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PricewaterhouseCoopers Report Validates Estimates of EDC Impact

Feb. 7, 2005 – The anxiously-awaited PricewaterhouseCoopers study on the impact of the Economic Development Commission program on the Virgin Islands economy validates previous estimates that the program's approximately 49 designated service businesses contribute a substantial amount to the government's treasury.
The report was commissioned by Winston & Strawn, the V.I. government's Washington, D.C. legal counsel, in the wake of the passage of a bill in the U.S. Congress. The bill has far-reaching, negative ramifications for the local tax benefit program and its beneficiaries – and ultimately for the financial health of the territory.
The PWC report, dated Jan. 12, focused on the designated service businesses because they are on the shakiest ground due to the new regulations to be promulgated as a result of changes to the income tax law in the recently enacted American Jobs Creation Act.
But the report admittedly reveals only part of the picture in terms of potential revenue losses under the new regulations, which include a 183-day residency requirement, and substantially change the source of income that was eligible for exemptions under the old tax law.
The conservative estimate of the direct income tax revenues paid by DSBs in 2004 is $114 million, roughly 20 percent of the territory's revenue. But the report does not include indirect revenue generation coming from taxes paid by employees, or "generated by the indirect economic activity attributable to DSBs, such as the payments to DSB suppliers."
It also does not include revenues generated by real estate development and other transactions.
A release from Government House Monday night cautioned that the report was based on projections that might not "prove to be valid," as the rules and regulations defining the new law have not yet been generated
"The report also cautioned that the response of EDC companies to the Jobs Act could not be determined with any precision in the absence of implementing regulations form the U.S. Treasury," the release said.
However, the report says some fallout has already been experienced.
"The real estate market … reflects the recent uncertainty surround the EDC program following the issuance of Treasury Notice 2004-45 in June 2004."
In June, the Internal Revenue Service issued a notice, without warning, saying that it would not tolerate abuses to the program – laying the ground work for the changes that would come later in the Jobs Act. (See "IRS Stance on Tax-Break Program Causes Concerns").
In that month, according to the PWC report, "Monthly stamp tax collections (assessed on the value of real estate sales) fell by 50 percent," and the report states, "remain 25 percent below the June peak."
Using a baseline established prior to the enactment of the Jobs Act, PWC estimated that direct contributions of DSBs to the V.I. economy would have reached $227 million by 2007, increasing in number from 49 businesses in 2004 to 79 in 2007.
Again, the report states this does not include indirect contributions in the form of local purchases made by DSB businesses and their employees or personal expenditures made in the islands by owners of DSBs .
The report considered two scenarios in measuring potential impact of the new law, the "freeze" scenario and the "contraction with limited future growth scenario."
Under the "freeze" scenario the number of DBSs is frozen at the 2004 level – no new DSBs are formed but none of the existing companies leave – with eligibility remaining constant.
Under the contraction theory some of the DSBs shut down and future growth is limited, with a reduction to 34 DSBs from 49 in 2005 and limited growth of three DSBs per year. Income from those who remain would also be reduced by 20 percent due to changes in the source income rules.
"Under either of these scenarios," the report says,' the results of the new rules, would significantly reduce USVI employment and tax receipts compared to the baseline forecast."
The report also covers the potential loss in charitable contributions and the indirect costs of the elimiation of high-paying jobs and the resulting reduction in income taxes and expenditures.
The report estimates a potential loss under the freeze scenario relative to the 2007 baseline projections of 1,952 jobs and $82.9 million in tax revenues. Charitable contributions fall by $7.6 million.
Under the contraction scenario 2,365 potential jobs are lost by 2007, tax collections fall by $94.9 million and $10 million in potential charitable contributions is lost.
On a hopeful note, the release from Government House said, "In the worst case scenario assumed by PWC in its study, the EDC program would contract initially but still survive and grow at a slower pace in the future."
The release said only four businesses have announced they are leaving the territory, but reliable sources in the business place the numbers higher. The PWC report places the loss of DSBs under the contraction scenario at 15 in 2005.
The Government House release also said six new EDC applicants have been approved for benefits.
Two new applicants are slated for a hearing Thursday on St. John, Sea View Care Services, Inc, a health care facility on St. Thomas and St. Thomas Health Care Management Inc., a residential treatment facility, also on St. Thomas.
Gov. Charles W. Turnbull has submitted the report to both the secretary of the Treasury and the Interior Department secretary, "in support of the Virgin Islands position on the Treasury regulations," the release said.
To view the entire 30-page PriceWaterhouseCooper report, click here .

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