New "international banking entities" that take no deposits but do bank-like activities will be encouraged to incorporate in the U.S. Virgin Islands with broad tax forgiveness in exchange for hiring three or more people, if a bill approved Tuesday by the V.I. Legislature becomes law.
Speaking in support of the measure before the vote, its sponsor, Sen. Louis Patrick Hill, said it is “just another bill to create a mechanism to allow investing in the territory,” one that he hopes will spur employment and capital investment. The measure is largely modeled after a 1980 Puerto Rico law.
During committee hearings on the bill, Hill said he was approached about the idea by former U.S. Attorney David Nissman, who also testified in support of the proposal.
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.
International banking entities would be entirely exempt from:
- corporate income tax;
- gross receipts taxes;
- property taxes;
- withholding taxes;
- and most excise taxes.
In the amended version of the bill approved Tuesday, international banking entity principals would also be entitled to reduce their personal income tax by either 75 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." Licensing involves background checks and financial filings with the V.I. director of banking and insurance – a political appointment within the Lieutenant Governor’s Office.
The bill states if the director of banking and insurance does not act on the application within 60 working days of concluding the investigation of the subject, the lieutenant governor would then have 10 more days to act, after which approval is automatic. Certificates can be canceled for criminal behavior of violating program terms.
The version of the bill approved Tuesday expresses a preference that such bank-like financial companies have $5 million in capital, with at least $500,000 paid in advance of issuing a license. But the director of banking and insurance can modify or waive this requirement altogether “when the type of business or power that the international banking entity intends to exercise or other circumstances thus merits it, in the criterion of the director.”
A certificate holder would also be able to use its tax-free holdings to invest in other companies that do not qualify for tax breaks, then get tax breaks on that income: “In addition, international banking entities may make capital contributions in excess of $1 million to Virgin Islands business entities and are permitted to take the tax benefits permitted by this chapter for any income or profit made from those investments.”
Sen. Nereida “Nellie” Rivera-O'Reilly said Tuesday she had hopes this provision would impel international banking entities to “make loans to borrowers in the Virgin Islands that have been rejected by other lenders.” She said, “The key here is this could potentially open the door for projects that have been sitting on the back burner because they did not have access to the capital that was needed.”
The proposed law would not allow international banking entities to take deposits. During committee hearings, supporters said this took away any risk to the territory, as investors would bear all the risks.
International banking entities would pay the Division of Banking and Insurance an annual fee of $10,000, plus another $10,000 fee for each million in income – or 2 percent for the first million in income, and 1 percent of each subsequent million.
An amendment added in the Rules Committee requires any company that gets the tax breaks pay at least $10,000 to the Education Department for scholarships – amounting to an additional 1 percent levy on the first $1 million in income, and a smaller portion thereafter.
The Division of Banking and Insurance can charge up to $25,000 for the cost of processing the application and performing background checks.
Taken together, these fees could levy up to 4.5 percent of the first year revenues of a certified international banking entity. That figure would be reduced in subsequent years, when there is no application to be processed. The more revenue the bank-like entity produces, the lower that effective rate will be.
As amended, at least 60 percent of the management or technical positions must be filled by Virgin Islands residents unless the bank gets a waiver.
The bill takes 5 percent of the fees and other revenues from the program that would otherwise have gone to the government's coffers and instead allocates it to the nonprofit organization Taproots – a charity selected by the bill's private sector proponents. An amendment from O'Reilly allocates 10 percent of the total fees collected to the Cancer Care Fund administered by Human Services.
During previous committee hearings on the measure, Kirk Chewning, a principal in a St. Croix company receiving Economic Development Commission benefits, testified he believed the bill could eventually draw in tens of millions of dollars in revenue and someday create 500 to 1,000 jobs. However, Chewning's calculations assumed constant growth at the rate the market grew in 2005 – an assumption that did not take into account any effect from the worldwide economic collapse caused by the financial industry in 2008.
Oran Bowry, Banco Popular’s senior vice president of operations for the Virgin Islands region, offered the Legislature official numbers from Puerto Rico that were less than a quarter of Chewning's estimates. The economic impact of Puerto Rico's international banking entities program is slight and shrinking, 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 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.”
The bill, as amended, was approved by the Senate unanimously, with 14 senator voting yea. Sen. Craig Barshinger was absent.