A new law approved by the Senate on Wednesday aims to increase transparency, speed up application processing, increase fees and tighten regulation of bank-like "international financial entities" that want to get special V.I. tax breaks. The aim of the new rules is ultimately to expand the number of applicants who may then hire Virgin Islanders and provide some revenue to the territory in exchange for tax breaks.
In 2012, the Legislature approved the tax-break program for these bank-like companies that take no deposits but do bank-like activities, encouraging them to incorporate locally in the U.S. Virgin Islands with broad tax forgiveness in exchange for hiring three or more people.
Since then, the territory has licensed three such financial businesses to receive V.I. tax breaks, of which one is currently operating in the territory.
In April 2015, Lt. Gov. Osbert Potter issued a moratorium on the licensing of any new international banking entities until the territory’s regulatory mechanisms can be strengthened.
The program is largely modeled after a 1980 Puerto Rico law.
It exempts international banking entities from corporate income tax, gross receipts taxes, property taxes, withholding taxes and most excise taxes.
Investors in the entities are also entitled to reduce their personal income tax by either 75 percent or 95 percent, depending on the location of the offices. If they set up in Frederiksted, they get a 95 percent break on their income taxes.
The law says each approved bank-like entity "must be granted 100 percent benefits for a period of 10 years if they remain in compliance."
This new law changes the terminology from "international banking" to "international financial entities." When the bill was heard in committee, V.I. officials in the Lieutenant Governor’s Office argued the change covered a broader array of activities and clarified that more than just banking was permitted.
Under the current law, the director of Banking and Insurance, who works under the Lieutenant Governor’s Office, has the power to approve or deny licensing and tax break applications from international banking entities that set up offices in the territory. Under the proposed changes, that would shift to the V.I. Banking Board.
The new law creates a two-step application process under which tax benefits for IBEs would be sought through the V.I. Economic Development Commission, the agency that handles most V.I. tax break programs. (The University of the Virgin Islands Research and Technology Park also gives tax breaks.)
The legislation also increases license and application fees for IBEs and makes background checks on investors more rigorous. It mandates hiring a compliance monitor, whose salary is funded through fees to the institutions.
When the program was approved in 2012, proponents argued the USVI had to compete for tax-break clients with Puerto Rico and projected the program could ultimately generate more than 500 local jobs. But Oran Bowry, Banco Popular’s senior vice president of operations for the Virgin Islands region, provided the V.I. Legislature in 2012 with official numbers from Puerto Rico that showed minimal benefit.
The law allowing international banking entities "has not generated significant business, it has not created job opportunities, and no calculable investments have been made to stimulate the Puerto Rico economy that can be directed attributed to the IBE market," Bowry told the V.I. Legislature.
Bowry said that while the program has existed for more than 20 years, as of 2012 there were only 31 registered IBEs and more than half of those are units of existing domestic banks.
During recent committee hearings on the proposed changes, Erika Kellerhals, an attorney with a V.I. law firm that specializes in clients seeking tax breaks, argued against the proposed changes, saying the territory needed to be able to compete with Puerto Rico. Kellerhals said Puerto Rico now has "over 40" of these financial entities getting tax breaks.
A scan of available sources online found no news stories nor any official Puerto Rico government information with data showing tax breaks for financial entities is notably helping the Puerto Rico economy, which is currently in a state of collapse.
When the new bill was heard in committee Dec. 14, Kellerhals told senators the changes "will make the rules that govern IBEs even more confusing, complicated and expensive than before.”
Giving the EDA and the Division of Banking and Insurance jurisdiction over two different parts of the IBE application process would create a “cross governmental division maze” that would discourage investment, Kellerhals said. She asked senators to consider at least changing the bill to clarify that financial institutions are not subject to any other laws governing EDA benefits, if they allowed EDA oversight.
Senators approved an amendment from Sen. Clifford Graham on Wednesday stating that only the banking rules provided in this law apply to these financial entities, and that most EDA rules do not apply. The Economic Development Commission still must approve applications.
Graham said representatives for a prospective applicant and the existing licensed financial entity testified at the initial hearing and discussed possible amendments with senators. "This is compromise language they agreed upon," Graham said.
Voting for the bill as amended were Graham, Sens. Marvin Blyden, Novelle Francis, Kenneth Gittens, Justin Harrigan, Almando "Rocky" Liburd, Nereida "Nellie" Rivera-O’Reilly, Tregenza Roach, Sammuel Sanes, Kurt Vialet and Janette Millin Young. Sen. Positive Nelson voted no. Sen. Jean Forde was absent.