By Marjorie Rawls Roberts
In December 2003, the U.S. Virgin Islands' legislature enacted amendments to its economic development program to extend the period of benefits for watch and jewelry manufacturing and assembly businesses, to require that fifty percent of contributions made by beneficiaries of the economic development program be designated for public school programs, to raise the application fees and annual compliance fees for applicants and beneficiaries respectively, and to institute an activation fee for the commencement of benefits. These amendments were contained in Act No. 6634, the Virgin Islands Omnibus Authorization Act of 2004, as passed by the Legislature of the Virgin Islands on November 24, 2003, and signed into law by Governor Charles W. Turnbull on December 23, 2003. The economic development program is administered by the seven-commissioner Economic Development Commission ("EDC"), a division of the Economic Development Authority .
Overview of Economic Benefits
The U.S. Virgin Islands' economic development program is authorized by the U.S. Congress. The legislation enabling the incentive programs is in Section 934(b)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). This legislation provides that the U.S. Virgin Islands can reduce or remit tax liability incurred to the U.S. Virgin Islands as is attributable to income derived from sources within the U.S. Virgin Islands or income effectively connected with the conduct of a trade or business within the U.S. Virgin Islands. Code section 934 became effective upon the signing of the Tax Implementation Agreement between the U.S. Virgin Islands and the United States on February 24, 1987.
Under the economic development program, a beneficiary business must make a minimum capital contribution of U.S. $100,000, exclusive of inventory , and employ at least 10 U.S. persons full-time . At least 80 percent of a beneficiary's employees must be U.S. Virgin Islands residents . To qualify as a resident for that purpose, a person must generally have been domiciled in the territory for at least one year, have attended school in the territory for six years, or have graduated from one of the territory's high schools or the University of the Virgin Islands . A beneficiary business also must agree to purchase all goods and services in the U.S. Virgin Islands from U.S. Virgin Islands suppliers that have valid business licenses and are in full payment of their taxes if the goods and services are available in the territory .
An applicant is also required to provide health insurance and a retirement plan for its employees . In practice, most beneficiaries are required to pay all the premiums for their employees and some beneficiaries also pay a portion of the dependent coverage, typically from one quarter to one half of the cost. Many beneficiaries also provide term life insurance ranging from $10,000 to $30,000. Beneficiaries usually provide a defined contribution retirement plan, such as a 401(k) . Beneficiaries often commit to contribute five percent of each employee's salary to the retirement plan, regardless of whether the employee contributes.
To be eligible for benefits from the EDC, an applicant's business must fall within one of the following four categories:
Category I rum production, milk/dairy production, and watch and jewelry manufacturing and assembly;
Category II product assembly, manufacturing (other than jewelry and watch manufacturing and assembly), agriculture/food processing, mariculture/food processing, marine industry, raw materials processing, hotels/guesthouses, transportation, and telecommunications;
Category IIA service businesses not limited to, but including, investment managers and advisers, research and development, business and management consultants, software developers, e-commerce businesses, call centers, high-tech businesses, international public relations firms, international trading and distribution, and any other businesses servicing clients outside the Virgin Islands; and
Category III — utilities, health care facilities, recreation facilities, insurance companies, physicians' corporations, and such other industries or businesses as may be deemed appropriate by the EDC.
Beneficiary businesses receive a 90 percent reduction of their tax liability on income from the business for which the benefits are granted. That reduction results in an effective tax rate of approximately four percent on income from approved operations. Beneficiaries also receive an exemption from the U.S. Virgin Islands property tax otherwise imposed at 0.75 percent of the property's fair market value , an exemption from U.S. Virgin Islands gross receipts tax otherwise imposed at four percent on the gross receipts of a business , a reduction in customs duties on certain items , and exemptions from excise taxes on building materials and raw materials .
If the beneficiary's owners are bona fide residents of the U.S. Virgin Islands, they also enjoy reduced tax rates on income from dividends, distributions, or allocations . Specifically, U.S. Virgin Islands resident individuals who are shareholders, members, partners, grantors, beneficiaries, or other owners receive a 90 percent tax reduction. Residency for this purpose is determined under Section 932(c) of the Code, which means that a taxpayer must be a bona fide resident at the end of his or her tax year. The determination of residency is a subjective test based on an analysis of the facts and circumstances, and not a number of days test.
Benefits are available for 10 years for the islands of St. John, St. Thomas, and the Christiansted District of St. Croix , and for 15 years for the Frederiksted District of St. Croix . Benefits can be extended for a 10-year period if the applicant is in full compliance with all requirements of the EDC and submits a completed extension application , and can then be extended in five-year increments . The EDC has the authority to reduce the benefits it grants on an extension, but not on the initial grant.
