By Alex M. Parker

Law360 (March 18, 2020, 9:04 PM EDT) -- Critics have long claimed cruise lines use the high seas and ownership in havens to dodge U.S. taxes, an accusation that could jeopardize their hope for federal assistance as they face an existential crisis with the COVID-19 outbreak.

The politically savvy industry has beaten back past attempts from Congress to negate an Internal Revenue Code exemption that covers most of its income. But that may change as President Donald Trump floats a federal cash infusion or tax deferral program, and many Democrats are questioning why the taxpayers should extend a hand to corporations that pay negligible income tax and largely maintain foreign residency.

"The giant cruise companies incorporate overseas to dodge U.S. taxes, flag vessels overseas to avoid U.S. taxes and laws, and pollute without offset," Sen. Sheldon Whitehouse, D-R.I., wrote on Twitter. "Why should we bail them out?"

The cruise industry faces monumental revenue losses after all the lines serving U.S. ports announced they would forgo operations for 30 days amid the global spread of the novel coronavirus, which leads to COVID-19. Many of the first U.S. cases came from cruises, which can be fertile grounds for the virus given the older age of most passengers and the confined space. Even if the industry resumes voyages, many question whether it can survive.

At several news conferences, Trump and Vice President Mike Pence have suggested that the administration would propose assistance of some kind to help the beleaguered sector.

"It was nobody's fault, and certainly none of these companies that, all of a sudden, had no passengers and planes and had no passengers on cruise ships," Trump said during a Wednesday briefing. "Certainly, hotel industry, the cruise ship industry, the airlines. Those are all prime candidates [for federal assistance]."

Despite Trump's statements, none of the major U.S. cruise lines have yet asked for assistance as they deal with the pandemic fallout.

Using the ocean to secure unusual legal treatment is baked into the DNA of the luxury passenger cruise line industry, going back to its roots with the "booze cruises" thirsty Americans used to escape Prohibition. Nearly all the major cruise lines are based outside the U.S., changing not only their tax treatment but often exemption against U.S. labor and safety regulations, according to James Walker, a Miami attorney who represents passengers and crew members in litigation against the industry.

"The attempts to isolate itself from accountability exist kind of across the board," Walker said.

In the case of taxes, the offshore registration allows the cruise lines to use IRC Section 883 , which exempts income earned by foreign corporations for the "international operation of a ship or ships," as long as their country of residence also extends the same protection to U.S. ships.

That "reciprocal exemption," more than half a century old, was meant to promote international trade and avoid the interminable disputes that would arise trying to use traditional income allocation for ocean voyages. All worldwide shipping profits would roll back to the lines' country of origin, in theory.

"It's basically, we won't tax your ships if you don't tax our ships, that's the idea," said Rafic Barrage, a principal at Baker McKenzie who has represented cruise lines.

But the U.S. is among the few countries in the world that establish tax residency simply through incorporation, rather than a factual analysis such as the place of management and control. The practice — or loophole, as critics would call it — has led to controversy as companies such as Burger King and Johnson Controls International PLC used inversions to establish offshore parent companies while maintaining headquarters in the U.S. The issue provoked debate about whether requiring a management and control test would keep those companies in the U.S. or force them to move their headquarters out, and whether residency is a meaningful tax definition in an age of global multinational corporations.

The three major cruise line companies, Carnival Corp. & PLC, Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings, are all based in Miami even as they maintain offshore parent companies. Royal Caribbean is registered in Liberia, Norwegian in Bermuda. Carnival uses a dual company structure with a U.S. arm, Carnival Corp., based in Panama. All are publicly traded on the New York Stock Exchange.

All three companies have reported low or zero taxation in recent years, which they mainly attribute to the exemption. Carnival Corp and Norwegian both posted negative income tax expenses — that is, they received more in refunds or deductions than they paid or set aside for taxes — with Carnival reporting an income tax expense of $71 million and Norwegian reporting an $18.9 million tax benefit.

Royal Caribbean told shareholders its total income tax expense for 2019 was $32.6 million, on total income of $1.9 billion.

Because of these relatively low payments, analysts wonder whether a tax deferral, one of the options considered by the Trump administration, would give the industry any help.

"It's difficult to see how these companies could be afforded any sort of meaningful tax relief," said Robert Willens, a tax and accounting analyst in New York. "Some sort of direct subsidy or refundable tax credit mechanism would probably have to be devised to actually put money into their pockets."

In the past, lawmakers on both sides of the aisle have challenged the major cruise lines on their offshore tax position. Sen. Jay Rockefeller, D-W.Va., held hearings about their offshore status in 2012 and proposed a bill to nix their Section 883 exemption.

In 2014, Rep. David Camp, R-Mich., then chairman of the U.S. House Ways and Means Committee, included a special provision in his draft for a tax overhaul that would bring the cruise line industry under new taxation.

Lawmakers included similar language in the Senate's initial version of the 2017 Tax Cuts and Jobs Act , which was passed out of the Finance Committee. That provision would have nixed the exemption and taxed cruise lines, regardless of their incorporation or flag, based on whether they disembarked from a U.S. port with U.S. passengers and for how long they stayed within 12 nautical miles of the U.S. shore.

But the provision was stripped from the bill in an amendment on the Senate floor, as Sen. Dan Sullivan, R-Alaska, claimed it discriminated against an industry that constitutes a significant portion of the state's economy.

Whether that language could reemerge as part of a package to rescue the agency remains to be seen. Sen. Elizabeth Warren, D-Mass., a former 2020 presidential candidate, unveiled a list of conditions on Twitter she would seek for any industry receiving a bailout, including a $15-an-hour minimum wage and employee representation on the board of directors — but did not include any tax-related items.

The Cruise Lines International Association, an industry trade group, said the industry supports 421,000 jobs in the U.S., including "travel agencies, airlines, hotels and a broad supply chain of industries that extend well beyond the cruise lines themselves." For every 1% drop in bookings, 2,000 jobs are lost, according to the association.

The group said cruise lines "are required to follow tax rules for international shipping, which have decades-long roots in U.S. tax law and international agreements between the U.S. and numerous foreign countries."

Carnival Corp., Royal Caribbean and Norwegian would not comment.

--Editing by Tim Ruel and John Oudens.

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