In December 2003, the V.I. Legislature enacted amendments to its economic development program [1] to extend the period of benefits for watch and jewelry manufacturing and assembly businesses, to require that 50 percent of contributions made by beneficiaries of the economic development program be designated for public school programs, to raise the application fees and annual compliance fees for applicants and beneficiaries respectively, and to institute an activation fee for the commencement of benefits.
These amendments were contained in Act No. 6634, the Omnibus Authorization Act of 2004, as passed by the Legislature on Nov. 24, 2003, and signed into law by Gov. Charles W. Turnbull on Dec. 23, 2003. The economic development program is administered by the seven-member Economic Development Commission, a division of the Economic Development Authority [2].
Overview of economic benefits
The Virgin Islands economic development program is authorized by Congress. The legislation enabling the incentive programs is in Section 934(b)(1) of the Internal Revenue Code of 1986, as amended (the Code). This legislation provides that the Virgin Islands can reduce or remit tax liability incurred to the territory as is attributable to income derived from sources within the Virgin Islands or income effectively connected with the conduct of a trade or business within the territory. Code section 934 became effective upon the signing of the Tax Implementation Agreement between the Virgin Islands and the United States on Feb. 24, 1987 [3].
Under the economic development program, a beneficiary business must make a minimum capital contribution of U.S. $100,000, exclusive of inventory [4] and employ at least 10 U.S. persons full-time [5]. At least 80 percent of a beneficiary's employees must be Virgin Islands residents [6]. To qualify as a resident for that purpose, a person must generally have been domiciled in the territory for at least one year, have attended school in the territory for six years, or have graduated from one of the territory's high schools or the University of the Virgin Islands [7]. A beneficiary business also must agree to purchase all goods and services in the Virgin Islands from Virgin Islands suppliers that have valid business licenses and are in full payment of their taxes if the goods and services are available in the territory [8].
An applicant is also required to provide health insurance and a retirement plan for its employees [9]. In practice, most beneficiaries are required to pay all the premiums for their employees and some beneficiaries also pay a portion of the dependent coverage, typically from one quarter to one half of the cost. Many beneficiaries also provide term life insurance ranging from $10,000 to $30,000. Beneficiaries usually provide a defined contribution retirement plan, such as a 401(k) [10]. Beneficiaries often commit to contribute 5 percent of each employee's salary to the retirement plan regardless of whether the employee contributes [11].
To be eligible for benefits from the EDC, an applicant's business must fall within one of the following four categories:
Category I — rum production, milk/dairy production, and 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 IIA — service businesses not limited to, but including, investment managers and advisers, research and development, business and management consultants, software developers, e-commerce businesses, call centers, high-tech businesses, international public relations firms, international trading and distribution, and any other businesses servicing clients outside the Virgin Islands.
Category III — utilities, health care facilities, recreation facilities, insurance companies, physicians corporations, and such other industries or businesses as may be deemed appropriate by the EDC.
Beneficiary businesses receive a 90 percent reduction of their tax liability on income from the business for which the benefits are granted [12]. That reduction results in an effective tax rate of approximately 4 percent on income from approved operations. Beneficiaries also receive an exemption from the Virgin Islands property tax otherwise imposed at 0.75 percent of the property's fair market value [13], an exemption from Virgin Islands gross receipts tax otherwise imposed at 4 percent on the gross receipts of a business [14], a reduction in customs duties on certain items [15], and exemptions from excise taxes on building materials [16] and raw materials [17].
If the beneficiary's owners are bona fide residents of the Virgin Islands, they also enjoy reduced tax rates on income from dividends, distributions or allocations [18]. Specifically, Virgin Islands resident individuals who are shareholders, members, partners, grantors, beneficiaries or other owners receive a 90 percent tax reduction. Residency for this purpose is determined under Section 932(c) of the V.I. Code, which means that a taxpayer must be a bona fide resident at the end of his or her tax year. The determination of residency is a subjective test based on an analysis of the facts and circumstances, and not a number-of-days test.
Benefits are available for 10 years for the islands of St. John and St. Thomas and the Christiansted district of St. Croix [19], and for 15 years for the Frederiksted district of St. Croix [20]. Benefits can be extended for a 10-year period if the applicant is in full compliance with all requirements of the EDC and submits a completed extension application [21], and can then be extended in five-year increments [22]. The EDC has the authority to reduce the benefits it grants on an extension, but not those on the initial grant.
