Why does methylation not occur in viral DNA?
Contrary to the question title, viral DNA can be methylated.  See for example Bonvicini et al. 2012. (1) and Hoelzer et al. 2008 (2). 

Hoelzer et al. give a review of the presence and role of cytosine methylation in DNA viruses of animals:


  To understand the impact of cytosine methylation on the viral life
  cycle and the evolution of base composition, the particularities of
  each virus will need to be considered. Differences will inevitably
  exist between actively replicating viral DNA and that which is
  integrated into the host genome. The type of viral persistence will
  also be of importance. The integration of adeno- or polyomavirus DNA
  into the host genome is usually a terminal process since the viruses
  cannot liberate their genomes and are therefore no longer infectious.
  The evolutionary roles of methylation in these cases will likely
  differ from those seen in other viruses, such as Herpesviruses, which
  can liberate their genome after periods of latency. But differences
  may also exist between large and small viruses—with many larger
  viruses encoding their own replication machinery and additional
  proteins which modify host cell processes and immune responses. The
  susceptibility of the viral genome to methylation and immune
  recognition will also be affected by other factors, such as the
  location of replication within the cell and the specific intracellular
  trafficking route.


Viral DNA methylation has mostly been studied in large DNA virii, and the extent of methylation may be related to repression of viral replication. Bonvicini et al. writes that


  Epigenetic mechanisms, and in particular the impact of cytosine
  methylation at CpG dinucleotides on the viral life cycle have been
  mainly studied for viruses that can establish latency and undergo
  reactivation, such as viruses in the Herpesviridae family, or for
  viruses that can integrate their genome into the host genome such as
  Retroviridae or Papillomaviridae. In general, a correlation has been
  found between the extent of CpG dinucleotides methylation of viral
  genomes and viral quiescence [24]. Scarce information is on the
  contrary available on the possible occurrence and role of methylation
  for actively replicating viruses