Qualifying small businesses are also eligible for economic development benefits under the Small Business Program . Those businesses must meet certain ownership requirements, but can obtain benefits with as few as two employees and a capital investment of as little as US $20,000.
Expansion of Benefits for Jewelry and Watch Manufacturers
Section 58 of Act No. 8834 added a new Section 714c to Chapter 12, Title 29, Virgin Islands Code. New Section 714c provides as follows:
Notwithstanding any other law, watch and jewelry manufacturing and assembly businesses that possess an industrial development certificate or an economic development certificate, under the provisions of this chapter, shall receive extended benefits under sections 713a, 713b, 713c and 713d of this chapter, for a period of time equal to the greater of (1) twenty (20) years from the date of enactment of this section, or (2) the period of time that the Federal Production Incentive Certificate Program provisions, which are set forth in the Harmonized Tariff Schedule of the United States, Supplement 1, Chapter 91, Additional U.S. Note 5 and Chapter 71, Additional U.S. Note, are in effect.
Watch and jewelry manufacturing and assembly businesses, which fall within Category I as set out above, would otherwise initially receive benefits for a period of 10 or 15 years, depending on location, then receive an extension of 10 years, and then receive subsequent extensions in five-year increments.
In addition to receiving economic development benefits, watch and jewelry assembly producers in the U.S. Virgin Islands receive credits for wages paid to their U.S. Virgin Islands employees under a Federal program. Specifically, Additional U.S. Note 5 to
Chapter 91 of the Harmonized Tariff Schedule of the United States ("HTSUS") provides for the duty-free entry of defined quantities of watches and watch movements produced in the U.S. insular possessions. Note 5 also requires the Secretaries of Commerce and the Interior to issue duty-refund certificates (known as Production Incentive Certificates) to each insular possession watch and watch movement producer based on the producer's duty-free shipments and creditable wages during the previous calendar year. Additional U.S. Note 3 to Chapter 71, which was added to the HTSUS in 1999, provides that a producer of any article of jewelry that is the product of the insular possessions is also eligible for the Production Incentive Certificate benefits provided for in Additional U.S. Note 5(h) to Chapter 91.
The watch industry is the largest light manufacturing industry in the U.S. Virgin Islands and historically is one of the most important sources of private sector employment in the territory. In addition to the approximately 300 jobs created directly by watch and jewelry producers in the U.S. Virgin Islands, primarily on the island of St. Croix, watch and jewelry production also indirectly support many related production and service jobs in the territory.
The current program providing benefits to insular possession watch and jewelry producers expires in 2007. However, legislation is currently before the U.S. Congress that would extend the Production Incentive Certificate provisions until 2015.
The amendment made by Section 58 will ensure that jewelry and watch producers in the U.S. Virgin Islands will have their economic development benefits for as long as the U.S. Congress keeps the Production Incentive Certificate program in place, including all extensions. This extension provides jewelry and watch producers with the certainty that they require to establish or expand their facilities in the U.S. Virgin Islands, and specifically to make necessary capital investments and invest in new product development. In particular, many of the watch producers have been in the U.S. Virgin Islands for more than 20 years, and thus were required to apply for extensions every five years without this amendment.
In response to the passage of Section 58, Alan Grunwald, President of the Virgin Islands Watch & Jewelry Manufacturers Association and President of Belair Quartz Inc., a St. Croix-based watch manufacturing business, notes that "the watch and jewelry industry has suffered from fierce competition from low-cost Far East labor. The changes made by Section 58 of Act No. 6634 will go a long way to stimulate long term investment in the territory by members of our industry, and will help to attract new firms to the U.S. Virgin Islands, and specifically to St. Croix."
Attorney Frank Schulterbrandt, Chief Executive Officer of the EDC, also advocated strongly for the change. "In order for the U.S. Virgin Islands to remain competitive in the changing international economic environment, we must continually adjust our tax incentive laws to attract businesses to the territory," he points out. "The additional term being granted for jewelry and watch manufacturers is testimony to the territory's commitment to its beneficiaries and potential investors that we will remain competitive to ensure additional investment and job creation in the U.S. Virgin Islands."
Contributions Required for Public Education
Section 57 of Act No. 6634 amended Section 708(m) of Chapter 12, Title 29 of the Virgin Islands Code by adding a clause at the end of the first sentence, as underscored below, so that Section 708(m) provides that an applicant for benefits must:
Provide educational assistance to residents of the Virgin Islands in an amount and form which is acceptable to the Commission or provide a financial contribution to a fund established by the Commission. As used in this subsection, educational assistance included all types of educational assistance including but not limited to vocational and other job training programs, except that fifty percent of any such financial contribution must be designated for public school programs and initiatives.
