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Federal Legislation Poses Threat to EDC Program

Oct. 5, 2004 – In what was characterized as a shocking turn of events, the U.S. House Ways and Means Committee spent Tuesday in conference committee debating a bill, and its amendments, that could spell disaster for the territory's Economic Development Commission tax incentive program.
Donna M. Christensen, V.I. delegate to Congress, said Tuesday night, "I don't know what's going to happen."
The bill, known as the American Jobs Creation Act of 2004, as it currently stands "totally changes" the 1986 tax law that governs the V.I.'s EDC program, according to Christensen.
The crux of the problem for the Virgin Islands lies with the repeal of the exclusion of extraterritorial income section of the 1986 law.
The Internal Revenue Code of 1986 allowed for tax breaks to EDC beneficiaries on world-wide income, Christensen said. The rules and regulations adopted locally to provide guidance for the program support that. Frank Schulterbrandt, executive director of the Economic Development Agency, the parent to the EDC, has repeatedly said, however, that beneficiaries must turn to the federal tax code in determining what is appropriate income under the program, which gives up to 90 percent tax breaks to eligible companies.
But Christensen said the 1986 federal law is clear, the eligible income can come from the U.S. mainland or "even foreign countries."
Christensen said she was shocked by the turn of events. She said when she left work on Friday she thought that an agreement had been reached on a satisfactory compromise that would address the residency requirement for the program.
Instead, when she got to work on Monday, she found out that the mark up by the Ways and Means Committee chairman William M. Thomas, not only reversed the '86 law, but does it "in this tax year," Christensen said.
That means, she said, "That people [beneficiaries] operating in good faith" could be severely hurt.
"I thought we were all okay on how we were going to do residency," she said. But the Treasury Department gave the marching orders, for a reason that Christensen said she didn't understand, and the Senate Finance Committee went along with the orders, and amended the bill.
Christensen said when she inquired of the Finance Committee as to why this happened, she was told by the Finance Committee chief of staff that the "abuses of the program were so egregious that they were not going to back down."
Christensen said she even "begged" Thomas and other committee members to reconsider the matter. "I told them … this is going to kill us."
She said, "The Treasury had 18 years to write these regulations, why all of a sudden," are these regulations being implemented, literally overnight.
Furthering the mystery is the rumor that the local Internal Revenue Bureau had been working on a Memorandum of Understanding with the Treasury Department.
Christensen said she didn't know what they were considering or who exactly was involved in the discussion, but confirmed that she had heard an MOU was in the works.
But Christensen said there was always concern among the stakeholders in the discussion that has been ongoing since May when a bill passed through the U.S. Senate that established a residency requirement for beneficiaries, about letting Treasury make the rules. (See "U.S. Bill to Restrict EDC Firms Causing V.I. Concern")
"Treasury has a history of being heavy handed," Christensen said Tuesday.
Charles B. Rangle, ranking member of the Ways and Means Committee and friend to the Virgin Islands and to Christensen had agreed to introduce his own amendment Tuesday, that would address the residency requirement, which the marked up bill says must be 183 days within the tax year and requires that the beneficiary not have a "tax home" elsewhere.
But according to Christensen, Rangle was called away from the committee conference before he could offer his amendment.
Fortunately he will get another chance Wednesday when the conference committee reconvenes at 10 a.m.
Christensen explained that a conference committee meets when both the House of Representatives and the Senate pass the same bill. The committee is charged with hammering out a bill that will be agreeable to both. After that happens, the bill goes directly to the full Congress, which the Ways and Means Committee hopes will happen before Congress recesses the end of the week. After that it is only left for the president to sign the bill, which is expected to pass regardless of what amendments are added that affect the Virgin Islands program.
At worst, Christensen said she believed the bill will be modified to delay implementation of the provisions for at least a year.
Without that "someone operating fully under the law could get clobbered," she said.
Either way, Christensen said, "The uncertainty is going to chase people away."
Louis M. Willis, director of the Internal Revenue Bureau, has estimated that 25 percent of the V.I. revenues come directly from the EDC beneficiaries.

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