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V.I. to Seek 'Clear Rules' for Tax-Incentive Program

June 30, 2004 – In a show of absolute solidarity, government officials said almost in unison Wednesday that those Economic Development Program beneficiaries who are doing the right thing "have nothing to fear" from the Internal Revenue Service.
"We hope to reassure the legitimate beneficiaries they have nothing to fear," Gov. Charles W. Turnbull said at a press conference he and Lt. Gov. Vargrave Richards called to address concerns raised by last week's surprise notice from the IRS that it is cracking down on abuses of the local tax-incentive program. (See "IRS Stance on Tax-Break Program Causes Concerns".)
Turnbull said he has appointed Richards to take the lead in meeting with federal officials in Washington, perhaps as early as next week, to work out "clear and reasonable rules" relative to the program that will be acceptable to the IRS and to local officials. Richards also is tentatively slated to meet with EDP beneficiaries July 8 on St. Croix.
Turnbull also said: "I have instructed my Washington counsel to meet with Treasury and IRS officials as soon as possible to accelerate the development and promulgation of these rules."
Richards said no meetings have taken place so far.
Frank Schulterbrandt, chief executive officer of the Economic Development Authority, was clear that the IRS has jurisdiction over tax matters relative to the program. When applicant companies come before the Economic Development Commission, he said, "we make it clear … that beneficiaries are required to comply with federal tax laws," which are mirrored in the territory.
Schulterbrandt's duties where compliance is concerned consist of making sure applicants have made sufficient investment in the territory, have the appropriate number of employees and meet the "special conditions" of their certificates. Special conditions can be many things, he said, but usually include charitable contributions.
Schulterbrandt said that "when I came on board I noticed a severe shortage" of compliance officers. He has remedied that situation, he said.
Asked about IRS suggestions that the V.I. tax benefit program might be used as an illegal tax shelter, Turnbull was emphatic: "That is not the truth. The Virgin Islands program is a legitimate program."
Louis M. Willis, Internal Revenue Bureau director, said after the press briefing that it is the "promoters" mentioned repeatedly in the IRS notice that federal officials are really after.
Willis, Schulterbrandt, Turnbull and Dean Plaskett, who chairs the Economic Development Authority governing board, all said they know of not one beneficiary that is abusing the program.
"The majority are legitimate, good, decent, honest businessmen and women," Turnbull said.
However, in his prepared statement Turnbull said that "we share the concerns of the federal government that some persons may have abused the program by exploiting the lack of regulations under Sections 932 and 934 of the U.S. Internal Revenue Code."
Part of the 1986 act that established the V.I. Industrial Development Commission — designed to lure business and off-island capital to the islands — called for the IRS to work closely with local officials to establish clear guidelines for the program, including a clear residency requirement. When federal officials announced the clamp-down on the program's abusers last week, it came to light that the guidelines had never been worked out.
Turnbull and Richards hope they now will be, "in as short a time as possible," the governor said Wednesday.
Turnbull also indicated that the Virgin Islands had merely gotten caught in a wide net thrown by the IRS, which he said has been trying to "prosecute promoters of tax shelters" for more than two years.
On the issue of effectively connected income, another concern raised in the IRS notice, Plaskett said the "effectively connected" rule is consistent throughout the United States. In simple terms, the rule applies to where income is earned and the accompanying tax liability.
"There is apportionment that goes on," Plaskett explained. "You must pay taxes in the state where you are conducting business."
Plaskett said he doesn't think people in the territory are claiming tax breaks on income earned elsewhere. But "the IRS is of the opinion that is not the case," he added.
Willis said 20 percent of all taxes collected in the Virgin Islands come directly from EDP beneficiaries. That amounts to about $90 million a year, he said.
Willis also said he doesn't think many beneficiaries are violating the rules. And, he said, "Some of the bad apples already got caught."
He was referring to an IRS raid on a St. Croix beneficiary's offices on the island last year. Reportedly offices of the same company elsewhere we raided at the same time.
"So long as you do the right thing," Willis echoed the other local officials, "you have nothing to fear."
Richards said "diplomacy" and "negotiation" will be the tack he takes when he meets with officials in Washington. He will take along suggestions from beneficiaries themselves, he said.

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