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EDC Problems: An Economic Hurricane

Dear Source,
In June of this year the IRS issued Notice 2004-45 adding a criminal component to the controversy and confusion regarding the failure of the U.S. Treasury Department to provide definitive tax guidance for the EDC Program during the last 17 years as mandated by Congress.
Although recently, there has been much discussion and action to encourage the V.I. Government and Treasury to provide guidance in the wake of the IRS Notice 2004-45, to date no such guidance has been issued.
The result may be an immediate and catastrophic economic hurricane, destroying the fastest growing sector of the Virgin Islands economy and dashing the hopes of many who see the EDC Program as the financial catalyst for generating lasting change in our community.
Over 50 companies approved for benefits have not yet begun business. Many point to the lack of definitive tax guidance as the primary reason. The losses represent 500 or more jobs, $20 million or more in locally earned annual salaries, and tens of millions in capital improvements and expenditures – and it may be just the beginning.
IRS Notice 2004-45 threatens the legal and accounting foundation on which the economic activity of the EDC Program is based. The absence of further definitive guidance on such issues as residency, effectively connected income and source of income paralyzes the legal and accounting professions, the V.I. Bureau of Internal Revenue, the EDC Program, EDC Program beneficiaries and the economy of the Virgin Islands. Strong winds of tax law uncertainty threaten to blow away the many positive advances that the EDC Program has generated.
The USVI Economic Alliance, the Chamber of Commerce and others have worked tirelessly to communicate the very real implications this lack of action on the part of Treasury and the BIR will have in the immediate future. The loss of tax revenues, jobs and investment from existing and new companies will impact the territory for decades to come.
For these reasons, we continue to press the V.I. Government to request the Departments of Interior and Treasury to issue a joint paper in support of the EDC Program and prioritize the development of fair definitive rules for the prevention of fraud and tax evasion. We are also encouraging BIR to establish a memorandum of understanding with Treasury from which tax professionals and attorneys may derive guidance until such time as revised rules and regulations may be promulgated. This will provide immeasurable stability for a program and economy that are in serious jeopardy.
In light of the failure by Treasury to provide such rules and regulations for over 17 years, we believe it is in the best interest of the Virgin Islands for our local Senators to create and propose legislation related to the EDC Program. The legislation should initially address residency and then provide guidelines related to effectively connected income, source income and other issues critical to the success of the EDC Program. It is a well-known fact that local legislation is inherently subordinate to any laws enacted by Congress or regulations issued by the Treasury. Nevertheless, local legislation signed into law will provide a useful example as to how such issues of critical importance to us might be addressed by Congress and the Treasury. In the absence of action by Congress or Treasury, the legislation would provide further clarification for program participants.
Oct. 15 is the next tax filing deadline. Inaction on the part of the local or federal governments will result in an exodus of program participants. Only the scope and scale is unknown. IRS Notice 2004-45 initiated events that can only be resolved through the issuance of tax guidance. Failure to act will decide the issue for many EDC companies by default.
In viewing the recent devastation of Grenada, Jamaica, the Bahamas and Grand Cayman, one cannot help being struck by the devastating effect of nature on the economies of those island nations. Failure to provide tax guidance will have a similar devastating effect on the economy of the USVI.
The rebuilding effort in those island-countries has a beginning and an end. In the USVI participants in the EDC Program are rapidly losing faith in the ability of the VI Government to provide timely, definitive tax guidance for program participants. Forced by circumstances to conduct business under the specter of the U.S. Treasury interpreting tax laws that are in conflict with the intent and guidance provided EDC participants by the V.I. Government the financial and services sectors of the EDC Program may suffer irreparable damage and with it the economy of the Virgin Islands.
To preserve the EDC Program and build a strong foundation for future growth, the V.I. Government must aggressively pursue a four-pronged strategy:
-Elicit a favorable response from Treasury and Interior relating to the June 2004 IRS Notice.
-Lobby Treasury for positive, comprehensive regulatory action on the critical issues.
-Issue BIR guidance related to effectively connected income in the interim.
-Enact local legislation related to residency for EDC beneficiaries.
Anything less than clear guidance regarding residency and effectively connected income for EDC companies and participants will likely result in long-term economic damage to the U.S. Virgin Islands in the form of a self-inflicted Category 4 economic storm.
Respectfully submitted,
Richard A. Difede
Chairman, USVI Economic Alliance
St. Croix

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