CNMI FICA LAWSUIT EXPECTED TO HINDER IRS AGREEMENT

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Businesses, officials offer mixed reactions to lawsuit, IRS talks

By Haidee V. Eugenio SAIPAN, CNMI (Saipan Tribune, Jan. 24, 2012) – Delegate Gregorio Kilili Sablan (Ind-MP) said the CNMI government's lawsuit stopping the imposition of Social Security and Medicare taxes on Filipinos and Koreans with Commonwealth-only worker status would just make it harder – if not impossible – for the CNMI to reach an agreement with the Internal Revenue Service (IRS) to help businesses and workers on the islands, but the business community's reactions to the lawsuit remain varied.

Sablan, at the same time, cautioned that if businesses with CW workers do not pay federal taxes just because of the CNMI government's lawsuit, these same businesses will have to answer to IRS later on especially if the lawsuit fails.

"Then who's responsible for it? The governor? Is he going to be responsible for these unpaid bills (taxes) that will grow over time? So he needs to be more realistic here. We're having conversation with IRS.to find whatever it is that we can do (to help workers and businesses)," Sablan told Saipan Tribune in an interview at the Saipan Chamber of Commerce installation dinner on Saturday.

[PIR editor’s note: Sablan is hopeful that talks between the CNMI government and the IRS continue in spite of the ongoing lawsuit. Sablan also said that the CNMI "had filed lawsuit after lawsuit before, and I don't know if they've won any, but I prefer that we don't do a lawsuit here [FICA]. I prefer we continue this conversation with the IRS. I won't speak for the governor because he doesn't listen to me at all, but I will continue to try our efforts with the IRS."]

Some business representatives said they have started withholding FICA taxes in December, others started doing so this month because they said IRS has already made it clear that those with CW status are not exempt from FICA taxes.

There were businesses on Saturday that also said they won't be affected by the FICA taxes at all because they have been paying these taxes for years for their employees.

IRS says unless temporary workers in the CNMI are eligible for an exemption from Social Security and Medicare taxes based on some other circumstances such as holding a valid H-2 visa, then employers are required to withhold and pay Social Security and Medicare taxes.

Eric Plinske of Staywell Health Insurance and one of the Saipan Chamber of Commerce's newly-sworn in board directors said while he has yet to fully read the CNMI government's lawsuit, he thinks it is unfair that temporary CW workers are subject to these taxes especially if holders of other temporary types of visas are exempt from these taxes.

"I think it's worth challenging. The bigger question is while it's in progress, when is the official date that you're supposed to comply (with the IRS decision)? Everyone has a different interpretation," he said.

Plinkse said for years, the federal government knew that the immigration takeover will happen but there was no mention of federal tax imposition which could have helped businesses and workers prepare for it.

"I think there's some real slip up on the part on the federal (government) regardless of how this lawsuit ends up," he added.

John Jones, co-owner of 360 Revolving Restaurant, said the issue of "fairness" comes to play because foreign workers with CW status will be contributing into the federal tax system and not benefit from it once the transitional CW program expires in 2014.

"They have a very big valid concern," said Jones. "I think it's unfair. Why don't they just exempt these CW workers altogether?"

Jones, who has been in the business sector in the CNMI since 1997, said when these workers invested some 10 to 20 years working in the CNMI under the previous system, they were not made to pay for federal taxes. He said those long years could have made them eligible to reap the benefits of paying into the federal tax system. But now that a new CW system was introduced, they will be made to pay federal taxes during the transition period with no guarantee of benefiting from it.

Federal taxes are on top of CNMI taxes that workers in the CNMI pay.

The CNMI government, in suing on Thursday the U.S. Department of Treasury and IRS, said the extension of the Federal Insurance Contribution Act taxes on Filipino and Korean nonresident workers could result in the imposition of $24 million annually in illegal taxes on the local economy.

FICA covers Social Security and Medicare taxes, which are shared by both employees and employers.

"We're having conversations with IRS on this FICA issue. We're just concerned that now they're going to shut down the whole thing, that they won't be able to talk to us because there's a lawsuit involved," Sablan told Saipan Tribune in an interview at the Saipan Chamber of Commerce installation dinner on Saturday.

Sablan said IRS has, for one, put out a notice that those with CW status, including workers from the Philippines, are not exempt from paying Federal Insurance Contribution Act taxes.

The delegate, now back in Washington, D.C., said despite the lawsuit, he will still continue to communicate with IRS on the issue of federal taxes.

"Let me put it this way. When they [Department of Homeland Security] published the rule two years ago on CW workers, we went to court, stopped the whole thing. Then now that it (worker rule) is out, somebody came up with a lawsuit complaining that DHS didn't do their job on time," Sablan said. "I'm just concerned that what I thought was beginning to be a good candid conversation as much as possible with IRS, that this lawsuit may actually just make it more complicated and more difficult to achieve what it is we can do for our businesses here."

Gov. Benigno R. Fitial, in an interview a few hours before the CNMI government filed a lawsuit against U.S. Treasury and IRS, said his administration would try to work amicably with IRS on the FICA issue.

Workers with pending CW status applications and their employees, meanwhile, are now bracing for the impact of additional taxation on their paychecks and personnel expenses.

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