23 January 2012

Northern Marianas Sues U.S. over unilateral application of taxes

Saipan Tribune

OAG: FICA translates to $24M in annual illegal taxes

By Ferdie de la Torre

The CNMI (Commonwealth of the Northern Mariana Islands) government is suing the U.S. Department of Treasury and U.S. Internal Revenue Service to stop the imposition of the Federal Insurance Contribution Act on Filipino and Korean workers with Commonwealth-only status.

The CNMI asserts that the extension of FICA taxes on Filipino and Korean nonresident workers could result in the imposition of $24 million annually in illegal taxes on the Commonwealth economy.

“Imposition of the unlawful FICA tax on businesses struggling in the contracting economy will certainly cause a large percentage of businesses to close,” according to assistant attorney general James R. Stump. The CNMI's economy will be further devastated and the government's budget will be further reduced, he added.

FICA covers Social Security and Medicare taxes. Both employers and employees share the cost of paying these taxes.

Stump filed the CNMI government's lawsuit in the U.S. District Court for the NMI yesterday afternoon. Also named as co-defendants are Treasury Secretary Timothy Geithner and Internal Revenue Commissioner Douglas Shulman.

The CNMI is suing for breach of the Covenant and violation of the Consolidated Natural Resources Act. It wants the district court to declare that the imposition of FICA taxes on Filipino and Korean workers in the Commonwealth with CW-I status (Commonwealth-only transitional worker) violates the Covenant and the CNRA.

Stump stated in the lawsuit that U.S. law provides an exemption from employer and employee FICA taxation for employment associated with “service performed in Guam by a resident of the Philippines and by a resident of the Republic of Korea while in Guam on a temporary basis as a nonimmigrant alien admitted to Guam.”

Stump said the purpose of such exemptions was to avoid imposing FICA taxation on alien individuals who, due to the limited nature of their visa status, would be unlikely to receive benefits.

Nonimmigrant Philippine and Korean nationals working in the CNMI have never been required to participate in the U.S. Social Security System.

On Oct. 5, 2011, IRS issued a memorandum stating that the adoption of the CNRA eliminates the exemption of Philippine and Korean workers in the Commonwealth from FICA taxation and that these individuals are now subject to this tax.

The current minimum wage in the CNMI is $5.05 per hour. An employee who works 40 hours per week for 52 weeks in a year would have 2,080 hours or $10,504 in gross income.

Stump said a Commonwealth employee earning $10,504 per year who is subject to a FICA tax rate of 7.65 percent would incur an annual liability of $803.

He said an employer paying an employee $10,504 per year who is subject to FICA liability of 7.65 percent would incur $803 in annual tax liability for the wages paid to that employee.

“If 75 percent of the 22,416 CW-1 classification visas that are authorized to be issued in 2012 are provided to Philippine and Korean workers working full-time and earning the minimum wage, the total annual FICA tax liability (employee and employer) would be $27,018,766,” Stump said.

The government lawyer pointed out that the ability of the CNMI to supplement local labor with short-term nonimmigrant aliens provides flexibility to the Commonwealth and avoids imposition of a 15.3-percent tax for which there is little likelihood of benefits and no opportunity for refund.

Stump said the avoidance of an inequitable, inappropriate, and detrimental tax structure was the specific intent of Congress in both the Covenant the CNRA, and the FICA tax liability exemption provided to nonresident aliens.

Stump asserted that the CNRA makes no changes to the Covenant sections authorizing the exemption of Philippine and Korean nonresident workers in the CNMI from FICA tax liability.

“It is unlikely that alien nationals present in the Commonwealth under a CW-I classification paying FICA taxes will quality for any associated benefits and the law does not provide a refund to either the employee or employer,” he pointed out.

This imposition of illegal taxation, Stump added, will cause significant unnecessary harm to the Commonwealth economy and is contrary to the stated intent of Congress that the CNRA be implemented in a manner as to minimize its impact.