This blog was last updated on June 27, 2021
Under the Affordable Care Act (ACA), the net investment income tax (NIIT) was enacted under section 1411 of the Internal Revenue Code (IRC). The American Institute of Certified Public Accountants (AICPA), Virgin Islands Society of Certified Public Accountants (VISCPA) and the Guam Society of Certified Public Accountants (GSCPA) wrote to Congress to inquire whether the NIIT applied to bona fide residents of the Virgin Islands, Guam and the Commonwealth of the Northern Mariana Islands.
The letter was sent Aug. 7. It notes that there is some confusion between what the NIIT regulations appear to state and what local tax authorities in Guam and the Virgin Islands have said on the matter.
“The wording of proposed and final [IRS] regulations regarding NIIT appears to exempt from the NIIT bona fide residents of the U.S. Territories; however, 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 of the U.S. Territories, causing much confusion among taxpayers and practitioners,” the letter read. “Clarity on the applicability of the NIIT to bona fide residents of the U.S. Territories is needed.”
The mirror code and NIIT regulations
Under what is known as the mirror code, all tax information reporting responsibilities outlined in the IRC apply to certain U.S. territories, including the three in question. However, territories following the mirror code have no income tax obligation to the IRS because they report tax information to their tax authorities. As such, it would appear that the NIIT regulations, which impose a 3.8 percent excise tax for net investment income of certain trusts, estates and individuals, would not be applicable for the three territories, according to the letter.
Furthermore, the letter asserted that certain provisions of the ACA, which fund sections of the health care law, were not to apply to bona fide residents of the territories because they cannot realize the benefits of the ACA. Based on the confusion, the three CPA groups had the following recommendation for providing more clarity for tax compliance professionals and taxpayers:
“Treasury should provide clarity to bona fide residents of mirror code U.S. Territories as to when and how the NIIT applies,” the letter said. “If bona fide residents of mirror code U.S. Territories are exempt from the NIIT, we additionally request clarification as to whether or not U.S. Territory estates and trusts are exempt from the NIIT as well.”
