Fitial admin wants ‘stay’ on FICA taxes

The Fitial administration described yesterday as “troubling,” “inappropriate,” and “discriminatory” an administrative decision to lift the exemption of Filipino, as well as Korean workers in the CNMI, from paying the Federal Income Tax Act taxes.

FICA covers U.S. Social Security and Medicare 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.”

The U.S. Internal Revenue Service, in an Oct. 5 letter, said Filipino workers in the CNMI are no longer exempt from FICA, unless they hold a valid H-2 U.S. visa, because of changes in CNMI immigration.

As late as July, even as the U.S. Government Accountability Office had been unsure about the FICA tax coverage of Filipino and Korean workers in the CNMI.

Demapan said the imposition of the FICA taxes will “unnecessarily increase the applicable tax rate paid by employers by 7.65 percent and on employees by 7.65 percent, for a total of 15.3 percent.

But President Barack Obama lowered the employee’s percentage share to 5.65 percent for this fiscal year, bringing the total applicable rate to 13.3 percent.

Demapan said the Fitial administration also finds the new policy to be “inappropriate because it is discriminatory, as similar nonresident Korean and Filipino workers in Guam are exempted.”

“It will impose additional cost on employees who are unlikely to receive any benefits as it requires 10 years of service in order to qualify for benefits and there are no refund provisions,” he said.

He said it will also impose an unnecessary cost increase of 7.6 percent on CNMI employers.

The press secretary said this is also contrary to the intent of Congress who specifically provided a tax exemption to nonresident Filipino and Korean workers due to their limited stay in the United States; and finally, because the exemption for Filipino and Korean nonresident workers is similar to that provided to nonresident agricultural workers in the United States who are also exempt from Social Security taxation

“In view of these concerns, the administration believes that this administrative decision should be stayed pending clarification that the Fitial administration is preparing to request from the Social Security Administration,” Demapan said.

Filipino and Korean employees and their employers are now bracing for the new taxes they have to pay to IRS.

Affected employees and employers also would want more information from IRS or any other federal agency on the matter.

Polly De Leon Guerrero, president of the CNMI Chapter of the Society for Human Resource Management, said their members have long been asking about the FICA tax applicability among Filipino and Korean workers, even before the final worker regulations came out.

She also said there’s little time between the release of the regulations and the Nov. 28 deadline for filing most Commonwealth-only worker petitions, as well as in addressing related matters related to the rules including the FICA taxes.

The Saipan Chamber of Commerce, the largest business organization in the CNMI with some 150 members, also received only on Friday a press statement from Deloitte & Touche LLP citing an Oct. 5 letter outlining changes to the way Social Security taxes are applied to Filipino workers in the CNMI.

“Unless an individual is eligible for FICA exemption based on some other circumstances, FICA taxes will apply to these Filipino workers,” said Lynne Camillo, branch chief of IRS’s Employment Tax Branch 2.

But many employers want to know whether this should have taken effect on Nov. 28, 2011 or at a later date. The issue has also drawn different views from community members.

Rey Perez, 45, a Filipino private school teacher on Saipan, said employees and employers have no choice but to follow the law, in this case, on paying federal taxes.

Perez said in his view, paying the FICA taxes will be beneficial to foreign workers who would be granted a change of status or improved status that will allow them to stay longer in the CNMI and therefore reap the benefits of U.S. Social Security and Medicare.

But just like others interviewed, Perez said other foreign workers who may lose their job in a year or two, for example, would not benefit from contributing to the federal program.

For a foreign worker earning a minimum wage of $5.05 an hour, the monthly FICA tax deduction will be over $45. The employer of such foreign worker also has to shell out almost $62 a month for each employee covered by the FICA taxes in these times of financial hardships.

These are on top of the CNMI taxes that employees and employers pay.

Some accountants on island are saying that, as far as they know, workers may only benefit from their FICA tax deductions if they contribute to the system for 40 quarters or for 10 years. But the transition period ends on Dec. 31, 2014. After that, the foreign worker population will be zeroed out, unless the transition period is extended.