Tax News
Net Investment Income Tax and US Territories – Confusion and Inequality Abound
May 14, 2014
Filing season is done for taxpayers without extensions and will soon be approaching for those with extensions. One item on the menu that is new is the NIIT. That item slices a 3.8% cut off the investor’s revenue and forwards it promptly to Uncle Sam.  Amid confusion regarding trusts, S corporations, real estate, netting losses and so on, apparently there is some confusion regarding the application of the NIIT to US territories. We were not aware of that confusion until today when we reviewed one USVI law firm’s plea to Office of International Tax Counsel to clarify the NIIT application to USVI. The letter goes on to reason that it is relatively clear that the tax should not apply to USVI bona fide residents who are not required to file a US tax return. The letter also points out that it is relatively clear that the tax applies to US territories without “mirror” laws, such as Puerto Rico. Well, by golly, we can’t think of a rational reason why the tax would not apply to USVI but apply to Puerto Rico. Also, having inquiring minds, we did a search on this issue and ended up on the USVI bureau of international revenue website, which states that “this tax applies to bona fide residents based on the application of the mirror income tax laws that apply in the Virgin Islands.” Not only that, but the note from BIR implies, contrary to the suggestion by the law firm letter to International Counsel, that the tax applies irrespective of whether the USVI resident files a US tax return. Long story short, considering that these two jurisdictions (Puerto Rico and USVI) cater towards high net worth LPs and fund managers, several things come to mind: (1) if indeed there is a difference between the two jurisdictions, if one were to take the plunge and move down south, a 3.8% differential is something to consider carefully, (2) LPs and managers in those jurisdictions should talk to their CPAs pronto to give them some color on this issue, and (3) on a grander scale, what would the policy behind the differential be?

The VIR note can be found here.
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Tags: net investment income tax, NIIT, Puerto Rico, USVI