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Washington—Despite discussions with foreign airline representatives and their lawyers, Treasury Department and Internal Revenue Service officials apparently are standing firm on a new initiative to impose federal income withholding taxes on Latin American airline crews who use U.S. airspace on their way to and from U.S. airports. The tax plan is a Pandora’s box which, once opened, could be applied to other industries and professions whose members travel to and from the United States, said those watching closely the Latin American tax effort. It could also spark similar retaliation against the United States. The Internal Revenue Service (IRS) is expected to expand its tax plan to airlines in other countries without double-taxation treaties. “What about lawyers who go back and forth between countries? And what about newspapers and periodicals whose reporters may be in 10 countries in one year?” asked Kenneth Bezozo of the New York office of Dallas-based Haynes and Boone, counsel to two air carrier associations. “You could go on and on.” Bezozo said that he and his clients had met in the last few weeks with officials at the departments of Treasury, Commerce, Transportation and State to share concerns about the “domino effect” of what could happen if the tax initiative goes forward. Last week, those agencies reportedly held an intergovernmental meeting on the issue and, Bezozo said, “The information we’ve gotten back was, in essence, Treasury is forging ahead.” The IRS has targeted airlines in seven Latin American countries: Brazil, Chile, Costa Rica, El Salvador, Guatemala, Panama and Peru, according to the Latin American Airline Association (AITAL), which, along with the International Air Transport Association, is represented by Haynes and Boone. Treasury officials did not answer a request for comment. Flawed interpretation? The IRS had been studying the tax issue for about 10 years, said Bezozo. “They reached the conclusion that the law is that when a foreign-based flight crew of a foreign airline that lands in the U.S. or is over U.S. territory, they should be paying U.S. federal income tax on the proportion of their salaries that were earned while they were in U.S. territory,” he explained. While that interpretation isn’t “unreasonable,” Bezozo said, it is flawed and incorrect. “Does the U.S. think the foreign governments, whose citizens are now going to be paying some of their salary to the U.S. and who presumably will claim a credit in their country for the tax paid, are going to say, ‘They can do it. They’re the U.S.?’ No, they’re probably going in every case to reciprocate, at least in kind, maybe more,” predicted Bezozo. Of all flights going back and forth between the United States and Latin America, 30% are in-bound to the U.S. by foreign carriers and 70% are out-bound, according to the AITAL. “It doesn’t take a highly intelligent person to figure out that if countries provide reciprocity on this issue, we lose,” Bezozo said. Tax scholar Daniel Goldberg of the University of Maryland School of Law noted that the new tax initiative presents practical difficulties for the foreign airlines and the IRS. “How many hours do they spend in the U.S. and how is anybody going to keep track of that?” he asked. “It’s a difficult allocation. Do you stop spending time in the U.S. as soon as those monitors that show where your plane is show it is in a different place or maybe when applause erupts in the cockpit?” Goldberg said that most of the world’s developed countries have double-taxation treaties with the U.S. The undeveloped nations do not, he added, and some are known as tax havens. “It may be this is a way of cajoling other countries into signing treaties with us,” he suggested. “The benefit for us is we get access to information that they may have on Americans who have bank accounts in various places,” Goldberg said. “It’s one major push of the current IRS administration to crack down on shelters and tax cheats.” Bezozo noted that Congress in 1997 amended the Internal Revenue Code specifically to exempt crews of foreign “vessels” engaged in transportation between the United States and foreign countries from the federal withholding tax. “There’s an argument that should apply to airlines as well,” he said, adding court action is “clearly a consideration.”

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