Section 2. The following powers are expressly delegated to Congress:
. . .
(e) to impose taxes on income;
. . .
The provisions of the Constitution are found in Part I of this code.
Editor’s note: The effective date of COM PL 7-32, relating to a progressive income tax, is January 1, 1983. See also COM PL 7-67 § 3; COM PL 7-94 § 1; COM PL 1-123 §§ 1, 2; and COM PL 2-27 § 1. The provisions of COM PL 7-32 have therefore not been incorporated into this codification. The 1980 edition of the TT Code erroneously included provisions of COM PL 7-32 as current law at 77 TTC 259, 77 TTC 269, 77 TTC 271, 77 TTC 272, and 77 TTC 273 thereof.
Wherever used in this chapter, unless the subject matter, context, or sense otherwise requires:
(1) “Business” means any profession, trade, manufacture, or other undertaking carried on for pecuniary profit and includes all activities whether personal, professional, or incorporated, carried on within the Federated States of Micronesia for economic benefit either direct or indirect, and excludes casual sales, as determined by the Secretary; however, one who qualifies as an employee under this section shall not be considered as a business. Copra production by unincorporated copra producers collectively or severally shall not be included as a business under this definition.
Case annotations: In FSM Income Tax Law, 54 F.S.M.C. 111 et seq., cooperatives are not singled out in any way within the definition of business and there is no indication in the tax law that cooperatives are to be treated differently than corporations or any other forms of businesses. Kolonia Consumers Coop. Ass’n v. Tuuth, 5 FSM R. 68, 70 (Pon. 1991).
Limitation of the definition of “business” under the FSM income tax law to “all activities . . . carried on within the Federated States of Micronesia” strongly implies that activities carried on elsewhere by a business functioning within the FSM are not subject to FSM income tax. 54 F.S.M.C. 112(1). Bank of the FSM v. FSM, 5 FSM R. 346, 348 (Pon. 1992).
(2) “Commercial aircraft” means any aircraft capable of and intended for use in commercial aviation.
(3) “Employee” means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.
Case annotations: All government officials are employees of the government within the meaning of the FSM Income Tax Law. Heston v. FSM, 2 FSM R. 61, 65 (Pon. 1985).
Although plaintiff incurred expenses in carrying out his obligations under contract, they were well below 10% of amount he received under the contract. Such expenditures are insufficient to alter plaintiff’s status from an “employee” to a “business” under FSM Income Tax Law. Heston v. FSM, 2 FSM R. 61, (Pon. 1985).
A taxpayer who held high public office of Chief of Finance, whose contract gave him wide degree of discretion in carrying out governmental powers, and who was not an outside consultant who could merely suggest or advise but was an integral part of governmental operation is a governmental official, therefore an employee for purposes of FSM Income Tax Law. Heston v. FSM, 2 FSM R. 61, 65 (Pon. 1985).
FSM Income Tax Law’s distinction between employees and businesses obviously reflects congressional expectation that businesses and employees are generally distinguishable on basis of whether generation of their income would require substantial expenditures by them. Rauzi v. FSM, 2 FSM R. 8, (Pon. 1985).
There is common law of taxation which addresses status of public officials as employees. Rauzi v. FSM, 2 FSM R. 8 (Pon. 1985).
Pohnpei State Government official is an employee for purposes of FSM Income Tax Law. Rauzi v. FSM, 2 FSM R. 8, 12 (Pon. 1985).
There appears to be uniform acceptance by common law jurisdictions of the principle that government officials are considered employees for income tax purposes. This amounts to common law rule of taxation and yields a result in harmony with the underlying principles of the taxation system established by the FSM Income Tax Law. Rauzi v. FSM, 2 FSM R. 8, 12 (Pon. 1985).
(4) “Employer” includes any individual, corporation, association, joint stock company, bank, insurance company, credit union, cooperative, or other equity or group employing any person, and also includes the Federated States of Micronesia, State and local governments, and their agencies, charged with the disbursement of public moneys as salaries or wages. “Employer” also includes the United States Government and instrumentalities thereof.
