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V.I. Makes Front Page of The New York Times

Sept. 19, 2004 – It is impossible to know what the fallout will be from a front-page article appearing in The New York Times Saturday edition about the territory's tax incentive program, known as the EDC (Economic Development Commission) program. It may bring even more federal scrutiny to potential abuses of the program and even prosecution. It may prevent potential businesses from setting up in the Virgin Islands. It could also force the U.S. Internal Revenue Service and the Treasury Department to get their collective minds together with territorial officials and reach a reasonable agreement about certain currently ambiguous definitions such as: residency and effectively connected income.
It had been widely known locally that Times reporters had been planning the article and had been in the territory talking to people and collecting information for the story. Some close to the EDC program had been holding their breath to see what tack the news report would take. In the day following the publication, several were saying the story was fair, even tame, compared to what they were expecting.
The article, headlined "Tax Break Bringing Businesses, and Fraud, to the Virgin Islands," zeros in on the issue surrounding the program's nebulous residency requirement. The report does not mention that the residency requirement issue is being addressed by a bill that made it through the U.S. Senate in May. (See "U.S. Bill to Restrict EDC Firms Causing V.I. Concern".)
Furthermore the reporters, Stephanie Strom and Lynnley Browning, touch on the issue of partnerships that are developed in some of the EDC beneficiary companies that may not be appropriate or even allowed under the program's guidelines. For instance, they discovered one company with 99 partners – a questionable practice that could allow all the partners to funnel income from businesses elsewhere through the local EDC certified company and thereby avoid paying up to 90 percent of their taxes. The Times article said that Frank Schulterbrant, chief executive officer of the Economic Development Authority, the umbrella over the EDC, didn't know the beneficiary was operating with that many partners. He told the Times reporters his records showed only three.
The program, developed in the 1960s to bring new business to the economically challenged territory, came under attack in June from the Internal Revenue Service when the IRS issued a warning that it was cracking down on abusers and misleading promoters of the program. (See "IRS Stance on Tax-Break Program Causes Concerns").
What the Times article barely touched on is what seems to be the biggest conundrum for beneficiaries, legal analysts and local officials – the matter of effectively connected income.
According to certificate holders in the category of designated service businesses, such as investment managers, software developers, business and management consultants and other international firms who serve clients outside of the territory, those designated businesses can claim income and therefore exemptions under the EDC program on money made outside the territory. In fact, they are barred from competing locally with similar types of businesses.
But the IRS sees it differently. In its notice issued in June it wrote, "it [the V.I. government] may reduce their tax liability only with respect to income from sources in the U.S.V.I. or income effectively connected with the conduct of a trade or business within the U.S.V.I."
Designated service businesses were newcomers to the program, having been designated eligible businesses in a 1986 act that expanded the program.
The long-awaited Times article speaks strongly about the benefits the expanded program brought to the territory, real estate boom, growth for local restaurants and professional services, employment and reversal of the islands' brain drain. Part of the program's requirement is local employment quotas. Because of that many educated Virgin Islanders have returned home to work in the financial management businesses.
But because of the ambiguity, the IRS threat also caused at least one beneficiary to close up shop, displacing at least eight local employees. Consolidated National Corp. closed its doors in July. Fred Rice, CNC's vice president, told the Source he couldn't afford to wait around while officials on both sides of the water worked out their difference. Rice said there was too much "indecison" and that nobody seemed to know what the rules were. (See "EDC Firm Closes Its Doors Citing Tax Rules Ambiguity").
The Times also interviewed Rice.
Other businesses that were poised to open their doors here have plans on hold, according to several beneficiaries who didn't want to be named.
Government officials and EDC beneficiary representatives have made at least one trip to Washington, D.C., to talk to officials there, and Delegate Donna M. Christensen has vowed to resolve the issues facing the program. But so far no one has come back to the territory with any concrete resolutions.
With this latest spotlight on the program that in the last few years has accounted for 25 percent of the territory's revenues, according to Louis M. Willis, director of the V.I. Bureau of Internal Revenue, the heat is on those in power to come to a swift resolution or face a potential for substantial revenue losses for the government's coffers.

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