The U.S. Virgin Islands, an unincorporated territory of the United States, has been given authority by the U.S. Congress to offer targeted income tax benefits to qualifying investors on income from USVI sources and on income that is effectively connected with a USVI trade or business. This authority is currently embodied in Section 934(b)(1) of the Internal Revenue Code of 1986, as substantially amended by the Tax Reform Act of 1986. However, the USVI has had the authority for more than 50 years to provide income-tax incentives as embodied in the Revised Organic Act of 1954 and the Internal Revenue Code.
Under this federal umbrella, the V.I. Legislature enacted the Industrial Development Program [Chapter 12, Title 29, V.I Code], which sets out the types of businesses that the USVI is seeking to attract with tax benefits, as well as the requirements for obtaining such benefits. The Industrial Development Program (IDP) is targeting enterprises engaged in manufacturing or assembly, transportation, recreation, hospitality, consulting and investment management for clients outside the USVI, computer services, and international trade.
The IDP statute was amended by Act No. 6390, signed into law by Gov. Charles Turnbull on Feb. 1, 2001. This statute sets out four categories of eligible industries or businesses.
Category I: rum production, milk/dairy production, watch and jewelry manufacturing and assembly.
Category II: product assembly, manufacturing other than jewelry and watch manufacturing and assembly, agriculture/food processing, mariculture/food processing, marine industry, raw materials processing, hotels/guesthouses, transportation and telecommunications.
Category II-A: service businesses (not limited to but including investment nanagers and advisors, research and development, business and management consultants, software developers, e-commerce businesses, call centers, high tech businesses, international public relations, international trading and distribution, and any other businesses serving clients located outside the Virgin Islands.
Category III: utilities, health care facilities, recreation facilities, and such other industries or businesses as may be deemed appropriate by the Economic Development Commission. (EDC)
The Industrial Development Program is administered by this seven-member body, formerly known as the Industrial Development Commission and reorganized as the Economic Development Commission by Act No. 6390. Currently there are five confirmed members. The two government members are the Tourism Department commissioner and the Bureau of Internal Revenue director. Another member represents the interests of organized labor.
It should be noted that the territory's economic development agencies are in the process of being reorganized under the same legislation.
Tax benefits offered
Under the Industrial Development Program, a beneficiary receives up to 90 percent reduction in income-tax liability on income from the business for which benefits are granted [Under the U.S. Naval Services Appropriation Act of 1922, the USVI uses the U.S. Internal Revenue Code of 1986, as amended, as its income tax code.] This reduction results in an effective tax rate of about 4 percent on income from approved operations. If the beneficiary's owners are USVI residents, the owners also receive the reduction on their dividends or distributions [Section 713b(e), Chapter 12, Title 29, V.I. Code]. Specifically, USVI individual residents who are the shareholders, members, partners, grantors, beneficiaries or other owners also receive the 90 percent reduction.
Residency is determined under Section 932(c) of the Internal Revenue Code of 1986, which means that the persons must be bona fide residents as of the end of their tax year. Beneficiaries also receive an exemption from the USVI property tax, otherwise imposed at a rate of 0.75 percent of the property's fair market value [Section 713a(a)(1), Chapter 12, Title 29, V.I. Code], as well as an exemption from USVI gross receipts tax, otherwise imposed at 4 percent on the gross receipts of a business, with no deductions [Section 713a(a)(2), Chapter 12, Title 29, V.I. Code]. Beneficiaries also receive a reduction in customs duties on certain items [Section 713(c), Chapter 12, Title 29, V.I. Code] and exemptions from excise tax on building materials [Section 713(a)(3), Chapter 12, Title 29, V.I. Code] and raw materials [Section 43d, Chapter 3, Title 33, V.I. Code].
Requirements for benefits
In order to receive tax benefits, qualifying businesses must meet certain investment criteria. As minimum qualifications, an investor must invest at least $100,000, exclusive of inventory, in an eligible business [Section 708(a), Chapter 12, Title 29, V.I. Code] and must employ at least 10 USVI residents full-time [Section 708(f), Chapter 12, Titla 29, V.I. Code], defined as working at least 32 hours a week [Section 708-605, IDC Rules and Regulations, promulgated Sept. 3, 1981). At least 80 percent of the total number of employees must be USVI residents [Section 710a, Chapter 12, Title 29, V.I. Code].