(5) “Gross revenue” means the gross receipts, cash or accrued, of the taxpayer received as compensation for personal services and the gross receipts of the taxpayer derived from trade, business, commerce, or sales and the value proceeding or accruing from the sale of tangible personal property, or services, or both, and all receipts, actual or accrued by reason of the capital of the business engaged in, including interest, rentals, royalties, fees, or other emoluments however designated and without any deductions on account of the cost of property sold, the cost of materials used, taxes, royalties, or interest paid or any other expenses whatsoever. Gross revenue shall not include the following:
(a) refunds and rebates;
Case annotations: Patronage refunds paid by a cooperative to its members are not refunds within the meaning of 54 F.S.M.C. 112(5)(a) and are not excludable from gross revenue under the FSM Tax Law. Kolonia Consumers Coop. Ass’n v. Tuuth, 5 FSM R. 68, 71 (Pon. 1991).
Where regulations existed referring to patronage refund as “bonus or refund” at time Congress enacted statute excluding refunds from definition of gross revenue, statute unambiguously excludes patronage refunds from gross revenue. Kolonia Consumers Coop. Ass’n v. FSM, 5 FSM R. 375, 379-80 (App. 1992).
Patronage refunds are not voluntarily paid refunds because regulations compel allocation of patronage refunds. Therefore they are properly excludable from gross revenue. Kolonia Consumers Coop. Ass’n v. FSM, 5 FSM R. 375, 380 (App. 1992).
(b) moneys held in a fiduciary capacity;
Case annotations: Moneys held in fiduciary capacity are specifically excluded by statute from definition of gross revenue. 54 F.S.M.C. 112(5)(b). The term “fiduciary capacity” is not restricted to technical or express trusts, but extends to money that is not the taxpayer’s own, but which is handled for the benefit of another. NIH Corp. v. FSM, 5 FSM R. 411, 416 (Pon. 1992).
(c) wages and salaries, received by the taxpayer, which are taxed under other provisions of this chapter;
(d) sale payments received for the sale of a commercial aircraft, to the extent that such sale payments in any quarter shall equal the rental payments made to the buyer/lessor by the seller/lessee of such aircraft for its rental by the seller/lessee;
(e) rental payments received for the rental of a commercial aircraft, to the extent that such rental payments in any quarter shall equal the sale payments made to the seller/lessee by the buyer/lessor of such aircraft for its purchase by the buyer/lessor;
(f) cash discounts allowed and taken on sales, the proceeds of sale of goods, wares, or merchandise returned by customers when the sale price is refunded either in cash or by credit; or the sale price of any article accepted as part of payment of any new article sold, if the full sale price of a new article is included in “gross revenue”;
(g) funds received by an international organization, foreign contractor, or other foreign entity paid from foreign aid proceeds donated to the Federated States of Micronesia pursuant to a foreign aid agreement entered into by the Federated States of Micronesia, the terms of which require that such gross revenue shall not be subject to taxation by the Government of the Federated States of Micronesia;
Editor’s notes: This definition was among those changed by PL 12-18 § 1.
Case annotations: Each exclusion from definition of “gross revenue” in 54 F.S.M.C. 112(5) seems to represent one or another of three possible purposes: to prevent dual taxation of revenue of single taxpayer, to make allowances for special situations, or to exclude funds received by taxpayer on behalf of another such as refunds and rebates, moneys held in a fiduciary capacity, cash discounts taken on sales, or proceeds of sales of goods returned by customers when sale price was refunded in cash or by credit. Kolonia Consumers Coop. Ass’n v. Tuuth, 5 FSM R. 68 (Pon. 1991).
Rents are income taxable under FSM Income Tax Statute, and a state tax on gross rental receipts combines to create vertical multiple taxation of a form of income. Truk Continental Hotel, Inc. v. Chuuk, 7 FSM R. 117 (App. 1995).