Qualifying small businesses [23] also are eligible for economic development benefits under the Small Business Program [24]. Such businesses must meet certain ownership requirements but can obtain benefits with as few as two employees and a capital investment of as little as $20,000.
Expanded benefits for jewelry, watch manufacturers
Section 58 of Act No. 8834 added a new Section 714c to Chapter 12, Title 29, V.I. Code. The new section 714c provides as follows:
Notwithstanding any other law, watch and jewelry manufacturing and assembly businesses that possess an industrial development certificate or an economic development certificate, under the provisions of this chapter, shall receive extended benefits under sections 713a, 713b, 713c and 713d of this chapter, for a period of time equal to the greater of (1) 20 years from the date of enactment of this section, or (2) the period of time that the Federal Production Incentive Certificate Program provisions, set forth in the Harmonized Tariff Schedule of the United States, Supplement 1, Chapter 91, Additional U.S. Note 5 and Chapter 71, Additional U.S. Note, are in effect.
Watch and jewelry manufacturing and assembly businesses, which fall within Category I as set out above, would otherwise initially receive benefits for a period of 10 or 15 years, depending on location, then receive an extension of 10 years, and then receive subsequent extensions in five-year increments.
In addition to receiving economic development benefits, watch and jewelry assembly producers in the Virgin Islands receive credits for wages paid to their V.I. employees under a federal program. Specifically, Additional U.S. Note 5 to Chapter 91 of the Harmonized Tariff Schedule of th
e United States provides for the duty-free entry of defined quantities of watches and watch movements produced in the U.S. insular possessions. Note 5 also requires the secretaries of Commerce and the Interior to issue duty-refund certificates (known as Production Incentive Certificates) to each insular possession watch and watch movement producer based on the producer's duty-free shipments and creditable wages during the previous calendar year.
Additional U.S. Note 3 to Chapter 71, added to the Harmonized Tariff Schedule in 1999, provides that a producer of any article of jewelry that is the product of the insular possessions is also eligible for the Production Incentive Certificate benefits provided for in Additional U.S. Note 5(h) to Chapter 91.
The watch industry is the largest light manufacturing industry in the Virgin Islands and historically one of the most important sources of private sector employment in the territory. In addition to the approximately 300 jobs created directly by watch and jewelry producers in the territory, primarily on St. Croix, watch and jewelry production also indirectly supports many related production and service jobs in the territory.
The current program providing benefits to insular possession watch and jewelry producers expires in 2007. However, legislation currently before Congress would extend the Production Incentive Certificate provisions until 2015.
The amendment made by Section 58 will ensure that jewelry and watch producers in the Virgin Islands will have their economic development benefits for as long as Congress keeps the Production Incentive Certificate program in place, including all extensions. This extension provides jewelry and watch producers with the certainty that they require to establish or expand their facilities in the Virgin Islands, and specifically to make necessary capital investments and invest in new product development. Many of the watch producers have been in the Virgin Islands for more than 20 years, and thus had been required to apply for extensions every five years without this amendment.
In response to the passage of Section 58, Alan Grunwald, president of the Virgin Islands Watch & Jewelry Manufacturers Association and president of Belair Quartz Inc., a St. Croix-based watch manufacturing business, notes that "the watch and jewelry industry has suffered from fierce competition from low-cost Far East labor. The changes made by Section 58 of Act No. 6634 will go a long way to stimulate long-term investment in the territory by members of our industry, and will help to attract new firms to the U.S. Virgin Islands, and specifically to St. Croix."
Frank Schulterbrandt, chief executive officer of the Economic Development Authority, advocated strongly for the change. "In order for the U.S. Virgin Islands to remain competitive in the changing international economic environment, we must continually adjust our tax incentive laws to attract businesses to the territory," he points out. "The additional term being granted for jewelry and watch manufacturers is testimony to the territory's commitment to its beneficiaries and potential investors that we will remain competitive to ensure additional investment and job creation in the U.S. Virgin Islands."
Contributions required for public education
Section 57 of Act No. 6634 amended Section 708(m) of Chapter 12, Title 29 of the V.I. Code by adding a clause at the end of the first sentence, as italicized below, so that Section 708(m) provides that an applicant for benefits must:
"Provide educational assistance to residents of the Virgin Islands in an amount and form which is acceptable to the commission or provide a financial contribution to a fund established by the commission. As used in this subsection, educational assistance includes all types of educational assistance including but not limited to vocational and other job training programs, except that 50 percent of any such financial contribution must be designated for public school programs and initiatives."
