US Territories Seek Clarity On Net Investment Income Tax

The American Institute of Certified Public Accountants (AICPA) has written to the United States Congress requesting clarification on the applicability of the net investment income tax (NIIT) to residents of the US Virgin Islands (USVI), Guam, and the Commonwealth of the Northern Mariana Islands (CNMI).

The NIIT was introduced in 2013 to help fund President Barack Obama’s health care reforms. It applies at a rate of 3.8 percent on the lesser of an individual’s net investment income or the excess of the individual’s modified adjusted gross income, over a threshold amount. It has already been confirmed by the IRS, within its tax guide for individuals with income from the US Possessions that was issued in March this year, that the NIIT applies to bona fide residents of the two other territories – Puerto Rico and American Samoa.

The letter, co-signed by the Virgin Islands Society of Certified Public Accountants and the Guam Society of Certified Public Accountants, asks for clarification as to whether the NIIT is a mirrored tax to be collected by tax authorities of the USVI, Guam, and CNMI. Under the “mirror code” system of taxation, the substantive provisions of the US tax code are also applicable as the income tax laws of the territories.

The letter states that, while “the wording of proposed and final [Internal Revenue Service (IRS)] regulations regarding NIIT appears to exempt from the NIIT bona fide residents of the US Territories, the VIBIR [Virgin Islands Bureau of Internal Revenue] has issued a statement, and the GDRT [Guam Department of Revenue and Taxation] Deputy Tax Commissioner has stated, that the NIIT applies to bona fide residents, causing much confusion among taxpayers and practitioners.”

“The AICPA, VISCPA, and GSCPA believe – as a matter of clarity and fair interpretation and application of congressional intent – Congress should request that Treasury provide clarification on whether the NIIT applies to bona fide residents of the mirror code US Territories,” the letter says. “In addition, if bona fide residents of mirror code US Territories are exempt from the NIIT, the extension of this exemption to mirror code US Territories’ estates and trusts should be clarified as well.” They have asked for confirmation before the extended due date of October 15, 2014, for the filing of 2013 tax returns.

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by Mike Godrey,, Washington

15 August 2014