(h) proceeds of export sales of tangible personal property produced or manufactured in the Federated States of Micronesia and delivered to a buyer outside the Federated States of Micronesia;
(i) proceeds of sales of products of a processing facility in the Federated States of Micronesia which are subsequently exported from, and not used in, the Federated States of Micronesia;
(j) proceeds of sales of fish by foreign or domestic fishing vessels to processing facilities within the Federated States of Micronesia; or
(k) proceeds of sales of bait fish to foreign or domestic fishing vessels.
(l) proceeds from
(i) recycling waste paper, plastic, aluminum, tin or other scrap metal, or glass so that such materials may be re-used,
(ii) removing such waste materials, motor vehicles, appliances, batteries, paint or toxic chemicals from the Federated States of Micronesia for disposal or recycling; or
(iii) collecting such waste materials, motor vehicles, appliances, batteries, paint or toxic chemicals for the purposes of removal from the Federated States of Micronesia for recycling or disposal.
(6) “Military or Naval Forces of the United States” and “Armed Forces of the United States” means all regular and reserve components of the uniformed services which are subject to the jurisdiction of the Secretary of the Army, Navy, or Air Force, and also includes the Coast Guard.
(7) “Month” means calendar month.
(8) “Taxable gross revenue” shall mean, for any tax period, the figure calculated by deducting from the Gross Revenues for the period, the following expenses of the business for that period:
(a) wages, salaries and benefits reasonably paid by the taxpayer to or on behalf of employees of the business for personal services relating to producing the Gross Revenues, as such wages and salaries are reported pursuant to subchapter III of chapter 1 of title 54 of this code; and
(b) Social Security contributions by the business in respect of its employees pursuant to section 902 of title 53 of this code.
Cross-reference: Title 53 of this code is on Social Security.
(9) “Processing facility” means a business that prepares, alters, and/or packages raw materials into a finished product for resale.
(10) “Purchase payments” means payments on the actual selling price, including any interest, carrying charges, or other charges associated with a sale. As used herein, the word “sale” implies a transfer of ownership of that which is sold, in exchange for the purchase payments or promise thereof.
(11) “Rental payments” means any payments made in exchange for use or rental, and includes interest, carrying charges, or other charges associated with use or rental.
(12) “Secretary” means the Secretary of the Department of Finance and Administration.
(13) “Wages” or “Salaries” means and includes commissions, fees, compensation, emoluments, bonuses, and every and all other kinds of compensation paid for, or credited or attributable to, personal services performed by an individual, which services have been performed by such person as an employee. Wages and salaries shall not include the following:
(a) any payment received from the United States by members of the Military or Naval Forces of the United States or the Armed Forces of the United States;
(b) reasonable per diem and travel allowances to the extent that they do not exceed any comparable Federated States of Micronesia Government rates;
(c) rental value of a home furnished to any employee or a reasonable rental allowance paid to any employee (to the extent such allowance is used by the employee to rent or provide a home);
(d) any payment on account of sickness or accident disability, or any payment of medical or hospitalization expenses, made by an employer to or on behalf of an employee; provided, however, that normal wages or salaries paid to an employee for a period of time during which he is excused from work because of sickness shall not be excluded from wages and salaries under this subsection;
(e) any payment made to or on behalf of an employee or to his beneficiary from a trust or annuity;
(f) remuneration paid in any medium other than cash to an employee for service not in the ordinary course of the employer’s trade or business;
(g) remuneration paid for casual or intermittent labor not performed in the ordinary course of the employer’s trade or business and for not more than one week in each calendar month;
(h) any payment in the form of a scholarship, fellowship, or stipend made to any employee while he is a full-time, bona fide student at an educational institution;
(i) any payment received by a minister of the gospel or clergyman from a religious group or organization;
(j) any payment received by an employee for services performed as a domestic or household employee for a private individual or family;
(k) any payment received by an employee, who is not a citizen of the Federated States of Micronesia, while employed by an international organization, foreign contractor, or other foreign entity performing services or otherwise conducting business in furtherance of a foreign aid agreement entered into by the Federated States of Micronesia, the terms of which require that such wages and salaries shall not be subject to taxation by the Government of the Federated States of Micronesia; or
(l) the foreign service premium authorized by section 163 of title 52 of this code.