Since the EDC has the authority to determine the amount and form of educational assistance, the EDC will presumably determine which public school programs and initiatives will receive a financial contribution under this section as amended.
Senator Louis Patrick Hill, who sponsored the amendment, has elaborated that he wanted additional funding for non-academic programs such as interscholastic sports and school bands. "These programs are vital to our efforts to prepare another generation of citizens who have the sense of purpose and character to make a greater society for us all."
Increases in Application and Compliance Fees and Imposition of an Activation Fee
Almost three years ago, on February 1, 2001, Governor Turnbull signed Act No. 6390 into law, which imposed application and compliance fees for the first time. These fees were largely geared towards making the EDC financially self-sufficient.
Section 59 of Act No. 6634 amended Section 708a of Title 29 of the Virgin Islands Code by deleting the existing fee table and by inserting the following in its stead:
Application Fee Activation Fee Annual Compliance Fee
Category I $1,500 $1,000 $1,500
Category II $3,500 $1,500 $3,000
Category IIA $5,000 $2,500 $7,500
Category III $5,000 $3,500 $5,000
Section 708a permitted the EDC to make "fee adjustments on an annual basis, with the approval of the Governor, and such fee adjustments shall not exceed the Consumer Price index for that year." However, these fee adjustments were passed by the U.S. Virgin Islands Legislature, and not proposed by the EDC. The new fees can now be raised by the EDC on an annual basis.
Economic benefits are recommended by the EDC after the applicant submits a lengthy application and has a public hearing. After the public hearing, the EDC holds an executive session in which benefits are discussed. The governor, who makes the final determination of all tax benefits, then reviews applicants that are recommended for approval by the EDC.
The application fee must be paid by the applicant when submitting the application to the EDC. After an applicant is approved for benefits by the governor, the applicant must advise the EDC when benefits should commence as well as the applicant's physical and mailing addresses and telephone and fax numbers. Once the applicant has advised the EDC, the EDC will provide the applicant with a Certificate setting out the general and special conditions for the applicant's grant of benefits. In connection with the issuance of the Certificate, the applicant will be required to pay the activation fee. Finally, beneficiaries are required to pay an annual compliance fee that covers the EDC's regular review of each beneficiary to ensure that the beneficiary is in full compliance with the EDC's requirements. The annual compliance fee will be applied towards the EDC's cost of carrying out the compliance reviews. In addition, each year the EDC holds a mandatory compliance conference for all beneficiaries.
Public Hearing Schedule
The EDC is composed of seven commissioners by statute, including three people who head Cabinet-level executive departments or are on the Governor's executive staff. The present commissioners who hold these positions are Dean Plaskett, Esq., who serves as chair, Kent Bernier, who serves as Vice Chair, and Louis Willis. Chair Plaskett is also Commissioner of Planning and Natural Resources; Vice Chair Bernier is also the Governor's Assistant for Economic Policy, and Mr. Willis is Director of the Virgin Islands Bureau of Internal Revenue.
In addition, the board includes three private citizens appointed by the Governor, one each from St. Croix, St. John, and St. Thomas. Those board members are former senator and businesswoman Mary Ann Pickard (St. Croix) and businessman Randolph Allen (St. Thomas). The St. John commissioner pos
ition is currently vacant, but Jose A. Penn has been nominated by Governor Turnbull to the position and was approved by the Senate Rules Committee on January 15, 2004. Mr. Penn is a businessman involved in the apartment rental, Jeep rental, and trucking sectors and his nomination is expected to go before the full Senate in the latter part of February when the Senate reconvenes. Finally, the EDC includes one representative from either the Government Employees Retirement System ("GERS"), the Port Authority, or the University of the Virgin Islands. Willis Todmann, Chief Financial Officer of the GERS, holds this position. The EDC also has a professional staff of approximately 25 persons, with offices in Frederiksted, St. Croix, and Charlotte Amalie, St. Thomas.
The EDC schedules public hearings on applications for benefits, extensions of benefits, and modifications of benefits throughout the year, and also has executive sessions following the public hearings which are not formally announced and are closed to the public. In order to hold a public hearing, the minimum quorum of commissioners is two . In order to hold an executive session, the minimum quorum of commissioners is four . There are eight public hearings scheduled for 2004, as follows: February 5, 2004, March 18, 2004, April 29, 2004, June 10, 2004, July 22, 2004, September 2, 2004, October 14, 2004 and November 24, 2004. In order to be scheduled for a public hearing, an application must be submitted at least four weeks before a specific hearing date.