The largest sector of the Virgin Islands' financial services industry suffered what may prove a fatal blow Thursday when the World Trade Organization's appellate body ruled against the United States' foreign sales corporation tax-shelter system.
The action upheld a WTO ruling first made in an interim report last July and formalized in October. The ruling calls for an end to the FSC by Oct. 1, a move that would require congressional action.
FSCs bring the territory about $6 million annually in franchise taxes and an undetermined amount of indirect revenues.
There was no immediate reaction either from Gov. Charles W. Turnbull, who is in Washington at the National Governor's Conference, or from the man who oversees FSCs and all corporations, Lt. Gov. Gerard Luz James, acting governor while Turnbull is away.
The decision was widely covered in the national press Thursday, since the FSC represents one of the strongest supports for U.S. exporting companies, sheltering billions of dollars each year. It has been in place since 1985, and the Virgin Islands hosts the majority of FSCs worldwide.
A foreign sales corporation is an offshore subsidiary of a United States company through which it passes export sales. A portion of the profits on those sales are exempt from federal taxes.
The European Union, which brought the complaint to the WTO, says the tax breaks the US gives to companies through their FSCs would amount to $17.5 billion over the next five years.
Reaction to the news ranged widely, from those predicting an all-out trade war, to those believing the US and the EU will negotiate some sort of modification of the FSC program. Many believe the FSC is just one more issue in ongoing trade pressures between the two sides.
Locally, Graham Dunn of Trident Trust Company (VI) Ltd., one of about a dozen FSC management companies who handle the paperwork for parent companies, noted that a healthy US export trade means a lot of US jobs, and the federal government will not give them up without a fight.
"I don't think the US is going to repeal the law just because the WTO has ruled against it," he said. "I think it's only the start. Now they'll start negotiating."
Lorna Webster, director of corporations and the V.I. government's hands-on FSC leader since the program began, predicted that the US will design another system to replace the FSC.
"I hope it means that the next program they introduce will be bigger and better for the V.I., " she said.
Webster also said, "I'm sad to see the FSC go, but I'm really happy that we didn't get lured into lowering our fees." The reference was to efforts a few years ago to lower the V.I. government's franchise tax to meet stiff competition from Barbados. Proponents had argued that any immediate losses would be made up in the long run by increased volume.
Dunn disagreed with Webster on that point, saying the V.I. government lost a lot of existing FSCs to Barbados and that by last year Barbados was leading the Virgin Islands in new incorporations.
The issue is likely moot at this point, however, as industry representatives wait to learn what will happen next.
