A little-noticed provision of the Senate's tax reform legislation introduced last week would partly repeal an exemption from U.S. income tax that the cruise industry has enjoyed for decades.

The Senate's Tax Cuts and Jobs Act addresses sections 873 and 883 of the tax code that provides for reciprocal exemption from income taxes for foreign corporations in the ocean shipping business.

All of the major cruise lines are legally incorporated in foreign nations such as Panama, although they maintain their principal headquarters in the United States.

The bill "creates a category of income defined as passenger cruise gross income," according to a summary by the Congressional Joint Committee on Taxation. "As a result, effectively connected passenger cruise income is subject to net basis taxation," the analysis said.

"Effectively connected passenger cruise income" is defined as the part of a voyage that occurs in U.S. territorial waters 12 miles from shore. It essentially applies to the embarkation and disembarkation days of cruises that leave from U.S. ports on ships owned by foreign corporations.

Cruise lines currently pay income taxes on land-based activities that occur in the U.S., such as excursions in Alaska, but it is a minor share of their overall income.

The cruise tax provision is detailed on the second-to-last page of the 247-page analysis under the heading "Other Provisions."

Stock analysts attributed a swoon in cruise shares on Friday to investor discovery of the provision. Shares of Carnival Corp. closed down 2.3% on Friday, while shares of Royal Caribbean Cruises Ltd. fell 1.9% and shares of Norwegian Cruise Line Holdings sank 2.9%.

Analysts pointed out that the shape of a final tax bill in the Senate is far from set, and the House tax bill currently does not change the tax treatment of cruise shipping income for foreign corporations or nonresident owners.

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