Tuesday, September 24, 2013

Tax Break for Businesses in Antarctica, But Not Employees

Internal Revenue Code section 911(a) allows US taxpayers living in a "foreign country" to earn tax-free up to $97,600 (in 2013) of wages and other earned income.  The US person would only pay the taxes of the country of residence, if any, on the first $97,600 of income.

In the landmark 1968 case of  Martin v. Commissioner, the taxpayer spent around a year working at Byrd Station, Antarctica for the Arctic Institute of North America.  The Tax Court rejected his claim that $7,000 of his wages should be considered tax-free income earned in a foreign country.  The court noted that "the Department of State does not consider the Antarctica region to be under the sovereignty of any government... [and] Antarctica has no territorial waters and that the waters surrounding the Antarctica land area and ice sheets are part of the high seas." 

In a 1993 non-tax case, the Supreme Court concluded that Antarctica is a "foreign country" under the Federal Tort Claims Act.  The Act provides that the US government cannot be sued for claims "arising in a foreign country," so the widow of a carpenter who died in Antarctica on a hike could not sue the US government.

Americans working in Antarctica saw the potential tax planning opportunity, but the lower courts quickly reaffirmed that Antarctica continues to not be a "foreign country" under the Internal Revenue Code, such as in Arnett v. Commissioner in 2007.  One explanation for the inconsistencies is that the taxpayer loses every time.

While American individuals in Antarctica have to pay US taxes as if they were living in the United States, businesses in Antarctica may benefit from a special rule in Internal Revenue Code section 863(d)(2) that could reduce their US tax rates to zero.  Certain special rules (too complex to describe in detail) provide tax benefits to "space or ocean activities," and section 863(d)(2) provides that space and ocean activity "includes any activity conducted in Antarctica."  Restaurants and oil wells in Antarctica are expected to be especially lucrative with the low tax rates.

Section 863(d)   Source rules for space and certain ocean activities.

(1) In general. Except as provided in regulations, any income derived from a space or ocean activity—(A) if derived by a United States person, shall be sourced in the United States, and (B) if derived by a person other than a United States person, shall be sourced outside the United States.

(2) Space or ocean activity. For purposes of paragraph (1)— (A) In general. The term “space or ocean activity” means— (i) any activity conducted in space, and (ii) any activity conducted on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States.
Such term includes any activity conducted in Antarctica.

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