Australia: IRS is aggressively targeting foreign vessel owners and US companies for Outer Continental Shelf oil & gas activities

Shipping newsletter - Legalseas
Shipping newsletter - Legalseas


The IRS continues to diligently pursue the foreign companies and the US companies that hire them to perform offshore services for the oil and gas industry on the Outer Continental Shelf in the Gulf of Mexico. The IRS is using sophisticated monitoring and vessel tracking systems, such as Sea-Web, Vessel Tracking Services, and satellites, to track the daily movement of certain vessels. The IRS contends that these foreign companies and their foreign workers have US source income and should have filed US income and employment tax returns and paid US taxes on amounts earned from these offshore activities. Moreover, the IRS contends that the US companies that hired and paid these foreign companies should have withheld taxes out of the amounts paid. The IRS's Industry Directives on this initiative can be found below.

IRS enforcement efforts

Following the announcement of this enforcement effort, the IRS sent a number of "soft" letters to foreign companies during 2009 that requested the company either file US tax returns and pay any tax and interest due, or provide a reason why the company believed that it was not required to file US tax returns. The IRS is now aggressively following up on those "soft" letters by preparing "substitute" returns for these foreign companies, issuing statutory notices of deficiency, and assessing the taxes, interest, and penalties that are purportedly due. The IRS has even gone so far as to issue Jeopardy Assessments against these foreign companies and serve levies on the US companies that hire them. The IRS has more than 50 people working on this initiative, and is pursuing both income and employment taxes. Moreover, the IRS is pursuing substantial penalties and denying income tax deductions for foreign companies that have not previously filed US tax returns.

The IRS's position

The linchpin of the IRS's position is that the services performed by these foreign companies are in the United States. The Internal Revenue Code's definition of the "United States" is extremely broad for personal services that relate to the "exploration and exploitation" of natural resources under section 638. Under this broad definition, those performing personal services on the Outer Continental Shelf that relate to the "exploration and exploitation" of natural resources are considered to be within the "United States" for federal tax purposes.

IRS broadly defines "exploration and exploitation"

The IRS has broadly defined the services that relate to the "exploration and exploitation" of natural resources in its Industry Directives and in a 2008 private letter ruling. Our previous briefing sets forth the IRS's expansive view of section 638 and is available by clicking here. It is currently unknown whether the IRS's expansive view of "exploration and exploitation" set forth in the Industry Directives and private letter ruling would survive a court challenge. The only reported case in this area, Ocean Drilling & Exploration Co. v. United States, 24 Cl. Ct. 714 (1991), aff'd, 988 F.2d 1135 (Fed. Cir. 1993), held that the IRS had overreached in defining "exploration and exploitation" activities.

The IRS is currently reviewing information on vessels operating on the Outer Continental Shelf

The IRS can determine what vessels have been operating on the Outer Continental Shelf through US Coast Guard and US State Department records. Extensive information must be submitted to the US Coast Guard to obtain approval for foreign vessels to be operated in US waters by foreign nationals. The necessary information includes the names and nationalities of the members of the crew, the bareboat charter agreements (including amounts paid), and information and documents about the owners of the vessels and their officers and directors. Moreover, the IRS is monitoring vessel operations on the Outer Continental Shelf through Lloyd's Register Fairplay, vessel automatic tracking systems, and satellites.

US companies and foreign vessel owners should be ready

In light of the IRS's enhanced enforcement efforts, both foreign vessel owners and the US companies that hire them should be prepared to respond to potential IRS inquiries and tax enforcement proceedings. Responding to such IRS actions would include analyzing the specific facts involved in light of the US tax laws; making any necessary challenges to the IRS's sometimes overly broad definition of what constitutes "exploration and exploitation" of natural resources; raising any available exceptions to or exemptions from US tax return filing or withholding requirements; asserting available tax treaty exemptions or reductions; and raising any applicable defenses to the IRS's collection efforts. Foreign vessel owners may also consider making a voluntary disclosure of their activities to the IRS and seek the waiver or reduction of any penalties the IRS may assert. Foreign vessel owners and the US companies that hire them may also consider reviewing the provisions of their charter agreements relating to US taxes, and adjust their tax compliance procedures going forward.

IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s].

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.