Give a little, get a little. Give a lot, get a lot.
Or is it: Give a lot, get a little?
That’s the question that has hung over the territory’s formal tax incentive efforts for half a century.
Back in the 1960s, with the approval of the federal government, then-Gov. Ralph Paiewonsky introduced tax relief packages designed to keep companies like Hess Oil Virgin Islands and Martin Marietta Alumina on St. Croix and to bolster that island’s watch industry.
St. Thomas businessman William Quetel went to work promoting and administrating the tiny agency known as the Industrial Development Commission, which was created within what was then the Commerce Department. He spoke recently with the Source and said the federal government set the perimeters for the tax incentives and sent inspectors to the territory periodically to monitor developments. In the early years, the emphasis was on manufacturing companies.
The initiative has expanded considerably since then – in scope and in numbers. Today, almost any type of business is potentially eligible to apply for tax benefits, and the list of current beneficiaries is weighted less to manufacturing and more to softer industries; investment and financial services companies and hotels dominate. In recent years, the number of beneficiaries has hovered between 50 and 80 in contrast to the 20 to 25 beneficiaries of a few decades ago.
The name of the program has changed too. Now, it is the Economic Development Commission – the mainstay of a quasi-governmental entity known as the Economic Development Authority. The EDA was established in 2001 as an umbrella organization. Besides the EDC, it houses the Economic Development Park Corporation, the Enterprise Zone Commission and the Economic Development Bank.
From IDC to EDC, the rationale remains the same: Granting tax breaks can generate investment in the territory and create jobs. The format has changed a bit, but the outline also remains the same. A company must make a minimum investment and retain a minimum number of Virgin Islands residents as employees in exchange for exemption and/or reduction of various tax obligations.
Yet, skepticism has dogged the idea from the start. Some critics argue that the government is overly generous in the amount of tax benefits it offers. Some say the program isn’t even necessary; plenty of companies want to do business in the territory. And they argue that the program is open to abuse.
Often controversial, the EDC has been getting a black eye in recent weeks as it has been drawn into numerous local and national news accounts about the disgraced millionaire Jeffrey Epstein, who died by apparent suicide while awaiting trial on sex-trafficking charges.
Officially a V.I. resident, Epstein’s interests in the territory included ownership of Little St. James and Great St. James islands, as well as several companies that were EDC beneficiaries. A Wednesday New York Times article was particularly damning, suggesting that Epstein received favored treatment by ingratiating himself with V.I. government officials and spreading money around the community in the form of donations.
This is not the type of publicity the agency wants as it has geared up promotion efforts to try to meet the ambitious goal of the EDA’s executive director Kamal Latham to add another 50 beneficiaries over the next two years.
And, as Latham suggested in a recent interview with the Source, it is less than fair to judge the program by the glare of scandal surrounding one of its beneficiaries.
Latham agreed to an interview with the Source for a comprehensive article about the EDA/EDC, giving an overview of the tax incentive program.
Who gets tax incentives?
The three objectives of the program are economic growth, job creation and wealth generation, Latham said. Since the EDC aims to bring “new money” into the Virgin Islands, for Latham, it means that existing retail businesses that primarily serve residents – such as grocery stores – aren’t eligible.
Information about eligibility on the EDA website, which includes a long list of typical types of beneficiaries, reflects that thinking. But it adds a caveat that “the VIEDC has the authority to grant benefits to any business that will advance the economic well-being of the Virgin Islands and its people.”
A list of active EDC beneficiaries as updated June 26, 2019, and provided by the EDA, contains the names of 71 companies. Of those, 36 companies are described as conducting business related to investment or asset management, consulting, banking or financial services. So more than half the current beneficiaries are office-based services not directly involved with a product.
The next largest group of beneficiaries are directly involved in the tourism industry. The list includes 13 hotels and hotel-like entities and five businesses commonly referred to as tourist attractions, such as a zipline and a marine park.
The remaining 17 beneficiaries are a potpourri, including air ambulance service, a cinema, a brewing company, a paving business, and a boat builder.
