The coming of the International Private Bank to St. Croix was an economic boom for the town of Christiansted, and senators expressed hope that by clarifying the Economic Development Authority’s regulations they can bring in half a dozen more entities just like it.
Wednesday, the Senate Committee on Finance gave a favorable recommendation to a bill limiting hiring requirements for international financial service entities.
The current regulations say international financial entities getting tax-break have to hire at least three employees and one more employee for each additional million dollars in annual income. There is a conflict with other passages of the law requiring five employees. And a company with high income may have to hire more employees.
The bill, as written, would cap the maximum number of employees required at seven.
Tax attorney Erika Kellerhals told the committee she has represented more than 75 companies seeking the USVI’s EDC tax breaks and half a dozen financial institutions balked at moving to the territory after learning they would have to hire more than the five employee-minimum.
She then listed what she saw wrong with the requirement.
– It creates an impractical and unworkable employment regime. Impractical in that it requires companies to hire more people than it would likely need to run its operations.
– Disregards the fact that most companies’ income rises and falls and does not stay level year after year.
– Doesn’t make allowances for when a company’s income decreases by $1 million.
– Practicality of enforcing the requirement. Most companies do not complete their financials until March of the following year.
– Will a company be required to file a waiver request if it does not need or cannot find an employee or employees?
Kellerhals has represented many USVI tax break recipients, including Jeffrey Epstein. She has testified at numerous Senate hearings concerning legislation to loosen or tighten tax break rules. She has generally favored loosening and opposed tightening regulations.
Wayne Biggs, EDA assistant chief executive officer, testified in support of the change but recommended the Senate increase the minimum number of employees be increased to five rather than three.
Sen. Novelle Francis Jr. asked Biggs about the health of the EDA’s tax break program overall. Biggs said the USVI tax break program was healthy with 70 companies under its umbrella right now. He added the latest report covering the years 2013 through 2015 showed companies under the Economic Development Commission has generated $1.1 billion in cumulative wages and salaries for its companies over those years and $9.6 million in charitable contributions. Those salary figures include numerous hotels, and are cumulative, so that a person who earned $25,000 per year at a hotel would be counted as $75,000 in wages created by the EDA program.
When asked previously for documentation of the charitable contributions, EDA officials declined, saying they were in the process of updating them.
Sen. Donna Frett-Gregory said she was concerned donations designated for public education were going to institutions other than the public schools.
International Private Bank’s agreement with the Authority has not been executed yet. Its building on Kings Street in Christiansted, reportedly, cost $5 million and more than 20 people are employed there. According to Sen. Kurt Vialet the average salary there is well over $50,000 per year.
Sen. Allison DeGazon said the Authority needs to ensure that residents hired by companies getting tax incentives receive adequate salaries.
The regulations would require a minimum of five employees and the Authority could require more through negotiations. Eighty percent of the employees must have lived in the Virgin Islands for at least a year.
The committee also moved forward with a favorable recommendation for a lease request from Caledonia Communication Corporation for a building at 24C Estate Recovery Hill, St. Croix.
Attending the hearing were Sens. Alicia Barnes, Marvin Blyden, DeGazon, Francis, Frett-Gregory, Oakland Benta, Kenneth Gittens, Janelle Sarauw and Vialet.
In 2012, the Legislature approved the tax-break program for these bank-like companies that take no deposits but do bank-like activities, encouraging them to incorporate locally in the U.S. Virgin Islands with broad tax forgiveness in exchange for hiring three or more people.
Since then, the territory has licensed three such financial businesses to receive V.I. tax breaks, of which one is currently operating in the territory.
In April 2015, Lt. Gov. Osbert Potter issued a moratorium on the licensing of any new international banking entities until the territory’s regulatory mechanisms can be strengthened.
The program is largely modeled after a 1980 Puerto Rico law.
It exempts international banking entities from corporate income tax, gross receipts taxes, property taxes, withholding taxes and most excise taxes.
Investors in the entities are also entitled to reduce their personal income tax by either 75 percent or 95 percent, depending on the location of the offices. If they set up in Frederiksted, they get a 95 percent break on their income taxes.
The law says each approved bank-like entity “must be granted 100 percent benefits for a period of 10 years if they remain in compliance.”
This new law changes the terminology from “international banking” to “international financial entities.” When the bill was heard in committee, V.I. officials in the Lieutenant Governor’s Office argued the change covered a broader array of activities and clarified that more than just banking was permitted.
When the program was approved in 2012, proponents argued the USVI had to compete for tax-break clients with Puerto Rico and projected the program could ultimately generate more than 500 local jobs. But Oran Bowry, Banco Popular’s senior vice president of operations for the Virgin Islands region, provided the V.I. Legislature in 2012 with official numbers from Puerto Rico that showed minimal benefit.
The law allowing international banking entities “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 told the V.I. Legislature.
Bowry said that while the program has existed for more than 20 years, as of 2012 there were only 31 registered IBEs and more than half of those are units of existing domestic banks.