A Tax Advantage For Someone
There are two little known tax regulations that may be of substantial benefit to some individuals and corporations. One is a United States Internal Revenue tax credit for U. S. “possessions” corporations and the other concerns the application of CNMI tax rates on the sale of appreciated property outside the Commonwealth.
With respect to the first, Section 936 of the Internal Revenue Code permits "qualified" U.S. corporations to operate virtually free of federal tax on their income derived from business activity in the Commonwealth. This particular section of the tax code was designed to encourage employment generating corporations to establish businesses in United States possessions and associated areas. While technically the Commonwealth is not a possession of the United States, U.S. corporations can qualify for this tax concession with the result that the maximum income tax rate would be 11.5 percent for a period up to ten years or more if extensions are granted by the Internal Revenue Service.
To qualify, corporations must be incorporated under the laws of the United States; have 80 percent of their gross income for the tax year and two preceding years derived from sources within the Commonwealth and have a fixed percentage of their gross income for the tax year and two proceeding years (55 percent, 60 percent and 65 percent respectively) derived from the active conduct of trade or business within the Commonwealth. Obviously, the taxpayer must weigh which of the tax formulae is best suited to their particular situation.The above method, or the current existing rebate system which is summarized below. NMTIT Rebate In the case of a taxpayer who is not a corporation: If the rebate base is: The rebate amount is: – Not over $1,000 90% of rebate base. – Over $1,000 but not $900 plus 70% of rebate over $2,500 base over $1,000. – Over $2,500 $1,950 plus 50% of the rebate base over $2,500. In the case of a taxpayer who is a corporation: If the rebate base is:
The rebate amount is: — Not over $20,000 90% of rebate base. – Over $20,000 but not $18,000 plus 70% of rebate over $100,000 base over $20,000. – Over $100,000 $74,000 plus 50% of the excess of the rebate base over $100,000. Source P.L. 9-22 The second and perhaps more interesting regulation concerns special United States Internal Revenue Service tax rules for the sale of appreciated personal property such as stock. In order to be taxed at CNMI rates a person must have been a resident of the CNMI for ten years if the appreciated value of the stock cannot be sourced in the Commonwealth. United States sourced income is that which is effectively connected with U.S. trade or business and gains from the sale of certain assets with a U. S. connection for the ten year period beginning when that person became a resident.
This provision applies to income earned after January 1, 1986 so, by the first of next year the provision ‘kicks -in” for those that can take advantage of the rule. While I am far from being an authority on United States tax law, which is the most extensive and complicated in the world, it may be that a shell CNMI corporation that is in good standing, that is, one that has obtained an annual business license and filed each year for the past ten years with the Register of Corporation, may have a valuable asset by virtue of its age. Just how much such a corporation might be worth depends upon how valuable, and to what use, it could be put by an individual or firm outside the CNMI with appreciated assets of substantial value. In any case consult a tax attorney, a Certified Public Accountant or a tax consultant. Don’t ask this economist who has only limited knowledge of the issues.
