Employment Tax And Employees On The Outer Continental Shelf

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On March 30, 2011, the Internal Revenue Service (the “IRS”) released Industry Director’s Directive #2 – Employment Tax and the Employees on the U.S. Outer Continental Shelf (“Directive #2”). Directive #2 provides notice and field direction on the application of section 3402 of the Internal Revenue Code,2 the Federal Insurance Contributions Act (“FICA”) and the Federal Unemployment Tax Act (“FUTA”) to remuneration for work performed by nonresident alien employees on the Outer Continental Shelf in the Gulf of Mexico (the “OCS”). Directive #2 draws from the legal conclusions reached in Chief Counsel Advice 201027046 released on July 9, 2010. CCA 201027046 concluded that services performed by a nonresident alien employee on structures permanently or temporarily attached to the OCS, or on vessels or other devices engaged in activities related to the exploration for, or exploitation of, natural resources on the OCS are performed within the U.S. and that any remuneration paid for such services is subject to withholding of income tax, FICA and FUTA.

The IRS has determined that many employers fail to comply with their withholding obligations for nonresident alien employees working on the OCS. An OCS compliance steering committee has been established to help identify, develop, resolve and improve IRS coordination of issues related to OCS activities.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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