Business Group Taking IRS Concerns to D.C.

Aug. 18, 2004 – A delegation from the USVI Economic Alliance, an association of Economic Development Program tax beneficiaries in the territory, is in Washington, D.C., for a meeting on Thursday with the Bush administration's top official for the U.S. insular territories.
The purpose of the trade organization representatives' meeting with Interior Department Deputy Assistant Secretary David B. Cohen is twofold, according to a release issued by the alliance on Wednesday:
– To present Cohen with information about the impact on the territory's private sector of the tax-incentive program, both before and since actions related thereto taken recently by the U.S. Internal Revenue service.
– To request Interior's assistance in seeking clarification from the U.S. Treasury Department concerning an IRS notice released in late June.
The notice was directed to people the IRS believes to be using the tax-incentive program as an illegal tax shelter — those who don't live in the Virgin Islands and those who don't make their money in the territory but still derive income-tax breaks of up to 90 percent. It also was a warning to those deemed to be "promoters" of such fraudulent tax schemes.
The notice said the V.I. government may not offer tax breaks to "U.S. citizens or residents who are not bona fide residents of the USVI." And for those who are bona fide residents, "it may reduce their tax liability only with respect to income from sources in the USVI or income effectively connected with the conduct of a trade or business within the USVI."
The IRS notice prompted immediate and open concern in the territory, from both the private and public sectors. One thing at issue is ambiguity as to what constitutes legal residency in the Virgin Islands.
One local legal expert, who wished to remain anonymous, said in June that the IRS was misinterpreting the law regarding "income effectively connected with the conduct of a trade or business" and the issue of whether income from business conducted on the U.S. mainland is eligible for tax breaks in the territory if the businesspeople are bona fide V.I. residents.
A local business executive speculated that a narrowing federal interpretation of the Economic Development Program laws could wipe out as many as 90 percent of the beneficiaries. (See "IRS Stance on Tax-Break Program Causes Concerns".)
"Several beneficiaries, and potential beneficiaries, perceive the notice as an attack against the entire [Economic Development Commission] program," Benjamin Rivera Jr., Economic Alliance executive director, said in the Wednesday release. "While we have heard from others that this was not Treasury's intent, we feel Treasury should offer some degree of comfort to EDC beneficiaries who have acted in good faith and compliance with laws governing the program."
According to Rivera, the goal of the alliance "is to assist in protecting and strengthening the program to foster economic prosperity in the territory by serving as a bridge between the public- and private-sector stakeholders affected by this issue."
On June 30 at a press conference called to discuss the IRS notice and its reverberations, Gov. Charles W. Turnbull said he had appointed Lt. Gov. Vargrave Richards to take the lead in meeting with federal officials in Washington to work out "clear and reasonable rules" relative to the program that would be acceptable to the IRS and to local officials.
The governor also said he had directed the administration's lawyers in Washington "to meet with Treasury and IRS officials as soon as possible to accelerate the development and promulgation of these rules." (See "V.I. to Seek 'Clear Rules' for Tax-Incentive Program".)
In mid-July, Richards went to Washington for meetings with Interior's Cohen and other Bush administration and congressional personnel. Upon his return to the territory Richards said in a release that he'd had "a very productive meeting with Secretary Cohen on coordinating our strategy to mitigate the concerns" of tax beneficiaries raised by the IRS notice.
Rivera said the alliance is working closely with local government officials in the executive and legislative branches as well as Delegate to Congress Donna M. Christensen "to provide all necessary support as they work toward a resolution of this issue."

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