Since the Economic Development Commission has the authority to determine the amount and form of educational assistance, it will presumably determine which public school programs and initiatives will receive a financial contribution under this section as amended.
Sen. Louis Hill, who sponsored the amendment, has elaborated that he wanted additional funding for non-academic programs such as interscholastic sports and school bands. "These programs are vital to our efforts to prepare another generation of citizens who have the sense of purpose and character to make a greater society for us all," he said.
Increased and additional fees
On Feb. 1, 2001, Gov. Turnbull signed into law Act No. 6390, which imposed application and compliance fees for the first time. These fees were largely geared towards making the EDC financially self-sufficient.
Section 59 of Act No. 6634 amended Section 708a of Title 29 of the V.I. Code by deleting the existing fee table and by inserting the following in its stead:
Application Fee / Activation Fee / Annual Compliance Fee:
Category I – $1,500 / $1,000 / $1,500
Category II – $3,500 / $1,500 / $3,000
Category IIA – $5,000 / $2,500 / $7,500
Category III – $5,000 / $3,500 / $5,000
Section 708a permitted the EDC to make "fee adjustments … on an annual basis, with the approval of the governor," provided that they "not exceed the Consumer Price Index for that year." However, these fee adjustments were passed by the Legislature, and not proposed by the EDC. The new fees can now be raised by the EDC on an annual basis.
Economic benefits are recommended by the EDC after the applicant submits a lengthy application and has a public hearing [25]. After the public hearing, the EDC holds an executive session in which benefits are discussed. The governor, who makes the final determination of all tax benefits, then reviews applicants that are recommended for approval by the EDC [26].
The application fee must be paid by the applicant when submitting the application to the EDC. After an applicant is approved for benefits by the governor, the applicant must advise the EDC when benefits should commence as well as the applicant's physical and mailing addresses and telephone and fax numbers. Once the applicant has advised the EDC, the EDC will provide the applicant with a certificate setting out the general and special conditions for the applicant's grant of benefits.
In connection with the issuance of the certificate, the applicant will be required to pay the activation fee. Finally, beneficiaries are required to pay an annual compliance fee that covers the EDC's regular review of each beneficiary to ensure that the beneficiary is in full compliance with the EDC requirements. The annual compliance fee will be applied toward the EDC's cost of carrying out the compliance reviews. In addition, each year the EDC holds a mandatory compliance conference for all beneficiaries.
Public hearing schedule
The EDC is composed of seven commission members by statute. Three must head cabinet-level executive departments or be on the governor's executive staff. The present members who hold these positions are Dean Plaskett, who serves as chair, Kent Bernier, who serves as vice chair, and Louis Willis. Plaskett is commissioner of Planning and Natural Resources; Bernier is the governor's assistant for economic policy, and Willis is director of the Internal Revenue Bureau.
Three other commission members must be private citizens appointed by the governor, one each from St. Thomas, St. Croix and St. John. Currently on the commission in this category are former senator and businesswoman Mary Ann Pickard [27] of St. Croix and businessman Randolph Allen [28] of St. Thomas. The St. John position is currently vacant, but Jose A. Penn, a St. John businessman, has been nominated by Gov. Turnbull to the position.
His nomination was approved by the Senate Rules Committee on Jan. 15, 2004, and is expected to go before the full Senate in late February.
Finally, the EDC includes one representative from the Government Employees Retirement System, the Port Authority, or the University of the Virgin Islands. Willis Todmann, GERS chief financial officer, holds this position.
The EDC has a professional staff of approximately 25 persons, with offices in Charlotte Amalie on St. Thomas and Frederiksted on St. Croix.
The EDC schedules public hearings on applications for benefits, extensions of benefits and modifications of benefits throughout the year. It also holds executive sessions following the public hearings which are not formally announced and are closed to the public. The quorum for conducting a public hearing is two commissioners [29]. For an executive session, a quorum is four commissioners [30].
Eight public hearings are scheduled for 2004: Feb. 5, March 18, April 29, June 10, July 22, Sept. 2, Oct. 14 and Nov. 24. In order to be scheduled for a public hearing, an application must be submitted at least four weeks before a specific hearing date.
Notes
1. V.I. Code, Chapter 12, Title 29.
2. V.I. Code, Section 704, Chapter 12, Title 29.
3. 1989-1 C.B. 347.
