CNMI Taxes

TAXES THAT A BUSINESS MAY ENCOUNTER IN THE CNMI

BUSINESS GROSS REVENUE TAX (BGRT)

This is the most important tax in the CNMI. It is assessed on your CNMI sourced revenues, not on profits.

The rates are as follows:

Annual Revenue
From zero to $5,000 ? No BGRT
From $5,000.01 to $50,000 ? 1.5%
From $50,000.01 to $100,000 ? 2%
From $100,000.01 to $250,000 ? 2.5%
From $250,000.01 to $500,000 ? 3%
From $500,000.01 to $750,000 ? 4%
Above $750,000 ? 5%

It is important to note that BGRT is assessed on the total revenue. For example, if your revenues were $50,000 for the first two quarters, you would be paying in at 2%. If your revenues in the third and fourth quarter were another $60,000 then the entire $110,000 for the year would be taxed at 2.5%.

BGRT is not deducted in arriving at taxable income. It is instead treated as a dollar-for-dollar credit against calculated income tax.

The CNMI requires BGRT returns to be filed on a quarterly basis. The deadline is the end of the month following the end of each quarter.

The BGRT form is available online at www.dof.gov.mp . It is Form OS-3105.

In my discussions with the Division of Revenue and Taxation, their opinion is that you have CNMI sourced income from professional services if you are physically in the CNMI when you provide the services. If you sitting at a desk somewhere other than the CNMI and you provide services to a CNMI entity, then that revenue is not CNMI sourced. Likewise, if you are sitting at a desk in the CNMI and you are providing services to an entity that is not in the CNMI, you do have CNMI sourced revenues.

INCOME TAXES

The income tax law in the CNMI is based on the Internal Revenue Code. Income, deductions, gains and losses are determined in the same manner as they are in the United States. The CNMI does recognize partnerships, S corporations and LLCs.

As mentioned above, the BGRT is not deducted in determining corporate income tax. Taxable income is calculated just as it is in the U.S. The graduated rate table is used, and the allocation of the graduated tax benefit rules do apply.

There is a rebate of income taxes on CNMI sourced income. The calculation of income tax is just a starting point. Once you calculate income tax just as you do in the U.S. (without deducting BGRT), you then subtract BGRT paid to arrive at a figure called a ?rebate base?. There is a rebate of income tax as follows:

Rebate Base
From zero to $20,000 ? 90% rebate
From $20,000.01 to $100,000 ? 70% rebate
Above $100,000 ? 50% rebate

The law states that you must pay in the full amount of tax without consideration of the rebate, in order to avoid underpayment penalties. You are then obliged to wait for the CNMI to write a check to you for the rebate.

As a practical matter, since all individuals and entities in the CNMI are entitled to a rebate, the taxpayer can choose to make estimated payments equal to the tax after rebate. If the taxpayer chooses to follow this method, a penalty will be assessed. The penalty fluctuates, but is usually around 4% of the underpayment.

The quarterly estimated tax payments are made using Form 500-ES. The quarterly payments are due at the end of the month following the end of the quarter.

The corporate tax return is filed using Form 1120-CM. If it is an S corporation, there is a covering sheet called Form 1120S-CM.

It is important to note that income and expenses must be segregated between those that are CNMI sourced and those that are not. The rebate only applies to CNMI source income.

EXCISE TAXES

For items imported into the CNMI for business purposes, an excise or import tax is imposed. There is a long list of rates, depending on the type of item imported. If an item is not specified in the list, the default rate is 5.0% of the cost of the item.

The tax is assessed at point of entry. The CNMI Customs office will prepare an assessment sheet, and a business usually has 30 days to pay the tax. There are Customs officers stationed at the post office and at the seaport and airport.

ANNUAL CORPORATION REPORT

Every corporation incorporated or registered in the CNMI must file an Annual Corporation Report, which is a one page document listing the resident agent, the shareholders, officers and directors of the corporation. The filing fee is $50 and the deadline for submission is March 1 of each year.

EMPLOYMENT RELATED MATTERS

A business with employees in the CNMI is obligated to withhold two types of taxes from a person?s wages or salaries ? Chapter 2 and Chapter 7 taxes. Chapter 7 taxes are similar to Federal withholdings. An employer can use the same Circular E as is used in the U.S. to calculate the Chapter 7 taxes.

Chapter 2 taxes are from zero to nine percent, as follows:

From zero to $1,000 ? zero
From $1,001 to $5,000 ? 2%
From $5,001 to $7,000 ? 3%
From $7,001 to $15,000 ? 4%
From $15,001 to $22,000 ? 5%
From $22,001 to $30,000 ? 6%
From $30,001 to $40,000 ? 7%
From $40,001 to $50,000 ? 8%
Above $50,000 ? 9%

Just like the BGRT mentioned previously, the rate is applied to the total wages for the year. For example, if an employee is scheduled to be paid $49,000 for the year, the withholding would be done at 8%. If the person received a $2,000 bonus at the end of the year, the entire $51,000 would be taxed at 9%.

The same general deadlines apply for remitting withheld taxes to the CNMI Treasury as they do for U.S. withholdings. The form used for remitting withheld taxes is Form 500-WH.

There are quarterly withholding tax returns to file with the CNMI. They are due at the end of the month following the end of the quarter. The form is OS-3705.

For social security taxes, the same rules apply in the CNMI as they do in the U.S., except that Filipinos and Koreans are not subject to FICA taxes. A quarterly return must be filed with the IRS. The form to use is Form 941-SS.

At the end of the year, employers must prepare Form W-2CM for each employee. Employers must also prepare an Annual Reconciliation of Taxes Withheld form. The totals of the W-2CM forms are entered on the Annual Reconciliation form. Employers also must transmit copies of the Forms W2-CM to the Social Security Administration using Form W-3SS.

If you are interested in learning about how you can qualify to legally save tax dollars by setting up in the CNMI, please see:
CNMI Residency Requirements

Information was provided by:
Burger & Comer, P.C. (the ?Firm?) was established in July 1995 when the two founders, David Burger and James Comer, agreed to join together to serve clients in Guam and the CNMI. Both founders have extensive experience in public accounting, including more than 10 years each in ?Big Four? firms.

Mr. Burger?s expertise and training centers around financial statement audits, and Mr. Comer?s expertise is in income tax compliance and planning. The Firm currently provides financial statement audits for about 30 entities, including private companies, non-profit organizations and government agencies.

The Firm prepares income tax returns for hundreds of individuals, partnerships, LLCs, corporations, and non-profit organizations. The Firm also provides bookkeeping services to more than 20 companies in the region. In addition, the Firm assists its clients with their investments. Mr. Burger is a Registered Investment Advisor in both Guam and the CNMI. Finally, the Firm has prepared 14 business valuations (appraisals) and the founders have served as expert witnesses in various court cases.

The Firm has two offices ? one in Guam and one in Saipan. There are currently nine full time personnel, including 2 Directors (partners), 1 office manager, 3 senior accountants, and 3 staff accountants.