Overview:

National Government Taxes. The National Government imposes three taxes through its Customs and Tax Administration (CTA). The first is an import tax on all products brought into the FSM. Imported items will not be released by customs officials until all import taxes have been paid.

The second tax is assessed on the "gross revenues" of all "businesses" operating within the FSM. This tax is based on gross receipts and very few deductions are allowed in computing the tax. Almost every person or company earning money from activities within the FSM will be subject to this tax, unless that person is an employee.

The third tax is on wages and salaries. It is the responsibility of every employer doing business within the FSM to withhold this tax from wages and salaries paid to employees working within the FSM. Withholding is based on gross wages and salaries (no deductions).

State and Municipal Taxes. The various states assess sales, use, excise, and other miscellaneous taxes. Municipalities are responsible for issuing and collecting fees for most business licenses. Each taxpayer should check with the authorities in the state and municipality where he is doing business to see what taxes his business is subject to.

Import Tax (Duties & Customs):

As a general rule, most products imported for resale are subject to import taxes with rates varying by product.

Currently the rates are: 100% ad valorem on Laundry Bar Soap; 50% ad valorem on Tobacco, other than cigarettes; 25% ad valorem on cigarettes, perfumery, cosmetics and other toiletries; soft drinks, drink mixes, drink preparations, coffee, tea, and nonalcoholic beverages; beer, malt beverages, wine, and citrus fruit; $10 per gallon of distilled alcoholic beverages; $0.05 per gallon of gasoline and diesel fuel; 3% ad valorem on food stuff for human consumption; 4% ad valorem on all other imported products.

Cigarettes, other tobacco products, beer and other malt beverages, distilled alcoholic beverages, and wine are subject to import tax irrespective of whether they are imported for resale or personal use and consumption. The is an exemption, however, for arriving passengers as follows:

Any person may import into the FSM duty free, the quantities specified below, provided such goods are for that person’s own personal use and consumption and not for resale, and are permitted by applicable State Law to possess, consume and use such goods:

a.	up to 200 cigarettes per trip.
b.	up to one pound of tobacco or twenty cigars per trip, and
c.	up to 52 fluid ounces or 1500 ml of distilled alcoholic beverages per trip.

Import taxes are assessed on the FOB (free on board) value of the products. There are import tax exemptions for goods "damaged or not received" and "goods exported". In both cases an application for refund of the import taxes is required. All goods must be cleared within 15 days of arrival, or a penalty is payable. The penalty for late payment is 10% plus an additional 10% for each month the tax is not paid. All imports are subject to physical inspection. Arrangements can be made, however, for the quick clearance of perishable items.

Gross Revenue Tax:

A Gross Revenue Tax is assessed on every business operating in the FSM. This tax is assessed on the "gross revenues", which means all receipts of a business, from whatever source, without deductions.

The tax rate is $80 on the first $10,000 of gross revenues and 3% of any excess for the calendar year. Businesses with less than $2,000 in gross revenues during a year are eligible for a refund of the taxes paid for the calendar year.

Every business shall pay, based on its gross revenue of the preceding quarter, the amount of tax imposed to the National revenue officer in the State in which the business has its place of business. Taxes are due on or before the last day of the month following the close of each quarter, to wit: January 31, April 30, July 31 and October 31. There are penalties assessed for late payments.

Wages and Salaries Tax:

Wages and Salaries Tax is assessed on employees income. Every FSM employer is obligated to withhold the tax from wages and salaries paid to employees working within and without the FSM. Withholding is based on gross wages and salaries, with no deductions.

Wages and salaries include almost everything of value that an employee receives in exchange for his or her services. Non-cash wages and salaries are taxable.

The tax rate is 6% of the first $11,000 and 10% of any excess earned during each calendar year. Employees earning less that $5,000 during a calendar year are entitled to a $1,000 deduction before computing the tax.

Social Security Taxes:

The FSM has a social security system, with employer paying half the social security tax, and the employee paying the other half through withholdings by the employer. Under the current rate, the employer and employee each pay 6% of wages and salaries not in excess of $6,000 per quarter.

U.S. Tax Considerations:

U.S. Internal Revenue Code, Section 936 is now extended to the Federated States of Micronesia. Specifically, Section 936 of the Internal Revenue Code provides a special tax credit for U.S. corporations operating in the FSM.



Land ownership and use

Land ownership is limited by the Constitution to citizens of the FSM. Even domestic corporations which have non-citizen shareholders may not own land. Non-citizen individuals and corporations may lease either public or private lands.

Special importance is attached to land in Micronesia both because of its short supply and because of its traditional importance. Leasing of private lands in particular can be time-consuming, due to fractional ownership and uncertain boundaries and titles. Many parcels of land are held by families or clans which may have different fraction, all of whom assert interests in the land.

