April 6, 2005 – The U.S. Treasury Department and Internal Revenue Service on Wednesday published the proposed regulations that will determine which V.I. companies and individuals can benefit from tax breaks under the Economic Development Commission.
The regulations have been anxiously awaited by government officials and EDC beneficiaries. A recent report estimated that 20 percent of the territory's annual revenue or $114 million came from just one group of EDC companies. (See "PricewaterhouseCoopers Report Validates Estimates of EDC Impact").
Those 49 companies, designated service businesses, seemed to be the most at risk with the regulations which reflect amendments to the Internal Revenue Code made by the American Jobs Creation Act of 2004.
The companies were at risk because what was previously assumed to be source income, and therefore eligible for tax exemptions, was being redefined.
In reading the Treasury Department press release and its reports, it appears that the exceptions to the source income rules are slight and may do little to help designated service businesses define all their income as eligible.
On the other hand, the new regulations may give adequate exceptions to the residency rule that was the other concern of EDC company officials. The regulations give several exceptions to the requirement that to be considered a resident a person must spend 183-days a year in the Virgin Islands. Those exceptions include people who spend no more than 90 days in the United States during the year; people who spend more time in the Virgin Islands than they do in the United States and have no income from the United States; and people who have no permanent connection to the United States.
Delegate Donna Christensen was reached Wednesday afternoon during a committee recess. She had not had a chance to look at the regulations.
However, she had met with officials of the U.S. Treasury Department in the morning to discuss the pending regulations regarding the EDC program and was informed that they were going to be filed.
She was not given any specifics on the regulations, but said, "I got the feeling that there was going to be compromise on the residency requirements, more so than on the source income definition."
The meeting had been called by Rep. Dave Camp, chairman of the Ways and Means Subcommittee on Select Revenues. It included Eric Solomon, deputy assistant secretary for regulatory affairs tax policy and Gretchen Sierra, deputy international tax counsel.
By late afternoon, word was spreading through the EDC community in the Virgin Islands that the regulations had been released. However, no one was prepared to make comments on the 128- page document.
Peter Hiebert, Washington counsel for the V.I. government, would only comment, "I am preparing to set in for a long evening of reading."
Some EDC company officials had begun to think that the regulations were not going to be written. Word was that the regulations would be out at the end of the year, when that didn't happen, it was thought they would be out in the beginning of January.
Christensen said the rules had been prepared "and ready to go two weeks ago."
She said in a press release, "We were given a commitment by Dep. Assistant Secretary Solomon, after we review the regulations, to work on ensuring that current or pre-Jobs Act EDC beneficiaries are not adversely impacted."
Residents have until July 11 to make comments on the proposed regulations. Christensen said that even though these are just proposed regulations, at this point they will have the force of law. Click below for the complete document.
Residence and Source Rules Involving Virgin Islands.
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