IRS hears testimony on jobs creation act

Last October the U.S. Congress passed the American Jobs Creation Act of 2004 that contained tax provisions could potentially cause the loss of local revenue, jobs and slow down economic recovery and discourage new investments in the U.S. Insular Areas. Under the tax provisions for Insular areas Congress’ aim was to clarify residency and income source rules to prevent a few taxpayers from abusing U.S. Virgin Islands residency rules, and avoid paying U.S. Income Tax. During the process of passing the bill, Congress re-defined the residency and income source laws for all U.S. Insular Areas including the CNMI.

On Thursday, the Internal Revenue Service (IRS) held a hearing on proposed rules promulgated in response to the Jobs Creation Act. Testifying were CNMI Resident Representative Pete A. Tenorio and Assistant AG Jim Stump as well as numerous officials and tax professionals from the U.S. Virgin Islands, Puerto Rico, and Guam, and Deputy Assistant Secretary Dave Cohen, who testified on behalf of the Department of Interior, Office of Insular Affairs.

The common theme voiced by all those who testified was the dramatic impact the law and the proposed rules and the law would have on fragile island economies, which are already suffering tremendously. “Any fiscal crises in the territories would result in greater investment by the Federal taxpayer to ensure that basic needs are met, and will curtail the ability of the territories to maintain and preserve the considerable amount of infrastructure there that U.S. taxpayers funded,” stated DAS Dave Cohen.

Tenorio voiced concern that the proposed regulations and their implementation by IRS was inconsistent with the Covenant, and asked that the rules be suspended for the CNMI and that the questions of residency and income source be handled through the 902 consultation process as outlined by the Covenant. He also requested that an economic impact analysis be conducted in all insular areas to determine if the proposed rules will further destabilize their fragile financial conditions.

“Implementation of these regulations now will be a direct violation of the intent of the parties which negotiated the Covenant in good faith and had established a mechanism under Covenant Section 902 to formally consult one another on issues affecting the relationship between the CNMI and the U.S.,” stated Tenorio in his testimony.

Stump reiterated Tenorio’s request stressing that the proposed rules would hamper the CNMI’s ability to self-govern as it interfered with its ability to tax its business and residents, and adversely reduce its tax base.

Under the new rules residency would be defined by a number of factors including a person’s residence on the fist day of the year, and whether or not they were present in the territory for 183 days during the year. This would affect those the CNMI has recruited to work in the CNMI including teachers, and returning students. There is also a question as to whether those individuals who travel frequently for business or family reasons would risk losing local residency status under the proposed rules.

The IRS will review the overwhelming testimony, and hopefully amend the proposed rules accordingly. No time frame was provided by the IRS for the publication of the final rules. (PR)