Tax Guide for US Expats Living and Working in the Commonwealth of the Northern Mariana Islands
Who Is Liable For Income Taxes in the Commonwealth of the Northern Mariana Islands
Commonwealth of the Northern Mariana Islands (CNMI) residents are subject to tax on their total income regardless of source. An individual who is not a U.S. citizen or permanent resident or a CNMI resident is subject to tax on income from sources within the CNMI only.
Foreign nationals who are not lawful U.S. permanent residents (who do not hold U.S. immigrant visas) are considered CNMI residents under a “substantial presence” test if they meet either of the following conditions:
- They are deemed to be present in the CNMI for at least 31 days during the current year.
- They are deemed to have been present in the CNMI for at least 183 days during a test period of three consecutive years, including the current year, using a formula weighted with the following percentages:
— Current year: 100%.
— 1st preceding year: 33.33%.
— 2nd preceding year: 16.67%.
Among the exceptions to the substantial presence test are the following:
- An individual may claim to be a nonresident of the CNMI in the year of departure by having a “closer connection” to a foreign country.
- Under certain circumstances, it may be beneficial to be considered a resident of the CNMI for income tax purposes. If certain conditions are met, an individual may elect to be a resident in the year of arrival (first-year election) for tax purposes.
Citizens and permanent residents of the United States are generally considered bona fide residents of the CNMI if they satisfy both of the following conditions:
- They are physically present in the CNMI for 183 days or more during the tax year.
- They do not have a tax home outside the CNMI during any part of the tax year and do not have a closer connection to the United States or a foreign country during any part of the tax year.
The CNMI, part of the post-World War II Trust Territory of the Pacific Islands, is now a self-governing commonwealth in political union with, and under the sovereignty of, the United States.
Because of this connection with the United States, U.S. citizens and permanent residents with CNMI income are taxed somewhat differently from nonresidents. In addition to its wage and salary tax and earnings tax system, the CNMI has adopted the U.S. Internal Revenue Code (IRC) as its income tax law, with “CNMI” substituted for all references to “United States.” U.S. citizens and permanent residents who are bona fide residents of the CNMI must file their individual tax returns with the CNMI instead of with the U.S. Internal Revenue Service (IRS).
Income subject to tax. A nonresident alien is subject to CNMI tax on income that is effectively connected with a CNMI trade or business and on CNMI-source gains, profits and fixed or determinable, annual or periodical income (generally includes investment income, dividends, interest and rental income).
Employment income. A two-tier tax system applies to all employees in the CNMI, one under the IRC and the other under the CNMI wage and salary tax and earnings tax laws. Under the IRC, gross income and deductions in the CNMI are determined as they are in the United States. Taxable income from personal services includes all cash wages, salaries, commissions and fees paid for services performed in the CNMI, no matter where the payments are made. In addition, taxable income includes the value of an employee’s expenses paid by the employer and the fair-market value of noncash goods and services provided by the employer, including housing and vehicles.
Under the CNMI wage and salary tax and earnings tax rules, taxable income is determined as in the preceding paragraph, except that reasonable travel and per diem allowances furnished by the employer are excluded.
Individuals are subject to the earnings tax on nonbusiness income earned in the CNMI. Examples of nonbusiness income include the following:
- Gain from the sale of personal property
- One-half of the gain from the sale of real property located in the CNMI
- Gross gambling winnings
- All other CNMI income, except retirement plan income, alimony, social security or unemployment compensation
A nonresident alien who performs personal services as an employee in the CNMI any time during the tax year is considered to be engaged in a CNMI trade or business. A limited exception to this rule applies to a nonresident alien performing services in the CNMI if the services are performed for a foreign employer, if the employee is present in the CNMI for no more than 90 days during the year and if compensation for the services does not exceed US$3,000.
Compensation is considered to be from a CNMI source if it is paid for services performed in the CNMI, regardless of where the income is paid or received. If income is paid for services rendered partly in the CNMI and partly in a foreign country, and if the amount of income attributable to services performed in the CNMI cannot be accurately determined, the CNMI portion is determined based on a workday ratio.
Educational allowances provided by employers to their local or expatriate employees’ children 18 years of age and under are taxable for income tax and social security tax purposes.
Self-employment and business income. Every CNMI resident who operates a business is taxable on the worldwide income of the business. Nonresidents are taxable on business income derived from CNMI sources only. Nonresidents are taxed on income effectively connected with a CNMI trade or business after related deductions at the graduated rates of tax. The rules for the computation of an individual’s taxable income from a business are similar to the U.S. rules. An individual’s self-employment income is combined with income from other sources and is subject to individual income tax at the rates discussed in Rates. The rebate provisions described in Rates also apply to income tax on self-employment income. Business gross revenue tax (see Section B) also applies on income earned by an individual in connection with a business in the CNMI.
Investment income. In general, dividend and interest income earned by residents is taxed at the ordinary rates.
However, dividends received by individuals from domestic corporations and “qualified foreign corporations” are treated as net capital gains that are subject to the capital gain tax rates for both the regular tax and alternative minimum tax. Consequently, dividends are taxed at a rate of 15% (0% for taxpayers with income in the lower brackets). To qualify for the 15% tax rate, the share-holder must hold a share of stock of the payer of the dividend for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date.