To be eligible to apply for benefits, an individual must be a bona fide resident of the USVI and a U.S. citizen or "green card" holder. Any partnership, limited liability company, trust or similar entity must fall under the meaning of that term according to USVI law. Any corporation must be incorporated under the laws of the USVI, the United States, a state, another territory or commonwealth thereof, or a foreign country, and must be registered to conduct business in the USVI.
Beneficiaries are required to purchase from local vendors if certain conditions are met [Section 708(h), Chapter 12, Title 29, V.I. Code]. A beneficiary is required to purchase materials from USVI businesses unless certain narrow exceptions apply. To count as an eligible USVI business for purposes of these "purchase" requirements, the business must have been licensed to do business in the USVI for at least a year and must be a resident of the USVI or incorporated or otherwise established under the laws of the USVI.
With certain limited exceptions, a beneficiary is required to invite competitive bidding for purchases, and to purchase from a USVI business if the items are available locally. Each beneficiary must advise the EDC in writing, with a copy to the Commissioner of Licensing and Consumer Affairs, when goods and materials are not available from USVI sources and demonstrate in writing efforts to obtain such services, goods, and materials from USVI sources. Each beneficiary must maintain a list of its actual and prospective USVI suppliers.
Beneficiaries are required to employ USVI residents, defined as persons who have resided in the USVI for at least one year, or who have attended school in the USVI for at least six years, or who are high school or University of the Virgin Islands graduates and registered to vote in the USVI. The EDC has the authority to grant exceptions to the requirement that 80 percent of a beneficiary's employees be USVI residents at the end of one year and may do so if there are unique qualifications for the job and if the beneficiary has an active training program for its employees. A beneficiary is required under Act No. 6390 to have a program to train USVI residents as managers and officers.
The development commission has generally required that beneficiaries provide their employees health and life insurance and a 401(k)-type retirement plan and that the beneficiary contribute minimum amounts to USVI charities, although these requirements are not set forth statutorily. Beneficiaries may agree to provide employment for students. The University of the Virgin Islands offers both undergraduate and graduate business degrees.
The EDC makes its recommendations on tax benefits after an applicant submits a detailed application and has a public hearing [Section 717(a), Chapter 12, Title 29, V.I. Code]. After the hearing, the development commission meets in executive s
ession to discuss the application. Applicants approved by the commission are reviewed by the governor, who makes the final determination on granting of all tax benefits [Section 717a, Chapter 12, Title 29, V.I. Code].
More than 80 investors – sole proprietorships, partnerships and corporations – currently receive EDC tax benefits for businesses ranging from investment management to shopping centers to luxury hotels. The development commission grants initial tax benefits for 10 years for investments on St. Thomas, St. John and eastern St. Croix, and for 15 years for investments on western St. Croix [Section 714(a), Chapter 12, Title 29, V.I. Code]. Benefit packages may be extended for one renewal period of another 10 years upon application and review [Section 715, Chapter 12, Title 29, V.I. Code]. Additional renewals may be granted upon application.
Act No. 6390 imposed application fees of $1,000 for Category I, $1,500 for Categories II and II-A, and $2,000 for Category III. It also imposed annual compliance fees for beneficiaries – $500 for Category I, $1,500 for Categories II and II-A, and $2,500 for Category III.
The EDC also can assess extraordinary costs and expenses against individual applicants or beneficiaries "to process the application or monitor a beneficiary's performance of the terms and conditions of its certificate." These costs and expenses may include the services of outside consultants necessitated by an application or compliance investigation. All fees go into the Industrial Promotion Fund for the use of the EDC, rather than into the USVI government's General Fund.
Editor's note: Marjorie Roberts, a tax and investment attorney in private practice on St. Thomas, presented this paper on Feb. 15, 2001, at a conference on "International Investment: Where and How to Do Business" sponsored by the Center for International Legal Studies in Steamboat Springs, Colo. Roberts holds law degrees from Harvard University and Cambridge University. She has served as an advisor in the U.S. Treasury Department Office of Tax Policy, chief counsel to the V.I. Bureau of Internal Revenue (1988-1995), and general counsel for St. Thomas-based Globalvest Management (1995-1999). She is the V.I. correspondent for Tax Notes International and serves on the Board of Advisors for the Council on International Tax Education.