Carnival Cruises 2008 Annual Report Download - page 28

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that directly addresses the effect, if any, of DLC arrangements on the availability of
benefits under the treaties and, consequently, the matter is not free from doubt. These
treaties may be abrogated by either applicable country, replaced or modified with new
agreements that treat income from international operation of ships differently than under
the agreements currently in force. If any of our subsidiaries that currently claim
exemption from U.S. income taxation on their U.S. source shipping income under an applicable
treaty do not qualify for benefits under the existing treaties, or if the existing treaties
are abrogated, replaced or materially modified in a manner adverse to our interests and,
with respect to U.S. federal income tax only, if any such subsidiary does not qualify for
exemption under Section 883, such ship-owning or operating subsidiary may be subject to U.S.
federal income taxation on a portion of its income.
Taxation in the Absence of an Exemption under Section 883 or any Applicable U.S.
Income Tax Treaty
Shipping income that is attributable to transportation of passengers which begins or
ends in the U.S. is considered to be 50% derived from U.S. sources. Shipping income that is
attributable to transportation of passengers which begins and ends in foreign countries is
considered 100% derived from foreign sources. Shipping income that is attributable to the
transportation of passengers which begins and ends in the U.S. without stopping at an
intermediate foreign port is considered to be 100% derived from U.S. sources.
The legislative history of the transportation income source rules suggests that a
cruise that begins and ends in a U.S. port, but that calls on more than one foreign port,
will derive U.S. source income only from the first and last legs of the cruise. Because
there are no regulations or other IRS interpretations of these rules, the applicability of
the transportation income source rules in the aforesaid manner is not free from doubt.
In the absence of an exemption under Section 883 or any applicable U.S. income tax
treaty, as appropriate, we and/or our subsidiaries would be subject to either the net income
and branch profits tax regimes of Section 882 and Section 884 of the Internal Revenue Code
(the "net tax regime") or the four percent of gross income tax regime of Section 887 of the
Internal Revenue Code (the "four percent tax regime").
Where the relevant foreign corporation has, or is considered to have, a fixed place of
business in the U.S. that is involved in the earning of U.S. source shipping income and
substantially all of this shipping income is attributable to regularly scheduled
transportation, the net tax regime is applicable. If the foreign corporation does not have
a fixed place of business in the U.S. or substantially all of its income is not derived from
regularly scheduled transportation, the four percent tax regime will apply.
The net tax regime should be the tax regime applied to Carnival Corporation in the
absence of an exemption under Section 883. Under the net tax regime, U.S. source shipping
income, net of applicable deductions, would be subject to a federal corporate income tax of
up to 35% and state income taxes at varying rates; and the net after-tax income would be
potentially subject to a further branch tax of 30%. In addition, interest paid by the
corporations, if any, would generally be subject to a branch interest tax.
The four percent tax regime should be the tax regime applicable to our vessel owning
subsidiaries based outside the U.S., in the absence of an exemption under Section 883 or any
applicable U.S. income tax treaty. Under the four percent tax regime, gross U.S. source
shipping income would be subject to a four percent tax, without the benefit of deductions.
UK Income Tax
Cunard, Ocean Village, P&O Cruises and P&O Cruises Australia have all elected to enter
the UK tonnage tax regime. Companies to which the tonnage tax regime applies pay corporation
tax on profit calculated by reference to the net tonnage of qualifying vessels. UK
corporation tax is not chargeable under the normal UK tax rules on these brands' relevant
shipping income. Relevant shipping income includes income from the operation of qualifying
ships and from shipping related activities. It also includes dividends from foreign
companies, which are subject to a tax on profits in their country of residence or elsewhere
and the activities of which broadly would qualify in full for the UK tonnage tax regime if
they were UK resident.
For a company to be eligible for the regime, it must be subject to UK corporation tax
and, among other matters, operate qualifying ships that are strategically and commercially
managed in the UK. There is also a seafarer training requirement to which the UK tonnage
tax companies are subject.