The following is an excerpt from a report prepared by Deloitte & Touche LLP, January 31, 2013
Overview
The islands of Micronesia lie scattered across the Western Pacific just above the equator and cover an ocean area as large as the continental United States: 7.8 million square miles. Nature chose to spread the combined land mass of approximately 1,000 square miles over the more than 2,000 beautiful Micronesian islands.
Population and Language
Over 300,000 people live within Micronesia with nearly fifty percent residing on the island of Guam. While nine major distinct languages are spoken, English is the principal business language throughout the islands.
Legal Entities
Micronesia encompasses five distinct legal entities:
- Commonwealth of the Northern Mariana Islands
- Federated States of Micronesia
- Guam
- Republic of the Marshall Islands
- Republic of Palau
Currency
The United States dollar is the basic currency throughout Micronesia.
A Brief History
The United States was ceded the Territory of Guam in 1898 at the conclusion of the Spanish-American War. Administration was assigned to the United States Navy until 1950 at which point a civilian governor was appointed. The first elected governor took office in 1970.
The remaining islands became a United Nations Trusteeship administered by the United States in 1947. The Trusteeship remained intact until the covenant to establish the Commonwealth of the Northern Mariana Islands was signed in 1976. In 1978, the island governments of Kosrae, Yap, Chuuk, and Pohnpei became the Federated States of Micronesia. The Republic of the Marshall Islands was established in 1979. The Republic of Palau was established on October 1, 1994.
Physical Characteristics
The FSM consists of approximately 600 islands, atolls and islets divided into four states: Kosrae, Pohnpei and Chuuk in the eastern Caroline Islands and Yap in the western Carolines. They are spread over an area of more than a million square miles (2.8 million square kilometres) extending from the equator to approximately 14 degrees north latitude.
The climate is warm and humid. Pohnpei boasts one of the highest average rainfalls on earth.
History
Ruins on some of the islands indicate early settlement and possible contact with Chinese civilization. While Spaniards visited the islands in the sixteenth century, they did not colonize them until the late 19th century. They were sold to Germany in 1899 and ultimately placed under Japanese mandate following World War I.
In 1946 the islands were placed under the trusteeship of the United Nations to be administered by the United States as part of the Trust Territory of the Pacific Islands.
In 1979 a new constitution was adopted with the people voting for an independent status, freely associated with the United States.
Government
The government consists of a president and vice-president elected by a unicameral congress made up of one at-large senator from each State, with four-year terms and district senators with two-year terms, elected on the basis of population. Each of the four State governments has a popularly elected governor and a unicameral legislature, except for Chuuk State which has a bicameral legislature.
Business Environment
Agriculture and fishing have been the dominant economic activities. However, there exists a desire to build a more vibrant tourism industry.
Foreign investment is welcomed by both state and local governments. Foreign investment permits may be required from both the state and local governments depending on the economic sector category. Applications must be submitted to and approved by the FSM Foreign Investment Board and the applicable state Department of Commerce and Industry. Business is conducted primarily in corporate form.
To incorporate a business in the FSM, the following information must be submitted to the Registrar of Corporations, Palikir, FSM:
- Proposed name of corporation
- Principal office or place of business
- Proposed duration of the corporation
- Purposes
- Powers
- Capitalization
- Names of incorporators
- Number of directors (not less than three) and proposed officers
- Names of officers and directors to serve until first election
- Provisions for management, if any
- Provisions for voting members
- Provisions for shareholding, if any
- Disposition of financial surplus
- Provisions for liquidation
- Provisions for amendment of articles of incorporation
- Articles of incorporation and bylaws
Labor
Non-U.S. citizens working in the FSM must have valid entry permits and expatriate worker authorizations. Anyone wishing to remain for longer than 30 days must obtain prior approval from the FSM Immigration Service.
Taxation
FSM Corporate Income Tax
On January 2005, the Federated States of Micronesia (FSM) enacted the “Corporate Income Tax Act of 2004.” The Act imposed a 25.5% income tax on the taxable income of major corporations for each taxable year. The Act has since then been amended and imposes an income tax rate of 21%. As defined under the Act, a major corporation is any corporation that is not exempt from taxation.
Corporations exempt from income tax are corporations incorporated in the FSM and which satisfy any of the following:
- The corporation’s equity at the start of its fiscal year is less than $1,000,000
- The corporation’s control group’s equity is less than $10,000,000
- The corporation is principally engaged in business as a bank in the FSM
- The corporation was incorporated in the FSM prior to January 1, 2005.
FSM Captive Insurance Law
The Federated States of Micronesia established its captive insurance law on November 2, 2006. There is a $500 non-refundable processing fee for the application of a captive insurance license and a $500 annual renewal fee thereafter. The license will expire on March 31st of each year.
A paid-in capital of not less than $100,000 is required for an insurance company to be registered as a Class 1 Captive and issued a captive insurance license in the FSM. A Class 1 Captive is one that insures the risks of its parents and affiliated companies or associations. For a Class 2 Captive, the minimum capital required is the greater of $100,000 or 20% of the net premium income; or 5% of the value of loss reserves. A Class 2 Captive is one that, in addition to insuring the risks of its parents and affiliated companies, also insures the risks of third-party businesses. The minimum capital requirement has to be maintained or failure to do so may result in the revocation or suspension of the license.
Within six months after the close of its fiscal year, a captive insurance company is required to submit audited financial statements and a report of its financial condition verified by oath by two of its executive officers.
Gross Revenue Business Tax
The gross revenue tax applies to receipts from sales of tangible personal property and services. The tax is $80 on the first
$10,000 of annual gross revenue and 3% of amounts over $10,000. Businesses with gross revenue of less than $2,000 are exempt from this tax.
Entities with gross revenue from business activities both within and without the Federated States of Micronesia may file for an apportionment on a form prescribed by the Secretary and the tax will be levied only on the revenue derived from within the FSM.
Gross Wage and Salary Tax
The gross wage and salary tax is applicable to all remuneration attributable to an individual for personal services performed as an employee. The tax is 6% of the first $11,000 of annual wages and 10% of amounts over $11,000.
Employees whose gross annual wages and salaries are less than $5,000 shall be allowed a deduction of $1,000 per year from amounts subject to this tax.
Social Security Tax
With respect to employees, businesses are also required to make quarterly social security contributions on “covered earnings.” Covered earnings are defined as the compensation paid to employees up to $7,000 per calendar quarter.
From the employee’s wages, the employer is to withhold and pay to the Social Security Administration 7.5% of covered earnings. From the employer’s revenues, the employer is to contribute to the Social Security Administration for the benefit of the employee another 7.5% of covered earnings.
This is an excerpt from a report prepared by Deloitte & Touche LLP, January 31, 2013