Editor’s note: Definition of “Director” has been editorially replaced with definition of “Secretary,” in accordance with title 2 (Executive), § 203, of this code. References to “Director” throughout this chapter have been changed to “Secretary.” Subsections have been rearranged in alphabetical order.
PL 4-81, § 1 added subsections 5(g) and 11(k) to this section. The effective date of PL 4-81 was December 24, 1986. PL 4-81, § 2 applied these subsections retroactively.
Cross-reference: Chapter 2 of title 10 (Foreign Relations) provides exemptions from taxation for certain designated international organizations.
Case annotations: The common law for the FSM referred to at 54 F.S.M.C. 112(3) is not based upon the law of England at the time of the American Revolution but upon the law of the United States, the Trust Territory and other nations in the common law tradition up to the initiation of constitutional government in 1979. Rauzi v. FSM, 2 FSM R. 8, 17 (Pon. 1985).
FSM Income Tax Law’s distinction between employees and businesses obviously reflects congressional expectation that businesses and employers are generally distinguishable on the basis of whether generation of their income would require substantial expenditures by them. Rauzi v. FSM, 2 FSM R. 8, (Pon. 1985).
In the Federated States of Micronesia Income Tax Law, 54 F.S.M.C. 111 et seq., cooperatives are not singled out in any way within the definition of business and there is no indication in the tax law that cooperatives are to be treated differently than corporations or any other forms of businesses. KCCA v. Tuuth, 5 FSM R. 68, 70 (Pon. 1991).
The taxes levied, assessed, and collected under and pursuant to this chapter shall be paid to the treasurer of the Federated States of Micronesia and become part of the General Fund of the Federated States of Micronesia as local revenue realization available for appropriation by the Congress of the Federated States of Micronesia.
Source: COM PL 4C-2 § 20; TT Code 1970, 77 TTC 269 (1975 supplement); TT Code 1980, not codified; amended by PL 7-41 § 2.
Editor’s note:
1. The 1980 edition of the Trust Territory Code erroneously codified COM PL 7-32 § 7 in place of COM PL 4C-2 § 20 as 77 TTC 269, although COM PL 7-32 was not in effect in the FSM.
2. PL 1-83 provides for the amendment of 77 TTC 269, inter alia. However, PL 1-83 § 1(11) amends former 77 TTC 270, on privileged information, although identifying it as section 269.
3. COM PL 4C-2 § 20 was the law prior to its amendment by PL 7-41 § 2. Its modification by Secretarial Order No. 3027 § 7 is noted by the cross-reference.
Cross-reference: See also Secretarial Order No. 3027, § 7.
The statutory provisions on the President and Executive are found in title 2 of this code. The statutory provisions on the FSM Congress are found in title 3 of this code.
The website of the FSM National Government contains announcements, press releases, news, forms, and other information on the National Government at http://fsmgov.org.
The official website of the Congress of the Federated States of Micronesia contains the public laws enacted by the Congress, sessions, committee hearings, rules, and other Congressional information at http://www.fsmcongress.fm/.
(1) The Secretary shall, subject to approval of the President of the Federated States of Micronesia, prescribe and have printed reasonable regulations for the enforcement of this chapter and such regulations shall have the force and effect of law if they are not in conflict with the express provisions of this chapter or other laws of the Federated States of Micronesia.
(2) Such regulations shall also provide for the making of returns concerning any taxes imposed by this chapter, and the payment thereof, in any situations not specifically covered by this chapter.