However, land use can be smoothly worked out, either through the Government or expert private sector personnel. Initial point of contact should involve the Secretary of the Department of Resources and Development, FSM National Government, P.O. Box PS-12, Palikir, Pohnpei 96941.

The National Government as well as the respective state governments will assist interested investors in identifying local partners as well as land owners who are interested in leasing their lands to outside investors. Many landowners may be willing to lease land in exchange for an equity in the venture or for a combination of equity and lease payments based on a percentage of the land value, or a share in the gross proceeds from the business.

Leasehold interests can be used in the FSM as security for mortgages using the concept of a springing mortgage. Under this approach, the mortgagor, in the event of default, is protected by the leasehold interest.

Infrastructure

In addition to existing infrastructure base, the FSM has received over $20 million per year under the fifteen year Compact of Free Association Treaty with the United States of America for its capital improvement program. Advances have been made in areas of airports, harbors, roads, telecommunications and utilities throughout the four state centers. Infrastructure on the other outlying islands are limited to bare essentials such as small docks, individual power generators, water catchment systems, and in some cases small airport runways.

Power

lElectricity, which is 110-220 volt 60 cycle, is generated throughout the FSM by diesel generators and is available mainly in the four urban centers. Pohnpei has the most reliable system which is operated separately of the government as a state enterprise fund. The other three states are also quickly pursuing similar direction. The existing electrical systems can accommodate additional users and the respective governments are prepared to provide means when necessary.

The cost of generating electricity is between $0.19 to $0.40 per kwh. Charges for electricity vary with usage, ranging from $0.09 to $0.40 per kwh.

Water and Sewer

The four urban centers in the FSM have public water and sewer systems. Outside the urban centers, the populations rely on water catchments or wells and different forms of septic tank systems. The charges for water and sewer vary also with usage, ranging from $1.80 to $5.40 per 1,000 gallons.

Transportation

Both air and sea transportation into and out of the FSM are quite good.

Air Service

Each of the four urban centers has an international airport capable of accommodating medium sized jet aircraft. Air terminals are being considered for expansion in the FSM to meet the needs of the steadily increasing air traffic.

International and interstate passenger and cargo services to the FSM are provided by Continental Micronesia’s fleet of 737 aircraft. Continental Micronesia provides scheduled air services from Hawaii through the Marshall Islands to Kosrae, Pohnpei, Chuuk and on to Guam three times weekly. Chuuk and Pohnpei are also served by Continental Micronesia from Guam four times weekly and to Kosrae three times weekly. Yap is also served by the same airline from Guam and Palau three weekly flights round trip.

Guam is the region’s airline hub and it is possible to fly anywhere in the world connecting through Guam on Continental Micronesia, Northwest Airlines, JAL and Air Nippon.

Inter-island air service in the States of Chuuk and Pohnpei is being provided by Caroline Island Air while Yap and its outer islands are being serviced by Pacific Missionary Aviation.

Ocean Shipping

All states in the FSM have deep draft harbors capable of handling almost all commercial shipping needs. Depths at ports range from 30 to 160 feet. Each of the ports is capable of providing containerized cargo handling, some warehousing, and transshipment capabilities. All ports offer cold storage facilities.

Ocean shipping is provided on a monthly basis to anywhere in the world by Matson Line, which originates from the West Coast of the United States to the FSM and to the Far East countries in Asia. Similarly, Kyowa Lines provides service from Japan and other ports in the Southeast Asian region to the FSM. Ocean freight rates are reasonable since these rates are monitored annually by the Micronesian Shipping Commission, which has a senior government official representing each of the three government entities of the Republic of Palau, FSM and the Republic of the Marshall Islands. Volume shipping can be arranged directly by a company with the two main shipping companies serving the FSM.

Telecommunications and Mail Service

The FSM has a state-of-the-art telecommunication system offering satellite access for telephone, telex, facsimile, and among all the internet connections/electronic mail to anywhere in the world.

It is possible to direct dial to each of the FSM states, to and from the U.S., Japan and most other locations. The country code is 691.

Mail service to and from the FSM is excellent. The FSM Postal Service picks up and delivers all mail to each of the states via air service. The FSM is part of the U.S. Zip code system. Mail rates from the U.S. to the FSM and from the FSM to the U.S. are the same as U.S. domestic rates. International rates are also the same as those charged by the U.S. Postal Service.

Banking

There are two commercial banks operating in the various FSM states and both are FDIC Insured. They are: The Bank of Guam and The Bank of the Federated States of Micronesia.

The FSM Government also operates the FSM Development Bank which makes concessionary low-interest long-term loans, primarily to local investors, for viable development projects.

Other Services:

Other services that are available locally include accounting, insurance, freight forwarding, legal and hotel accommodations. Detailed information on each one of these services as well as others can be provided upon request.