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Virgin Islanders Coming to Grips With New EDC Rules

Oct. 11, 2004 – A bill that has been seen by some residents as having the potential to kill the V.I. Economic Development Commission program had a hard time getting through the U.S. Congress. The bill, now referred to as Jumpstart Our Business Strength Act, was expected to be passed by the Senate last Friday. However, it took a rare Sunday session and an even more extraordinary holiday session on Monday to get it through the Senate.
However, Virgin Islanders cannot take comfort in that difficulty. According to national news reports, it was concerns about tobacco growers, Florida farmers and corporations who pay reservists that have been activated that stalled the bill. The V.I. concerns appear to fall under the footnote national politicians called "closing tax loopholes."
Gov. Charles W. Turnbull sees the new EDC regulations as more than a footnote and said in a statement Monday, "The international tax bill passed by the U.S. House of Representatives and the U.S. Senate on Monday significantly changes the tax rules governing our Economic Development Commission (EDC) program and will, unfortunately, have serious financial consequences for the territory, if as expected, it is signed into law by President George W. Bush."
He went on in his statement to say that he, along with Lt. Gov. Vargrave Richards and Delegate Donna Christensen, "will continue to fight for necessary changes to these new rules to ensure that our EDC program, which has contributed so much to our economy and to our revenue base, will survive."
Richard Difede, president of the Economic Alliance, a group which represents EDC companies, also watched very closely as the bill made its way through Congress. He said Monday, "Up until four o'clock today we were hoping to affect some changes."
However, now that the time for possible changes has passed, he is looking for silver lining in this legislative cloud.
He said about the EDC, "It is still a great program that offers some great tax benefits."
According to Difede the new rules will only affect some EDC businesses and the scope of their business. He said that each particular business owner would have to look at the new regulations and how they affect her or her business.
He said that EDC businesses cover a broad spectrum and some may feel little effect from the new rules. Those businesses that will feel an effect, according to those who have analyzed the bill, are those that can't connect their income to the Virgin Islands or do not have a strong residency connection to the islands. (See "EDC: Treasury 'Lowers the Boom' on the V.I." ).
Difede said that in the long run the new clarity might have some positive effects for those wanting to take advantage of the program. He added that even the effect on revenues to the V.I. government might be exaggerated. V.I. Bureau of Internal Revenue Director Louis M. Willis said EDC beneficiaries contribute about 25 percent of the territory's revenues.
Difede said some companies might be paying more money to the V.I. government after the bill goes into effect.
Still, he noted there were immediate negative impacts. He said about 50 companies that had been approved by the EDC have put their plans on hold because of the recent legislative developments. He said that in itself is costing the Virgin Islands about 100 jobs and tens of millions of dollars in investment.
He also said there was "panic in the air" and business people were wondering whether the "aggravation" was worth becoming an EDC beneficiary company.
For his part Turnbull emphasized what other V.I. officials said last week: abuses of the program would not be tolerated. (See "Uncertainty Reigns as Congress Fiddles With EDC").
Turnbull also mentioned in his statement that the V.I. government had hired some heavy guns to meet and discuss the need for changes with U.S. Treasury and Internal Revenue Service officials. They include Dick Armey, the former Majority Leader of the House of Representatives, and Michael Deaver, the former communications director to President Ronald Reagan.
Turnbull said the V.I. government has commissioned PricewaterhouseCoopers "to do an economic study of the impact that these new rules will have on our economy and our finances."
According to Turnbull, the Virgin Islands submitted a compromise proposal last week, based on the original Senate language on residency, to address some of the concerns expressed by the Congress regarding reports of alleged continuing abuses in the EDC program.
"The V.I. compromise amendment, which included the three-year, 122-day residency test contained in the original Senate bill and, in addition, required an individual to demonstrate that he or she had a substantial connection to the islands, was rejected by Treasury at a closed door meeting with Congressional tax writers. At that meeting, Treasury also rejected the original Senate language, which we believe could have, and should have, served as a reasonable basis for an acceptable resolution. Instead, Treasury proposed the new provision which goes far beyond existing law without any consideration of its potential impact on the V. I. economy."
Also of concern to EDC businesses and the V.I. government are new rules, added by the Treasury Department, which would restrict the type of income that can qualify for EDC benefits.
Turnbull concluded, "We will continue to work with all stakeholders in a coordinated effort to minimize the harmful effects of this bill on the economy and general welfare of the residents of the Virgin Islands."
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