MicronesiaTax Obligations Detailed

In Micronesia, employers must withhold wages and salaries tax, social security contributions, and adhere to specific filing deadlines.

Wages and Salaries Tax

The wages and salaries tax is a progressive tax with two brackets: 6% on the first $11,000 of annual income and 10% on any income exceeding $11,000. Employees earning less than $5,000 annually are eligible for a $1,000 deduction. Employers are responsible for withholding this tax and remitting it quarterly. The following are exempt from wages and salaries tax:

• Reasonable per diem and travel allowances
• Housing allowances used for rent or to provide a home
• Employer-paid sickness, disability, medical, or hospitalization expenses

Social Security Tax

As of 2025, both employers and employees contribute 7.5% of the employee's earnings to the social security system. According to source [12], as of January 1, 2023, the maximum quarterly taxable wage is $9,000, and it will increase to $10,000 as of January 1, 2028.

Business Gross Revenue Tax

Businesses operating in Micronesia are subject to a gross revenue tax. The rate is $80 on the first $10,000 of gross revenue and 3% on any excess. Businesses with less than $2,000 in annual gross revenue are exempt. Quarterly filing is required.

Filing Requirements and Deadlines

Employers must file quarterly returns and remit withheld taxes by January 31st, April 30th, July 31st, and October 31st. Social Security tax payments are due by the 10th of the month following the end of each quarter.

General Employer Responsibilities

• Withhold and remit wages and salaries tax.
• Contribute to social security for employees.
• File quarterly tax returns for both income tax and gross revenue tax.
• Comply with state and municipal regulations, which may vary.
• Ensure compliance with all legal employment requirements, including work permits and visas for foreign workers.

This information is current as of February 5, 2025, and may be subject to change.

In Micronesia, employee tax deductions primarily consist of income tax and social security contributions.

Income Tax

The income tax rate is 6% on the first $11,000 of annual income and 10% on any income exceeding $11,000. Employees earning less than $5,000 annually are eligible for a $1,000 deduction before tax calculation.

Social Security

As of July 1, 1980, the total social security contribution was 2% of the employee's salary, with an equal amount matched by the employer. Legislation aimed to increase this to 4% by 1983. The current rate for 2025 needs to be verified with the Federated States of Micronesia Social Security Administration. As of 2020, the employee contribution was 7.5% with the employer matching that amount.

Other Deductions and Exemptions

Several exemptions and deductions exist:

• Per Diem and Travel Allowances: Reasonable amounts are exempt.
• Housing Allowances: Exempt if used for rent or to provide a home.
• Employer-Paid Medical Expenses: Payments for sickness, disability, or medical/hospitalization expenses are exempt.
• Non-Cash Payments: Payments for services outside the employer's usual business are exempt.
• Casual Labor Payments: Payments for casual labor outside the employer's usual business, limited to one week per month, are exempt.
• Domestic Help Payments: Exempt.
• Other Exemptions: Exemptions also exist for military personnel, trust/annuity payments, scholarships, and clergy.

Employer Responsibilities

Employers with a place of business in Micronesia are required to withhold income tax and social security contributions from employee wages. They must file quarterly income tax withholding returns and remit payments to the appropriate state revenue officer or the Secretary of Finance. Failure to comply can result in penalties and interest charged to the employer, and potentially to the employee.

Employee Responsibilities

Employees should ensure their employer withholds the correct taxes and pays over to the Division of Customs and Tax Administration. Employees working for businesses without a place of business in Micronesia are responsible for filing and paying their own taxes.

It is important to consult with the Federated States of Micronesia tax authorities or a qualified tax advisor for the most current and specific information regarding tax obligations, as rates, and regulations can change. The information provided here is based on available information and should be used for general knowledge.

In the Federated States of Micronesia (FSM), the tax system utilizes a gross revenue tax rather than a value-added tax (VAT) or goods and services tax (GST). Each of the four states (Yap, Chuuk, Pohnpei, and Kosrae) also has the authority to levy its own taxes.

Gross Revenue Tax

The FSM gross revenue tax applies to all businesses operating for profit within the FSM.

• Tax Rate: $80 per year on the first $10,000 of gross revenue, plus 3% per year on any amount exceeding $10,000.
• Threshold: Businesses with annual gross revenue of $2,000 or less are exempt.
• Filing Frequency: Quarterly.
• Due Dates: January 31st, April 30th, July 31st, and October 31st.

Import Tax

The FSM levies an import tax on goods brought into the country. The rates vary depending on the specific goods. Goods are not released by customs until the import tax is paid. Some exemptions exist, such as for goods in transit or for re-export.

Wages and Salaries Tax

A tax is levied on wages and salaries earned within the FSM. Specific rates and exemptions can be found in the FSM Tax Code.

State and Municipal Taxes

Each state within the FSM (Yap, Chuuk, Pohnpei, and Kosrae) has the authority to impose its own taxes in addition to the national taxes outlined above. Information on these taxes should be sought from the respective state's tax administration. For example, some states may have sales taxes applicable to specific goods and services.

Other Taxes

• Social Security: Both employers and employees contribute to social security.
• Corporate Income Tax: Corporations are subject to corporate income tax.

It's important to note that tax laws are subject to change, and this information is current as of February 5, 2025. Consulting with a tax professional or the FSM Division of Customs and Tax Administration for the latest regulations and specific details is recommended.

Micronesia currently does not offer any government programs or tax incentives specifically designed to attract foreign investment.

Tax Rates and Obligations in Micronesia

• Corporate Tax: Major corporations not operating within Micronesia but remitting taxes under section 321 of the FSM Code are exempt from gross revenue tax. Those operating within Micronesia are subject to gross revenue tax.
• Gross Revenue Tax: The gross revenue tax rate is $80 on the first $10,000 and 3% on any amount exceeding this threshold. Businesses earning less than $2,000 annually are exempt. Quarterly filings are required.
• Payroll Tax: A payroll tax is levied, with rates of 6% on the first $11,000 of income and 10% on any income exceeding that amount. Individuals earning under $5,000 annually are eligible for a $1,000 deduction.
• Social Security: Employers and employees each contribute 7.5% for social security, totaling 15%.
• Sales Tax (VAT): A 5% Value Added Tax (VAT) is applied to goods and services.

Other Considerations

• Absence of Investment Incentives: Currently, no specific tax incentives or programs are available to attract foreign investors, including those in sectors like tourism or aquaculture.
• Local Employment Mandate: The government requires businesses to prioritize employing local citizens when suitably qualified candidates are available.

It's important to remember that tax regulations are subject to change. This information is current as of February 5, 2025. It is recommended to consult with a tax advisor for the most recent updates and personalized guidance.