US Virgin Islands Lures Businesses With Tax Breaks

The U.S. Virgin Islands is attempting to lure small businesses with substantial corporate tax breaks, in a bid to create jobs and diversify the tiny territory’s $4.2 billion economy.

Democratic Gov. John de Jongh toured New York late last week with regional economic development officials, meeting companies and investors. De Jongh has been promoting the territory’s 90 percent cut in corporate income taxes to financial firms and light manufacturing companies, among others.

That comes alongside a 90 percent cut in personal income tax, and considerable exemptions for excise, property and import taxes. There are no territorial or local taxes in the U.S. Virgin Islands, which has about 100,000 residents.

These generous tax breaks don’t render the Virgin Islands a corporate or offshore tax haven, like such well-known rivals as Bermuda or the Cayman Islands, de Jongh asserted in an interview with IBTimes. That’s because the Virgin Islands’ tax benefits are legally sanctioned by the U.S. government, unlike regimes at overseas havens under pressure from a global regulatory crackdown.

“Our program is sanctioned by the Congress and the U.S. Treasury,” Percival Clouden, CEO of the Virgin Islands’ economic development authority, told IBTimes. “It’s a safe environment for them [businesses] to operate.”

Mandated job creation offsets any lost tax revenue, added de Jongh. Under the incentives program, companies must employ at least 10 Virgin Islands residents and invest $100,000 or more toward the “economic well-being” of the territory.

The program has 85 corporate beneficiaries so far, with 15 pending applications, mostly from financial companies. Existing beneficiaries include hotel companies.

Asset managers and hedge funds have increasingly left high-tax places for low tax jurisdictions, said de Jongh, who seeks such firms as “low-hanging fruit” for the islands. The Virgin Islands already hosts Denali Asset Management as one longtime resident firm.

The Cayman Islands, a British territory, has a reputation as a hedge and mutual fund haven, hosting thousands of accounts that collectively managed $1.8 trillion by the end of 2011, according to the Cayman Islands Monetary Authority.

One reason for de Jongh’s outreach is the January 2012 loss of the island’s single biggest taxpayer and employer, the HOVENSA oil refinery. That shutdown cost the island $100 million in revenue and 2,000 jobs, worsening an economy that has shrunk 22 percent since the 2008 financial crisis.

Tourism is one of the largest sectors in the Virgin Islands, accounting for almost half of employment alongside trade in 2010. Officials are promoting tourism from Europe, especially from Denmark, which ruled the islands until selling them to the U.S. in 1917.

But troubles at its larger Caribbean neighbor Puerto Rico, with a population of 3.6 million, are causing concern.

Even though the Virgin Islands attracted the makers of Captain Morgan rum, Diageo PLC (LON:DGE), away from Puerto Rico in 2010, via a rum subsidy scheme, the Virgin Islands’ economy relies heavily on Puerto Rico, according to de Jongh.

“We need Puerto Rico to succeed,” said de Jongh. “Puerto Rico’s airport hub, for example, is a major way to get to the Virgin Islands…We’re not competing with Puerto Rico. We do a lot of business with Puerto Rico.”

Some financial firms may see effective tax rates as low as 3.85 percent, according to Clouden. That's just over a tenth of the standard U.S. corporate tax rate of 35 percent.

The Virgin Islands is targeting small businesses, not large public companies or U.S. household names, though it counts mortgage servicer Ocwen Financial Corporation (NYSE:OCN) as a beneficiary. Companies like Apple Inc. (NASDAQ:AAPL) came under fire in 2013 for alleged corporate tax evasion schemes, as they exploited domiciles like Ireland.

The territory also hopes to profit from the widening of the Panama Canal, which could send more freight via St. Croix’s deepwater port.

But tax evasion is still a problem on the island, de Jongh warned in his January 2014 annual address. Both individuals and businesses have dodged taxes owed, with the Department of Justice and the IRS helping to investigate. That echoes false claims made by corporates under the incentives program, as reported by the New York Times in 2004.

Another area of evasion is the local gross receipts taxes owed by businesses: “We’ve made a concerted effort and targeted that area, just to make sure there’s full compliance,” said de Jongh, who described it as a “self-regulated tax.”