Senate holds off override of vetoed foreign corporation tax bill

Senators held off yesterday from overriding the governor’s veto of a bill that seeks to create a tax rate for foreign corporations earning income from outside of the CNMI, after the Fitial administration through assistant attorney general Jim Stump asked for more time to review a House legal opinion that says the bill’s proposed taxes do not violate the terms of the Covenant.

But House Ways and Means Committee chair Ray Basa (Cov-Saipan), author of the bill, said yesterday he will push for a House override of the governor’s veto during Thursday’s session, considering that a House legal opinion has already answered several questions on the bill.

Basa expressed disappointment that the administration, by sending Stump to the Senate session, did not consider “separation of powers” doctrine, adding that the administration had already spent considerable time to review the bill and could have made errors in its conclusion and it is now the Legislature’s time to act on the bill.

He said he also wishes the Senate did not hold off its planned override of the governor’s veto, now that the Jan. 29 deadline for the Legislature to override it is drawing near.

Stump cautioned senators yesterday on the impact of any proposed changes to the complex U.S. taxation system, and asked the Senate to give the administration more time to review the House legal opinion on the bill.

He said U.S. law and the Covenant have restrictions on the changes that can be made to tax codes.

Because of the complex nature of the U.S. tax system, Stump said that “further study” is needed on the bill and any legal analysis of it. “We don’t want to invite the U.S. [Internal Revenue Service] to scrutinize our tax structure,” Stump told senators during yesterday’s session.

This comes a few days after the CNMI government filed Thursday a lawsuit against IRS and the U.S. Treasury to stop them from imposing Federal Insurance Contribution Act taxes on Filipinos and Koreans with Commonwealth-only worker status. FICA covers Social Security and Medicare taxes.

Stump, however, told senators that the Office of the Governor supports programs that spur economic activity. Lawmakers consider the foreign corporation tax bill as an important revenue-generating bill that will help grow the economy.

House legal counsel John Cool, who was in the Senate chamber, reiterated that the House legal opinion concurs with the Fitial administration on the basic premise that local amendments to the Northern Marianas territorial income tax (NMTIT) system is not permissible.

Cool and some senators said the bill “adds” proposed tax under Chapter 5, Miscellaneous Taxes and License Fees, not Chapter 7 (NMTIT).

Just the same, as a result of Stump’s request on behalf of the administration, the Senate held off its override of the governor’s veto of House Bill 17-163, Senate Draft 2, Conference Committee Substitute 1.

The Legislature has until the end of this month to override the governor’s veto.

Senate President Paul Manglona (Ind-Rota) said even if the Legislature misses the deadline for overriding the veto, the more important thing is that the administration and the Legislature will be able to work together to move the bill’s intent forward.

He said the bill’s author, Basa, could reintroduce the bill, among other things.

After the motion to override the bill’s veto was withdrawn, the Senate president instructed Senate Fiscal Affairs Committee chair Sen. Jovita Taimanao (Ind-Rota) to immediately meet with Basa on how to proceed with talks on the bill involving the administration. Taimanao and Basa will meet today.

“Irrespective of the bill’s author, I will push for this kind of bill which will generate revenues for the CNMI to help its economy,” Basa added.

Then acting governor Eloy S. Inos, in vetoing the bill on Dec. 1, said the proposed changes to the Northern Marianas territorial income tax structure violate Covenant restrictions to limit rebates to CNMI-sourced income and case law, which prohibits changes by insular areas that have adopted the U.S. tax code.

But a Jan. 17 memo from the House legal counsel states that while he concurs with the acting governor’s conclusion that local amendments to Chapter 7 Tax (NMTIT) are not permissible, the acting governor “erroneously characterizes the tax on ‘Net Foreign Income’ as being under NMTIT Chapter 7.’”

The bill proposes a 10-percent tax imposed on “Net Foreign Income.”

Following the sourcing rules of the NMTIT, the “Net Foreign Income” would not be included in gross income taxable under the NMTIT. None of the “Net Foreign Income” is derived from sources within the U.S. or the CNMI under the NMTIT income sourcing rules.

However, if it were determined that the “Net Foreign Income” was sourced in the CNMI and subject to the NMTIT, the amount of the tax would be subject to the rebate offset.