May 16, 2004 – A bill passed by the U.S. Senate in the last week seeks to deter abuse of the tax-break program designed to attract businesses to the Virgin Islands — and which experts say accounts for at least 60 percent of the territory's revenue.
Part of the bill, nicknamed "Jumpstart Our Business Strength," or JOBS, seeks to clarify who is eligible for tax breaks of up to 90 percent available through the V.I. Economic Development Commission.
A Massachusetts businessman pleaded guilty in February to two counts of tax evasion through abuse of the program. He admitted to operating his business from the U.S. mainland, having no source of income from the Virgin Islands and never becoming a resident of the territory. (See "Partner in IDC Firm Pleads Guilty to Tax Fraud.)
Under Economic Development Authority rules, beneficiaries must meet a number of criteria, including maintaining V.I. residency, a concept tax experts say is vaguely defined. To better define residency status, federal lawmakers are proposing a minimum number of days spent in the territory to be considered a resident, much like those used to determine tax status for foreign nationals working in the United States.
Those seeking the tax breaks would need either to spend at least 183 days in the territory to gain residency for a given year, or else spent an average of 122 days per year over a three-year period.
But such a requirement does not address the situation of people who legitimately live in the Virgin Islands but spend the majority of their time traveling abroad, according to Richard Difede, who chairs the board of the recently formed USVI Economic Alliance, a not-for-profit organization representing some of the 98 companies receiving tax breaks. (See "EDC Companies Form Advocacy Group".)
Provision should be added whereby business owners could prove they have closer connection to the Virgin Islands than anywhere else, even if they don't spend 183 days in the territory each year, Difede said. "In the absence of that, the bill would be detrimental to the Virgin Islands," he said.
The bill also requires residents of the territory to file a duplicate tax return with the federal Internal Revenue Service, declaring their payments to the V.I. Internal Revenue Bureau.
St. Thomas tax attorney Richard Bourne-Vanneck said such a cumbersome requirement would inhibit businesses from moving to the territory. "They are trying to make it as uncomfortable as possible to move to the Virgin Islands," he said.
Being able to offer tax benefits to U.S. companies "is what takes American possessions out of sugar cane plantations and makes them middle-class America," Bourne-Vanneck said. "We depend on this for the development of our community."
He said applicants for the tax breaks already have to go through a rigorous screening process from the Legislature and must meet criteria such as:
– Employing more than 10 Virgin Islanders.
– Declaring how much employees to be paid.
– Offering medical, dental, vision and life insurance to employees.
– Giving vacation time.
– Offering an employee retirement plan contributed to by the employer whether the employee participates or not.
– Providing the Legislature a five-year projection of profits or losses.
The federal bill also fails to define where someone who has moved to the territory but not yet gained residency should pay taxes, Difede said. "There's major problems in this bill," he said. "It's a revenue generating bill for the U.S. Treasury, and that means it's a revenue-costing bill for the Virgin Islands."
Also, Difede said, the bill increases the time it takes for someone to be considered a Virgin Islands resident, which could result in a lost of $70 million to $110 million to the V.I. government.
(For an analysis of the tax relationships between Congress and the U.S. Treasury and the Virgin Islands aimed at stimulating local economic growth over the last three-quarters of a century, see "Analysis: The Territory's Taxing Relationships".)
It is not clear when the House of Representatives will address the bill, but Delegate Donna M. Christensen has warned officials of Economic Development Program beneficiary companies to "exercise caution in expressing their displeasure." She said in a release issued on Friday that such reactions could end up "provoking an even stronger response by Congress to deficiencies in the EDC program."
Christensen said some provisions of the U.S. Senate bill need clarification. "This is a process that isn't over yet, and I promise to sit down with everyone affected to hear their recommendations on how the language of the amendment should be improved to make our EDC program stronger," she said in the release.
She further pledged her efforts "to ensure that Congress and the Treasury Department develop fair and reasonable rules" to "ensure the integrity and effectiveness of the territory's EDC program and to promote both tax compliance and economic growth."
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