Transitional CNMI Workers Exempted From Federal Taxes

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No refunds offered for ‘illegal taxes’ already collected

By Haidee V. Eugenio

SAIPAN, CNMI (Saipan Tribune, Dec. 20, 2012) – Christmas will be a bit merrier for thousands of transitional Filipino workers and their employers following the U.S. Internal Revenue Service's (IRS) announcement that Filipinos working in the Commonwealth of the Northern Mariana Islands need not pay federal taxes between now and Dec. 31, 2014, drawing positive responses from CNMI officials, employers, and employees yesterday. But concerns about these taxes remain.

The Fitial administration has said the federal taxes on Filipino and Korean workers could result in $24 million in annual "illegal taxes" that could have been circulating in the local economy.

IRS, in its Dec. 17 announcement, however, said that employers must withhold and pay Federal Insurance Contribution Act, or FICA, taxes on wages paid to Filipino workers who do not hold H-2 status in the CNMI "after December 31, 2014"-the end of the immigration transition period.

FICA covers Social Security and Medicare taxes.

"This will be a big relief to us. I have almost $25 deduction in my paycheck every payday. I could have used that for food, gas for the car, CUC [Commonwealth Utilities Corp.], house rental payment. I am hoping they will also refund us, those that we already contributed," Francisca Bergonia, 49, told Saipan Tribune yesterday.

Bergonia said she and her colleagues started having FICA tax deductions in November 2011.

'No refund'

Gov. Benigno R. Fitial welcomed the IRS announcement but he said he is "not fully satisfied with this proposed settlement" because "it does not agree to refund the illegal taxes already collected, exempt similarly situated Korean nationals and their employers, or resolve long-term exemption from this taxation."

"We are going to continue to press our case for resolution of these remaining issues," Fitial said in a statement.

Filipino workers interviewed yesterday would also like to find out whether they would get back the FICA taxes already deducted from their checks.

Some, however, want to ask whether they could have the option of continuing to pay FICA taxes.

'Right decision'

Delegate Gregorio Kilili Sablan (Ind-MP), in a separate statement, said, "The IRS has done exactly what we asked, setting a specific date, December 31, 2014, after which employers must withhold and pay FICA taxes for most Filipino workers in the Northern Mariana Islands.

"We asked that the IRS take into consideration the continuing uncertainty of workers and their employers about workers' immigration status. We asked that the IRS consider congressional intent in the Consolidated Natural Resources Act to minimize adverse economic impacts arising from federal management of immigration. We asked that the IRS set a date certain when Filipino workers and their employers would be subject to FICA taxation," Sablan said.

The delegate said he believes IRS "has now finally made the right decision" in response to recommendations.

But he said he remains concerned that as long as employers do not have to pay FICA taxes for Filipino workers but do have to pay FICA taxes for U.S. workers, "there is a disincentive to hire U.S. workers."

"For that reason, I am strongly supportive of the recent statements by the U.S. Citizenship and Immigration Service that any employer, seeking to obtain CW status for their foreign employees, who falsely attests that U.S. workers are not available to work, will face severe penalties," Sablan added.

'We could take on IRS'

Press secretary Angel Demapan said the Fitial administration is pleased with IRS' announcement that they would no longer impose Old-age Survivors, and Disability Insurance, or OASDI, tax on Philippine nationals who are working in the CNMI during the transition period to implementation of full U.S. immigration that is currently scheduled to occur on Jan. 1, 2015.

"This action will have a direct benefit to both Philippine workers and their employers as it will mean the elimination of a 15.3 percent tax (7.65 percent on both employee and employer)," he said.

The lifting of this tax will also directly benefit the CNMI economy because it was removing millions of dollars each year from the islands and sending it to Washington, D.C. "and thus causing direct harm to the local economies," the administration said.

Fitial also said it was an "unwarranted, ill-advised tax that was in direct conflict with the law, and should never have been imposed."

"Lt. Governor Inos and I have been objecting to this tax since it was announced, and I'm glad that Washington has recognized the absurdity of their actions and have agreed with our argument. Everyone told us that a small island government could not to take on the United States Internal Revenue Service, but we knew that we were right, and we were not going to be intimidated," Fitial said.

Settlement discussions

The CNMI sued the IRS early this year but later withdrew it to facilitate direct settlement discussions.

Fitial said the IRS announcement is the result of all of the previous efforts of the administration to return tax revenues that had been improperly retained by the United States.

"Under terms of the Covenant, these funds were to be retained in our local economy to foster growth and offset local government expenses. Instead, these funds were diverted to Washington and acted as a drain on the local economy. Over the past several years, we have been able to return over $100 million in tax revenues that were improperly diverted to Washington and we still have additional claims to present," he added.

IRS announced the policy change on its website on Dec. 17, 2012. The principal author of the IRS announcement is Don Parkinson of the Office of Associate Chief Counsel-Tax Exempt and Government Entities). Parkinson could be reached at (202) 622-6040 (not a toll-free call).

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