A handful of Virgin Islands lawyers represent many of the beneficiaries regarding EDC matters, and information about the program seemed to spread via word of mouth throughout the States in the 1990s as the program began to swing towards the financial services industry. Most of the companies that moved into the V.I. to take advantage of the program came from the U.S. mainland.
More recently, EDA has been marketing the tax-incentive program and showcasing it on its website. Last year, the authority ran a promotion video in New York’s Times Square. In June, Latham and a small crew represented the territory at the SelectUSA Investment Summit in Washington, D.C., pitching the EDC program to a global market of potential investors. Latham wants to significantly increase those efforts and has been trying to convince legislators to include more money for marketing in the EDA budget.
Give and Take
With the blessings of Congress and the U.S. Internal Revenue Service, the Virgin Islands government is able to offer hefty reductions in local and federal taxes and fees:
– 90 percent reduction in corporate income tax
– 90 percent reduction in personal income tax for a company owner who is a V.I. resident
– 100 percent exemption on gross receipts tax
– 100 percent exemption on business property tax
– 100 percent exemption on excise tax
– 83 percent reduction in Customs duty (from the standard 6 percent to 1 percent)
Not all exemptions apply in all cases. For instance, many financial services businesses rent a small office so they have no need of a property tax exemption, Latham said. Not all business owners want to move to the territory to take advantage of the personal income tax exemption either.
The EDC board negotiates a contract with each beneficiary, the exact terms of which are decided on a case-by-case basis.
However, the law creating the program and EDC regulations dictate the basic things a company must do in order to meet the requirements to be a beneficiary:
– Invest at least $100,000 in the V.I. business (not counting inventory)
– Generate its income locally
– Hire at least 10 full-time employees (or just 5 for a financial services company,) with 80 percent of all employees being V.I. residents for at least one year before they are hired
– Provide a salary above minimum wage and a full benefits package including health insurance for each employee
– Comply with all applicable local and federal laws including licensing restrictions and environmental laws
– Donate $3,000 to territorial scholarships
– Donate $2,500 to the Labor Department for training programs
– Donate a specified sum annually to one or more local charities
– Sign Form 8821, giving the EDC permission to review company filings with the V.I. Internal Revenue Bureau
The provision relating to local charities was not part of the original equation and is not part of the tax incentive law. It was added to the requirements by a previous EDC board, and Latham said he does not know when or what the reasoning was for the requirement, but he likes it.
“We think it’s a good thing,” he said. “It helps to benefit the community.”
“There’s no formula” for determining how much a given company must contribute, said EDA marketing manager Shanell Petersen who joined Latham for the interview. It is a matter of negotiation and becomes part of the contract between the government and the beneficiary. It is an opportunity for a beneficiary to support causes of particular interest.
The company may make its donation(s) to any V.I. organization that is registered with the Lieutenant Governor’s Office as a non-profit and/or has a 501 (c)(3) designation from the federal government, attesting that contributions to it are tax-deductible, Petersen said. At least half of the amount must go in some way to education.
Latham described a streamlined process for determining whether a company will receive benefits. The company submits an application to the EDC. Staff in the Application Division review it and make a recommendation to the EDC board. After publishing a public notice, the board holds a hearing on the application during, which board members may query company representatives.
The board used to make a recommendation for or against approval and, while it was generally pro forma, the governor actually had the final say. Latham said the law was changed “a year or two ago,” and now the board makes the decision.
The board, however, is largely the governor’s creature. By law, the governor appoints three of its seven members from his cabinet or executive staff. Another three must be from the private sector, one from each of the three largest islands. And one member must be from the board or executive staff of the Port Authority, the Government Employees Retirement System or the University of the Virgin Islands.
