Inos: Pay FICA taxes now unless there’s change

Acting governor Eloy S. Inos said yesterday it will be better for employers to comply now with an Internal Revenue Service letter on the applicability of Federal Insurance Contribution taxes among Filipino workers in the CNMI to avoid penalty, and just seek a refund later if IRS changes its position on the applicability of these taxes on previously exempt foreign workers.

FICA covers Social Security and Medicare taxes.

“My advice is to comply [with IRS] and then turn around and file for refund [if there’s any change from IRS] as opposed to just not complying because non-compliance carries civil penalties,” Inos told Saipan Tribune in an interview during the ribbon cutting for new traffic lights in San Vicente yesterday morning.

Douglas Brennan, president of the Saipan Chamber of Commerce, also said yesterday that “until such time evidence is offered to the contrary, foreign nationals employed in the CNMI prior to Nov. 27, 2011, and previously exempted from paying FICA taxes by bilateral agreements with the U.S., would now fall subject to individual and employer FICA tax contributions.”

This means affected employees will be subject to FICA withholding for wages earned on and after Nov. 28.

“SCC has advised the date of this change in practice would be Nov. 28, 2011,” Brennan said in a statement, after the Chamber reviewed the Department of Treasury/IRS memo, as well as an advisory from Deloitte & Touche.

Lance K. Kamigaki, partner at Ernst & Young, also advised clients yesterday that FICA taxes apply to Filipinos working in the CNMI unless they have a valid H-2 visa.

Joe M. Arnett, tax partner-in-charge for Guam/Micronesia’s Deloitte & Touche LLP, was the first to issue a statement Thursday on the FICA taxes’ applicability among Filipino workers in the CNMI based on an IRS letter dated Oct. 6.

Brennan said after further comment by tax consultants, the Chamber believes the IRS would issue a more formal notice with guidance on reporting procedures “very soon.”

“SCC has initiated action to meet with CNMI Social Security Administration officials to seek further clarification also,” said Brennan.

\The Chamber is the largest business organization in the CNMI with some 150 members.

“There are a number of additional problems that may arise from this CNMI FICA change in practice. SCC believes there may be Filipino nationals working legally in the CNMI now without the benefit of a valid Social Security number. What would those employees, and employers, face as a result of this IRS announcement?” Brennan said.

He added that the Chamber will further advise its membership as soon as they get further clarification.

The IRS letter of Oct. 6 made no mention of the applicability of FICA taxes among Koreans working in the CNMI.

There are different views whether Korean workers in the CNMI were supposed to be exempted from the FICA taxes to begin with, even before the implementation of federalization. Different IRS documents and statements in past years also contained different information.

Even the U.S. Government Accountability Office, in a July report, said it’s unknown whether Filipino and Korean workers in the CNMI are covered by Social Security taxes if they obtain CNMI-only work permits.

Affected employees and employers have different views on the FICA taxes and their impact on their salaries and business operations. They said these taxes are an added cost during these tough financial times.

Inos, a former Finance secretary and who has decades of experience in finance, said the applicability of FICA taxes as stated in the IRS letter came as a surprise.

He said the administration is taking up the matter with federal officials.

“The main concern here is essentially, it is an additional cost to doing business for the employers. Number two, what kind of benefits employees will get as a result of their contribution? We’re reviewing it,” Inos said

The acting governor said foreign workers are “temporary workers per se and any contribution that they make right now.they won’t be able to get refund.”

He said it is “not fair” for these workers who are now being asked to contribute and not benefit from these contributions.

Inos also said foreign workers who are just now covered by the FICA taxes will need to contribute for 40 quarters or 10 years before they could benefit from it.

On Monday, the Fitial administration described as “troubling,” “inappropriate,” and “discriminatory” the administrative decision to lift the exemption of Filipino, as well as Korean workers in the CNMI, from paying FICA taxes.

Press secretary Angel Demapan said in view of concerns about the taxes, the Fitial administration believes that the administrative decision “should be stayed pending clarification that the Fitial administration is preparing to request from the Social Security Administration.”

For a Filipino worker earning a minimum wage of $5.05 an hour, the monthly FICA tax deduction will be over $45 a month. Employee’s FICA contribution is 5.65 percent of their salary.

This deduction consists of 4.20 percent for Social Security, and 1.45 percent for Medicare. This is also on top of the CNMI taxes that foreign workers pay.

For employers, this means an additional expense of almost $62 a month in employer’s share for every employee required to pay FICA taxes. Employer’s share is 7.65 of the employee’s salary-6.20 percent for Social Security, and 1.45 percent for Medicare.

The FICA tax payments mean that a business with 15 Filipino workers earning minimum wage, for example, will incur an additional expense of over $24,000 a year.