4. V.I. Code, Section 708(a), Chapter 12, Title 29.
5. V.I. Code, Section 708(f), Chapter 12, Title 29.
6. V.I. Code, Section 710(a), Chapter 12, Title 29.
7. V.I. Code, Section 703(e), Chapter 12, Title 29.
8. V.I. Code, Section 708(h), Chapter 12, Title 29.
9. V.I. Code, Section 708(q), Chapter 12, Title 29. This requirement does not apply to beneficiaries under the Small Business Program.
10. V.I. Code, Section 708(q), Chapter 12, Title 29.
11. V.I. Code, Section 708, Chapter 12, Title 29 also contains additional requirements for beneficiaries. For example, an applicant whose committed investment is in excess of $500,000 must agree in writing to employ at least two individuals from the Welfare to Work Program administered by the Labor Department [Section 708(l)]. Also, every beneficiary must provide its employees additional leave from work other than time applied to annual leave to participate and represent the Virgin Islands in athletic and sporting events [Section 708(p)].
12. Under the U.S. Naval Services Appropriation Act of 1922, the Virgin Islands uses the U.S. Internal Revenue Code of 1986 (as amended) as its income tax code. A V.I. corporation, for example, will file Form 1120 with the V.I. Internal Revenue Bureau, not with the Internal Revenue Service (IRS). If the corporation engaged in business only in the Virgin Islands, it would not have any additional income tax filing requirements. If a Virgin Islands corporation is engaged in business in the United States, it files Form 1120F, and not Form 1120, with the IRS. As for individual tax filing, a U.S. citizen who is a bona fide resident of the Virgin Islands files a single Form 1040 with the IRB, reporting his or her worldwide income, and does not file a Form 1040 with the IRS.
13. V.I. Code, Section 713a(a)(1), Chapter 12, Title 29.
14. V.I. Code, Section 713a(a)(2), Chapter 12, Title 29.
15. V.I. Code, Section 713c, Chapter 12, Title 29.
16. V.I. Code, Section 713(a)(3), Chapter 12, Title 29.
17. V.I. Code, Section 43d, Chapter 3, Title 33.
18. V.I. Code, Section 713b(e), Chapter 12, Title 29. The statute refers specifically to "dividends or distributions," but in practice the tax reduction is provided to income allocated to a partner or a member on a Form K-1 regardless of whether the income is distributed to the partner or member.
19. V.I. Code, Section 713a(b), Chapter 12, Title 29.
20. V.I. Code, Section 714(a), Chapter 12, Title 29.
21. V.I. Code, Section 713a(b), Chapter 12, Title 29.
22. V.I. Code, Section 715(b), Chapter 12, Title 29.
23. V.I. Code, Section 703(f), Chapter 12, Title 29.
24. V.I. Code, Section 708b, Chapter 12, Title 29.
25. V.I. Code, Section 717(a), Chapter 12, Title 29.
26. V.I. Code, Section 717(a), Chapter 12, Title 29; Section 717-501, Rules and Regulations of the V.I. Industrial Development Program, as signed by then-Gov. Juan Luis on Sept. 4, 1981.
27. Ms. Pickard was initially appointed under Section 704(b)(2), Chapter 12, Title 29, V.I. Code, prior to its amendment by Act No. 6391, which required in pertinent part that "not more than three (3) … members shall be residents of the same district" and provided further that "each member shall be qualified by virtue of his background and experience, whether in business, labor, the professions or academic fields, to make a constructive contribution to the functioning of the [Industrial Development] Commission." Although the board configuration was changed, Ms. Pickard was retained for the duration of her three-year term, pursuant to Section 1102(a), Chapter 21, Title 29, V.I. Code, which provided in pertinent part that "the first appointments … shall be of individuals currently appointed to and approved by the Legislature as a member of one of the government bodies being subsumed by the [Economic Development] Authority."
28. Mr. Allen was initially appointed under Section 704(b) (2), Chapter 12, Title 29, V.I. Code, prior to its amendment by Act No. 6391, which required one of the members to "be a representative of organized labor." This requirement no longer exists, but Mr. Allen was retained for the duration of his three-year term, pursuant to Section 1102(a), Chapter 21, Title 29, V.I. Code.
29. Section 704-4(b), Rules and Regulations of the V.I. Industrial Development Program, as signed by then-Gov. Juan Luis on Sept. 4, 1981.
30. Section 704-4(c), Rules and Regulations of the V.I. Industrial Development Program, as signed by then-Gov. Juan Luis on Sept. 4, 1981.
Editor's note: Marjorie Rawls Roberts is a tax and investment attorney on St. Thomas.
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