Currently the board is shy one member. Its chair is Kevin Rodriquez, the deputy chief of staff to Gov. Albert Bryan. The vice chair is Bryan’s Labor commissioner, Gary Molloy. Other members are Agriculture Commissioner Positive Nelson, Haldane Davies, the UVI vice president of Business Development and Innovation, Jose A. Penn, a St. John businessman who has served on the board under previous administrations, and Philip E. Payne, who represents the private sector appointee for St. Croix. The St. Thomas private sector seat is not currently filled, according to Petersen.
Latham stressed the ease and speed of the application process. Although he said the EDC carefully vets the principles of each company that applies for the program, he also said the entire procedure – from application review to public hearing to final determination – is completed within 60 days.
“This is a very serious program, and we’re diligent,” Latham said. The EDC has two divisions: Application and Compliance. Compliance staff ensure that a company abides by its contract.
“We have an annual compliance process,” Latham said. Besides the tax information that is open to the EDA, it can review pages of other documents. A beneficiary has to file regular reports with the Compliance division and with the Labor Department and must show proof of residency for the employees it counts as Virgin Islands workers.
It also has to provide documentation for its charitable contributions, such items as letters of acknowledgement from the recipient organization, cancelled checks and ledgers. Sometimes a compliance officer will check with the charity itself to confirm it received the donation, he said.
The agency has published aggregate figures for charitable contributions by all beneficiaries. Petersen said it does have totals for each beneficiary but, in response to a request for a list, she said that information is not available in a digital format.
It’s not hard to find community organizations that have benefitted from EDC-inspired donations.
Dee Brown, longtime president of the Community Foundation of the Virgin Islands, is a big fan of the program.
“We have worked with EDC beneficiaries for many years,” she said. “They’re a big part of our donor base.”
CFVI advocates for underserved populations and administers some programs primarily aimed at improving educational opportunities. But its main purpose is to promote local philanthropy by connecting would-be donors with V.I. organizations and programs in need of funding.
In the last two years, because of disaster-related assistance prompted by the 2017 hurricanes, CFVI grant administration has ballooned to $14 million, Brown said. Such high amounts are likely temporary. In prior years, its grants ran about $2 million to $3 million annually.
“I would say at least 10 percent” of those totals can be attributed to EDC beneficiaries, Brown said.
That amount does not include donations made by beneficiaries directly to various non-profits or channeled through umbrella agencies other than CFVI, nor does it include the mandated donations to scholarship and Labor Department programs.
“EDC businesses are more likely to provide annual donations … It’s not a one-shot deal,” Brown said. “They may make donations above and beyond what’s required in their agreements.”
Brown said CFVI prides itself on its oversight. It can – and has – provided the EDC with “10 to 15 years” of records of a beneficiary’s donations.
Tracking charitable contributions is just part of the mission for the EDC compliance division. It’s charged with ensuring that a beneficiary meets all the requirements in its agreement, from employee numbers and benefit packages to investment to compliance with local and federal laws.
Compliance oversight is limited to the business that receives benefits; it does not attempt to monitor the behavior of any of its principals, a point Latham made clear concerning the Epstein case.
Latham calls the agency’s oversight “robust” and said it has taken action when it finds violations of a contract.
“We have fined companies, and they have paid,” he said. “In the past, we have revoked some (agreements)” because of non-compliance. He did not provide specific examples.
In July, the EDA held a news conference and revealed an independent study of the EDC program that traced its benefits over a three-year period from 2013 to 2015.
According to the Economic Impact Report, the combined taxes paid into the V.I. Treasury between 2013 and 2015 by EDC beneficiaries averaged $103 million each year.
The combined annual average of contractually obligated donations to education and to charity was $3.3 million.
The combined number of people employed by beneficiaries over the three-year span ranged from a low of 2,939 to 4,305.
For supporters, the numbers spell obvious success. Without the tax incentive program, they say, none of this would be happening.
For critics, two questions remain that seem impossible to answer: How many of the beneficiaries would still do business in the territory without EDC incentives? And how much would they pay in taxes?
Editor’s Note: This has been updated to accurately reflect the current board membership. It originally use the membership list provided by the VIEDA website, which was out of date.