(1) The Secretary shall prescribe the forms of all returns required to be furnished under the provisions of this chapter or provide for other methods of filing returns and may provide in such forms for the giving of such information as he may deem necessary or advisable.
(2) All information required by the form of any return must be included in the return by the person, employer, company, or business responsible for making the return.
(3) No return shall be complete unless and until it is signed by or for the employer, business or other person liable to make the return, or by someone authorized to do so in behalf of such employer, business, or other person. Every return shall be signed by a natural person.
(4) The Secretary may require that, if any person or persons actually prepare or sign a return for another employer, business, or other person, a form stating such facts and authorizing such person to sign such return be signed by the person so preparing or signing the return, and the employer, business, or other person in whose name the return is filed.
(5) The Secretary may by regulations define the classes of persons to whom this provision shall apply.
(6) Any other provision of law to the contrary notwithstanding, no oath shall be required upon any tax return.
(7) Revenue shall be identified by the State or States in which it is earned.
Source: COM PL 4C-2 § 11; COM PL 5-26 § 7; TT Code 1980, 77 TTC 261; amended by PL 5-84 § 1.
(1) All reports and returns required by this chapter shall be preserved for three years and thereafter until the Secretary orders them to be destroyed.
(2) The Secretary and every employee of the Department of Finance shall maintain the secrecy of all matters relating to this chapter which come to their knowledge and shall not communicate such matters to any person except for the purpose of carrying into effect this chapter or any other enactment imposing taxes or duties payable to the Government of the Federated States of Micronesia.
(3) No employee of the Department of Finance shall be required to produce in any court any matter or thing relating to the taxes imposed by this chapter coming under his notice in the performance of his duties as an employee of the Revenue Division except when it is necessary to do so for the purpose of carrying into effect any provision of this chapter or any other enactment imposing duties or taxes payable to the Government of the Federated States of Micronesia.
(4) Information as to the amount of income or any particular set forth or disclosed in any report or return required under this chapter may, upon request of a committee appointed by the Congress of the Federated States of Micronesia, be furnished to the committee, but the committee or any member, clerk, or other officer or employee thereof shall not disclose any particulars of the information so furnished except to law enforcement officers for the purpose of aiding the detection or prosecution of crimes committed in violation of this chapter.
(5) The Governor of each State may appoint one representative of his administration who shall have access to all returns, reports, or other information on file with the Department of Finance as may be necessary to show that the required distribution of revenues to his State has been made. Each Governor shall make the appointment of his representative known to the Secretary of Finance. The appointee may share information acquired hereunder with the Governor of his State. The Governor and his appointee may not disclose the information to any other person except for the specific purpose of ensuring that the required distribution of revenues to their State has been made, or except as otherwise provided for by law.
(6) The Attorney General or other legal representatives of the Government of the Federated States of Micronesia may inspect the report of return of any taxpayer who brings an action to set aside or review the tax based thereon, or against whom an action or proceeding has been instituted to recover any tax or any penalty imposed by this chapter.
(7) Nothing herein shall prohibit the Secretary or his delegate from compiling and publishing statistics or information generally on the returns filed so long as there is no reference to a particular return and the statistics and the information do not in effect divulge the contents of any one return.
(1) The Secretary and every employee of the Department of Finance while in such employment shall not engage in the business or profession of tax accounting or accept employment with compensation from any person, firm, or corporation for the purpose, directly or indirectly, of preparing the tax returns required by the Government of the Federated States of Micronesia.
(2) Nor shall any person accept any employment for the purpose of advising or preparing materials or data, or the auditing of books or records to be used in an effort to defeat or cancel any tax or part thereof that has been assessed by the Government of the Federated States of Micronesia.
Any violation of subsections (2), (3), (4), or (5) of section 116 or violation of section 117 of this chapter shall be a misdemeanor and shall be punishable by a fine of not more than $500, or imprisonment for not more than six months, or both.