Foreign sales corporations — the V.I.-based subsidiaries of U.S. export companies which pump $8 million to $10 million a year into the territory's treasury — have drawn the scrutiny of the World Trade Organization and the European Union.
The WTO recently issued a preliminary report on FSCs following a complaint lodged by the EU. The report has not been made public and its contents were the subject of intense speculation in the national and international media Monday and Tuesday.
Early assessments of the WTO ruling's impact on the FSC program range from catastrophic to marginal; what appears clear, however, is Congress may have to change the laws regulating FSCs and the territory's program will go through some alterations.
FSCs are set up in the Virgin Islands and five or six other jurisdictions by U.S. exporting companies seeking tax breaks on federal income taxes.
Graham Dunn, vice president of the V.I. FSC Association, said the adjustment may even mean more FSC activity in the territory.
"Up until now the EU has claimed the FSCs don't have a sufficient nexus in the offshore jurisdictions. My understanding is that the corporations will have to create offshore entities that have more substance," he said.
In other words, FSCs may have to expand their local operations from the management companies that currently represent the extent of their existence in the territory; such expansion would likely generate more taxes and could mean hiring more employees.
It remains to be seen, however, how U.S. corporations would react to the increased costs of FSCs and if that would drive them out of the Virgin Islands.
"It's a little bit anxious, but eventually there could be extra work and extra finances for the industry and extra finances for the local government," Dunn said Tuesday.
The WTO's final report is expected in September and the U.S. will have until November to appeal the decision, Dunn said.
"A large percentage of Fortune 500 companies have FSCs and they're not going to sit back and watch their millions disappear," he said. "And the U.S. itself isn't going to let the program fall down, even if it's in retaliation against the EU."
The Division of Corporations and Trademarks in the Lieutenant Governor's Office oversees FSCs. As of Tuesday afternoon, Lt. Gov. Gerard Luz James and his staff were still reviewing documents and other information received from the Clinton administration and the U.S. Trade Office.
James will make a statement on the report later in the week, an aide said.
"It's a very important program," Dunn said. "It certainly makes the Division of Trademarks one of the more profitable agencies in the government."