Nonresident alien individuals with investment income are subject to special rules. Investment income received by nonresidents from CNMI sources is ordinarily taxed at a flat rate of 30% of gross income, which may be withheld by the payer. The nonresident alien must then file an individual tax return to obtain the 90% rebate (see Rates). Portfolio interest from the sale of stock in a CNMI company is exempt from the 30% tax. An election to tax rental income on a net basis is available.
Directors’ fees. In general, directors’ fees are considered earnings from self-employment. The business gross revenue tax (see Section B) applies to directors’ fees earned in the CNMI.
Capital gains and losses. Net capital gain income is taxed at ordinary rates, except that the maximum marginal rate of tax for long-term gains (gains on assets held longer than 12 months) is 15%. Net capital gain is equal to the difference between net long-term capital gains and short-term capital losses. Short-term capital gains are taxed at ordinary income tax rates. For treatment of capital losses, see Relief for losses.
When the IRC took effect in the CNMI on 1 January 1985, a provision was adopted to exempt pre-1985 appreciation of CNMI property from income tax. For the purposes of determining gains and allowances for depreciation and amortization, the basis of CNMI real and personal property is the greater of the basis determined under the IRC or the fair-market value as of 1 January 1985. Fair-market value may be established either by independent appraisal or by discounting the ultimate sales price back to 1 January 1985, using discount factors specified in the tax regulations. Rates published by the IRS are currently used.
In general, capital gains received by nonresidents from the sale of stock in a CNMI company are exempt from the 30% tax that applies to investment income received by nonresidents. Gains from sales of CNMI real property interests, however, are generally considered to be “effectively connected income,” and special complex rules apply.
Deductions.
Deductions and personal exemptions are allowed under the same rules that apply in the United States.
Rates. Taxes on income derived within the CNMI by CNMI residents are low, but their computation is complicated. The following factors affect the amount of taxes paid:
- The wage and salary tax, earnings tax and business gross revenue tax (see Section B)
- The tax under the IRC
- A rebate, usually at a rate of 90%, of the excess of taxes under the IRC over the combined total of wage and salary tax and earnings tax, and business gross revenue tax (see Credit and rebate)
Wage and salary tax and earnings tax. The following wage and salary tax and earnings tax rates apply to total taxable income in the CNMI.
Relief for losses. Business losses not used in the year incurred may be deducted from taxable income earned in the two years preceding the year of loss or in the subsequent 20 years.
Capital losses are fully deductible from capital gains. However, net capital losses are deductible against other income only up to an annual limit of US$3,000. Unused capital losses may be carried forward indefinitely.
No deduction is allowed for operating or capital losses incurred before 1 January 1985.
Passive losses, including those generated from limited partnership investments or real estate rentals, may be offset against passive income only. Limited relief is available for individuals who actively participate in real estate rental activities. Losses from such activities may offset up to US$25,000 of other income. This offset is phased out for taxpayers with adjusted gross income from US$100,000 to US$150,000, and special rules apply to married individuals filing separate tax returns. Unused losses may be carried forward indefinitely to offset net passive income in future years. Any remaining loss may be used in full when a taxpayer sells the investment.
B. Other taxes
Estate and gift taxes. Non-U.S. citizens and U.S. citizens who receive their citizenship by birth or naturalization in the CNMI are subject to U.S. estate and gift taxes on assets located in the United States only, not on those located in the CNMI.
U.S. citizens other than those who receive their citizenship by birth or naturalization in the CNMI are subject to U.S. estate and gift taxes on all of their assets, including those located in the CNMI.
The CNMI imposes an estate tax that applies only to estates that have U.S. estate tax liability. The CNMI estate tax equals the lesser of the amount of the foreign death tax credit allowed under Section 2014 of the United States Internal Revenue Code, or the amount derived by multiplying the U.S. estate tax less any allowable credits by the quotient of the value of the property situated in the CNMI, divided by the value of the gross estate.
C. Social security
The CNMI is covered under the U.S. social security system. For 2011, the old-age, survivor and disability insurance component (6.2%) of the social security tax applies to only the first US$106,800 of an employee’s wages. The health insurance component (1.45%) applies to all wages. For 2011, the employee’s portion of the oldage, survivor and disability insurance component of the social security tax is reduced by two percentage points (from 6.2% to 4.2%). The employer’s portion of the old-age, survivor and disability insurance component is not changed (remains at 6.2%).
U.S. Social Security tax (FICA) is imposed on compensation for services performed within the CNMI, regardless of the citizenship or residence of the employee or employer. Filipino and Korean non-residents are exempt from FICA under treaty provisions. CNMI and foreign employers are responsible for withholding CNMI income and social security taxes from payments to non-resident alien employees.
E. Double tax relief and tax treaties
Foreign tax credits offset CNMI taxes on foreign income in the same manner as in the United States. However, none of the U.S. double tax treaties applies to the CNMI, and the CNMI has no double tax treaties of its own.
We have been preparing US income tax returns for US Citizens and permanent residents living in the Northern Mariana Islands for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in the Northern Mariana Islands and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in the Northern Mariana Islands.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email