Some people I have recently spoken with have suggested the US Virgin Islands is just another "tax haven" wealthy individuals and businesses use to evade US taxes. Are they right?
According to the Organisation for Economic Co-Operation and Development (OECD) there is no precise technical definition of a "tax haven". The OECD set out a number of factors for identifying "tax havens".
The four key factors they set out were:
1) No or nominal tax on the relevant income
2) Lack of effective exchange of information
3) Lack of transparency
4) No substantial activities
How does the US Virgin Islands and their Economic Development Program measure up to these standards? Let's consider these four key factors and see what the facts suggest.
1) No or nominal tax on the relevant income
The US Virgin Islands does offer a low tax incentive for qualifying businesses under its Economic Development Program. However, the OECD also states "No or nominal tax is not sufficient in itself to classify a country (or in this case, a US Territory) as a tax haven."
Is the OECD opposed to low tax jurisdictions? According to the OECD website "The OECD favors competition in all economic spheres, including taxation, providing it is fair and open. The OECD is not opposed to low or zero tax rates. On the contrary, the OECD supports tax reforms that lower rates and broaden the tax base. It supports tax competition that is based on the service provided, but not on the basis of secrecy."
2) Lack of effective exchange of information
With respect to effective exchange of information, in an official letter to the OECD in early 2002, the Governor of the US Virgin Islands formally acknowledged "the USVI understands that the United States has provided the OECD with information indicating that effective exchange of information with respect to the USVI is already available to foreign countries through the operation of U.S. federal law, the exchange of information of U.S. tax treaties and tax information exchange agreements, and the Tax Implementation Agreement Between the United States of America and the Virgin Islands (implemented in 1987)."
Following the G20 Summit this week (March 2009), the OECD tax haven list was published. The United States Virgin Islands are one of only two Caribbean countries on the OECD 'white list' which gives credit to 40 jurisdictions that "have substantially implemented the internationally agreed tax standard". This standard requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It also provides for extensive safeguards to protect the confidentiality of the information exchanged.
3) Lack of transparency
In the same official letter to the OECD in 2002 the US Virgin Islands also acknowledged with respect to transparency "that the USVI substantially meets the standards set out by the OECD. In particular, USVI authorities have access to beneficial ownership for all entities incorporated or organized in the USVI, either directly or through USVI-based resident agents who are required to maintain that information. USVI authorities also have access to bank information."
Further, IRS Notice 2007-31 issued on March 21, 2007, states that the US Internal Revenue Service and VI Bureau of Internal Revenue officials entered into a new working arrangement which provided revised guidelines and procedures for the routine exchange of information under the Tax Implementation Agreement (1987) for US Virgin Islands taxpayers.
4) No substantial activities
Meeting the "Specific Requirements for Granting of Benefits" (29 Virgin Islands Code §708) to receive tax incentives through the US Virgin Islands Economic Development Commission requires by its definition "substantial activities".
Such activities include, but are not limited to, the following:
- Invest at least $100,000, exclusive of inventory, in an approved industry or business.
- Be a bona fide resident of the US Virgin islands.
- Have their principal place of business in the US Virgin Islands.
- Receive income that is eligible under IRC §934 of the Internal Revenue Code of 1986.
- Employ at least ten (10) persons on a full-time basis who are residents of the US Virgin Islands.
- Maintain an employee pension benefit plan.
- Maintain an employee welfare benefits plan, which includes medical insurance, vacation and sick leave, and paid time off.
- Establish and maintain a management training program for employees.
- Provide educational assistance to residents of the US Virgin Islands in an amount and form which is acceptable to the EDC.
- To obtain services and goods form persons or companies who are residents of the US Virgin Islands.
Clearly, meeting such requirements require substantial activities. The US Virgin islands Economic Development Program meets the OECD's comments above in that "it supports tax competition that is based on the service provided, but not on the basis of secrecy."
An informed person will see that the US Virgin Islands and its Economic Development Program's tax incentives allow qualified businesses and individuals nominal tax on effectively connected income. However, the tax incentives are provided with effective exchange of information under federal law in a fully transparent way that substantially meets the OECD's requirements. Additionally, the tax incentives are only provided by the US Virgin Islands in return for the substantial employment and investment activities that such businesses provide to the US Virgin Islands economy and community.
So, are the US Virgin Islands just another "tax haven"? To all those who have suggested so, the facts speak loud and clear...
The resounding answer is NO!
