New "International Banking Entities," that act like banks but do not take deposits, will be encouraged to set up in the U.S. Virgin Islands with broad, long-term tax forgiveness in exchange for hiring three or more people, if a bill before the V.I. Legislature becomes law.
The measure, sponsored by Sen. Louis Hill, is largely modeled after a 1980 Puerto Rico law. Hill said he was approached about the idea by former U.S. Attorney David Nissman, who brought several business owners currently participating in other V.I. tax incentive programs and a Texas legislator to join him in testifying in support of the bill Thursday.
"The Virgin Islands and Puerto Rico both have international banking entity laws," Nissman said. “The Puerto Rican law has produced business and revenue for their community. Ours has not. What we have done … is to rewrite our law to attract new business to our territory.”
Although it would be regulated from the Division of Banking and Insurance in the Lieutenant Governor’s Office, the tax breaks on international banking entities would largely mirror those given out by the V.I. Economic Development Authority.
IBEs would be entirely exempt from:
– corporate income tax;
– gross receipts taxes;
– property taxes;
— withholding taxes;
– and most excise taxes.
IBE principals would also personally be entitled to reduce their own personal income tax by either 90 percent or 95 percent, depending on the location of the offices.
The bill says each approved bank-like entity "must be granted 100 percent benefits for a period of 10 years if they remain in compliance."
The proposed law would not allow IBEs to take deposits, which Nissman said took away any risk to the territory, as investors would bear all the risks. IBEs would pay the Division of Banking and Insurance an annual fee of $5,000, plus another $10,000 fee for each million in income – or 1.5 percent for the first million in income, and one percent of each subsequent million.
Kirk Chewning, a principal in a St. Croix company receiving EDC benefits, testified he believed the bill could eventually draw in tens of millions in revenue and someday create 500 to 1,000 jobs.
"According to the data we have from 2005, it appears that its market was over $75 billion dollars in assets with net income estimated to be over $660 million a year," Chewning said. "The market was growing at 7 percent a year which may place the current market at $120 billon and may have approximately $1 billion in combined net incomes."
Using those numbers as a starting point, he speculated the Virgin Islands might get 15 percent of the business Puerto Rico does, and used that to estimate its economic impact.
Banco Popular Senior Vice President of Operations for the Virgin Islands Region Oran Bowry offered official numbers from Puerto Rico that were far lower than Chewning’s estimates.
According to data from the Puerto Rico Office of the Commissioner of Financial Institutions, as of the first quarter of 2012, Puerto Rico IBEs hold $33.6 billion in assets, Bowry said. This is roughly a quarter of Chewning’s estimate, which appears to have skipped over the recent recession.
"This reflects a loss of over 55 percent just within the last five years," Bowry said. The economic impact is slight and shrinking, she said.
"Over the same period, the reported net income of these IBEs has declined by over 80 percent from $886 million in 2007 to just $168 million in 2011 and this income is nontaxable," she said. While the program has existed for more than 20 years, there are only 31 registered IBEs and over half of those are units of domestic banks, she said.
"The result has been little-to-no revenue infusion, no economic activity and no measurable financial benefit to the government of Puerto Rico," Bowry said. The law allowing IBEs "has not generated significant business, it has not created job opportunities, and no calculable investments have been made to stimulate the Puerto Rico economy that can be directed attributed to the IBE market.”
Bowry added that the law is currently being debated by the Puerto Rico Senate.
Bowry said Banco Popular was also concerned about potential for abuse by money launderers. By not taking deposits, the IBEs would not be regulated by the Federal Deposit Insurance Corporation, and would avoid that regulatory oversight, she said. Also, the bill gives broad regulatory power to the Division of Banking and Insurance, but provides no funding to the small, already overstretched entity, she said.
Director of Banking and Insurance John McDonald testified the division did not have the resources to effectively oversee the program and would need funding and staffing, but otherwise the division "had no overriding concerns with the bill."
Sen. Sammuel Sanes asked McDonald whether the bill put Virgin Islands tax revenues, funds or jobs at risk, and McDonald replied that, with the decision to not allow IBEs to take deposits, the territory was not at risk.
Speaking in support of the measure before the vote, Hill said he had no "illusion this is a silver bullet to take the territory out of the financial situation we are in." He said he thinks the measure is a good idea and "if we passed this and one company came to St. Croix and that company hired three people, who were then able to take care of their families and pay taxes, I would go to bed feeling good."
Voting to send the bill on to the Rules and Judiciary Committee for further amendment were Sanes
Hill, Sens. Nereida "Nellie" Rivera-O’Reilly and Carlton "Ital" Dowe. Sens. Shawn-Michael Malone, Celestino White and Janette Millin-Young young were absent at the time of the vote.
The committee also voted in favor of approving a 20-year lease on 12.3 acres of government-owned land in Estate Upper Bethlehem to the USVI Soccer Federation. The federation plans to build a concession stand and bar, along with soccer facilities. After the first two years, rent on the land would be $800 per month.
Voting in favor of the lease were Hill, Rivera-O’Reilly, Sanes, Dowe and Millin-Young. Malone and White were absent.