Financial companies engaging in bank-like activities will now be eligible for broad tax exemptions similar to those given to other companies through the Economic Development Authority, thanks to a measure signed into law by Gov. John deJongh Jr. this week.
DeJongh said he signed the measure "despite harboring reservations about creating a new tax exemption apparatus that many argue will compete against our already existing industrial incentive tax programs," in a statement to the Legislature.
He wrote that he approved the bill after resolving its inherent problems can be corrected with programmatic and legislative adjustments “to assure the continued health and focus of our business incentive program.”
The new law, [29-0308] sponsored by Sen. Louis Patrick Hill, would grant "international banking entities," which take no deposits but do bank-like activities, broad tax forgiveness in exchange for hiring three or more people. It will be regulated from the Division of Banking and Insurance in the Lieutenant Governor’s Office, rather than the EDA, although the tax breaks are similar in scope.
Qualifying "international banking entities" would be entirely exempt from:
- corporate income tax;
- gross receipts taxes;
- property taxes;
- withholding taxes;
- and most excise taxes.
International banking entity principals are also entitled to reduce their personal income tax by either 75 percent or 95 percent, depending on the location of the offices.
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.
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 new law 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," according to the text of the law.
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, and 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,” according to the text of the law.
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 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. Another 10 percent of the total fees collected are to be allocated to the Cancer Care Fund administered by Human Services.
In another move affecting the territory's tax programs, deJongh vetoed a measure to reduce the number of resident workers an Economic Development Commission beneficiary must employ by half—from 10 to five. "This would enable manufacturers and even hotels to qualify for benefits with literally only a handful of staffers. There is good and sufficient reason to retain the 10 employee requirement," deJongh wrote to the Legislature.
DeJongh also vetoed legislation aimed at exempting Carnival and Festival activities from a recent noise pollution law, saying it was so over-broad as to amount to “a complete gutting of the noise pollution control effort in the territory," because the measure, sponsored by Sen. Alicia "Chucky" Hansen, would permit "unlimited noise on any weekend of the year until 3 a.m. on Saturday and Sunday mornings, and even Monday morning if that day happened to be a holiday."
DeJongh also vetoed a measure seeking to address invasive species like the Pacific lionfish, saying the intention was laudable, but the funding mechanism was flawed. In the opinion of the U.S. Fish and Wildlife Services, such an appropriation would constitute a violation of the “assent legislation” that enables the Virgin Islands to receive federal funding, deJongh said.
“In an abundance of caution, I have determined that the potential cost of this measure’s enactment is simply too high for our Fish and Wildlife program and for us as a people,” deJongh wrote, suggesting passing another bill with a modified funding source.
The governor also vetoed a bill designed to increase government transparency by directing executive branch agencies to post their financial reports online, saying the proposed law has too short a time period for implementation, no funding and only called for increased transparency in one branch of government.
“Such an undertaking as this is so important, and the accuracy and easy interface of the presentation so crucial, the time and resources required to produce the result that our citizens deserve are worthy investments in our future," deJongh wrote.
DeJongh item-vetoed several unrelated portions of a multi-faceted bill. The rejected passages pertain to economic hardship loans, the University of Virgin Islands power consumption, and placing the Water and Power Authority under the regulatory jurisdiction of the Public Services Commission, “an idea that some legislators seem determined to enact despite the undisputed objections articulated repeatedly by informed individuals and authorities.”