a 20% (35% ordinary tax rate vs. 15% qualified dividend) differential on the profits from the export sales.

An IC-DISC can be a subsidiary of the U.S. exporter or owned separately, but it must meet certain requirements, including the following:

U.S. corporation;
The initial capital of USD 2,500;
A single class of stock;
Elect to be treated as an IC-DISC within 90 days of the organization; and
Meet a 95% of export assets and gross receipts test.

COVID-19 Emergency Measures

As a part of measures to support employers and employees amid the COVID-19 pandemic, the U.S. government signed into law ‘the Families First Coronavirus Response Act on 18 March 2020’ (FFCRA).

The IRS published releases on 20 March 2020 and 7 May 2020, providing additional reliefs for employees and small and midsize businesses under the aforesaid Act. The release includes the following:

Paid sick leave for workers - employee unable to work (including telework) because of coronavirus quarantine or self-quarantine or has symptoms and is seeking medical diagnosis will receive up to 10 days (80 hours) of paid sick leave at the employee’s regular rate of pay up to USD 511 per day and USD 5,110 in total;
Employees who are unable to work due to caring for someone with coronavirus or caring for a child whose school is closed or childcare is unavailable due to coronavirus are entitled to paid sick leave for up to two weeks (up to 80 hours) at 2/3 the employee's regular rate of pay or up to USD 200 per day and USD 2,000 in total. Employers with less than 50 employees (i.e., small businesses) are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed or where child care is unavailable, in cases where the viability of the business is threatened;
Paid family and medical leave - employees will receive paid family and medical leave equal to 2/3 of the employee’s regular pay, up to USD 200 per day and USD 10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit;
Complete coverage - employers will receive 100% reimbursement for the paid leave, including health insurance costs, pursuant to the Act. Employers will not be liable for payroll tax, and self-employed individuals will receive an equivalent credit;
Fast funds - reimbursements will be quick and easy to obtain; and
Easing compliance - requirements subject to a 30-day non-enforcement period for good faith compliance efforts.

It is further specified that, in order to take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. Eligible employers are entitled to immediately receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer's share of medicare tax on the leave, for the period between 1 April 2020 until 31 March 2021 (extended from 31 December 2020). If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form.

The American Rescue Plan Act 21 (ARP), enacted on 11 March 2021, issued FAQs on the paid sick and family leave tax credits. It is clarified that eligible employers can claim the credits for providing leave to employees, accompanying or taking care of a family or household member, or certain other individuals to obtain immunization relating to COVID-19 or recovering from the immunization. The ARP also amends and extends the leave credit until 30 September 2021 for paid leave taken after 31 March 2021 (as extended earlier under FFCRA).

On 27 March 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (The Relief Act), providing certain tax relief measures in response to the COVID-19 pandemic, followed by various releases updating the measures by the IRS. The tax relief measures include the following:

Employee Retention Credit (ERC) (suspended from 14 September 2023 until 31 December 2023): The tax relief measures in relation to the ERC include the following:

A Paycheck Protection Program (PPP) is established to help small businesses during the pandemic. The program provides eligible businesses with funds (i.e., a loan) to pay up to 8 weeks of payroll costs, including benefits, interest on mortgages, rent, and utilities, as also certain covered operational expenditures, property damage costs, supplier costs, and worker protection expenditure related to COVID-19 incurred during the period between 1 March 2020 until the end of the national emergency declaration. The program covers small businesses under the Small Business Act, eligible non-profit organizations, veterans’ organizations, specified tribal businesses, and certain individuals. The loan payments under this program can be deferred for 6 months and may also be waived entirely, subject to certain conditions. The loan carries annual interest at the rate of 1% with a maturity period of 2 years. Further, for federal tax purposes, a deduction is not allowed in respect of debt waivers under the program, and the income associated with the debt waiver is also excluded from the gross income. Effective for taxable years ending after 27 March 2020, taxpayers are allowed to deduct eligible expenses paid with the proceeds of the loan under PPP that is forgiven (such deduction was previously disallowed). Further, retroactive to 27 March 2020, the PPP loan will be forgiven even if the employers obtained the ERC, provided the same wages are not counted both for seeking forgiveness of the PPP loan and for calculating the ERC. On 21 September 2022, the IRS issued guidance to address the improper forgiveness of loans under PPP. The guidance clarifies that taxpayers who receive forgiveness of their PPP loans based on misrepresentations or omissions are not entitled to exclude the forgiven portion of the loan from their reported income. Such taxpayers are required to file amended tax returns by including the forgiven loan portion in the income and pay additional tax on the same. In order to qualify for the PPP program, the following conditions must be met:

the loan recipient must be a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a tax-exempt entity, or must have hired employees or independent contractors on a payment basis;
the loan recipient must have been engaged in business on or before 15 February 2020;
the loan proceeds must be utilized towards allowable expenses which include payroll costs, rent, interest on the business' mortgage, utilities, etc.; and
the loan recipient is required to file an application for loan forgiveness which must be attested and verified and must meet other requirements under the program.

On 26 July 2023, the U.S. IRS published the final regulations providing guidance on recapturing the excess employment tax credits granted under the aforesaid Acts, i.e., the Families First Act and the CARES Act replacing the temporary and proposed regulation issued on 29 July 2020. The regulations are effective from 24 July 2023. The regulations require taxpayers to reconcile the advance payments with the total credits claimed and total taxes due on their employment tax returns. Any refund of these credits paid to a taxpayer that exceeds the amount the taxpayer is allowed is an erroneous refund. The regulations authorize the assessment and collection of any such erroneous refund of the credits in the normal course of processing the applicable employment tax returns or advance payments.

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