June 1, 2005 Making changes to the Economic Development Commission program was the discussion focus of a Senate Economic Development, Planning and Environmental Protection Committee hearing Wednesday.
One portion of a proposed bill, sponsored by Senate President Lorraine L. Berry, seeks to eliminate abuse in the tax-incentive program while another portion makes provisions for Virgin Islanders to own EDC companies.
"We are trying to send a message to the federal government that we are trying to close all loopholes," Berry said.
The EDC program has been a major topic of discussion since President George W. Bush signed the Jobs Creation Act of 2004 into law. In accordance with the act, the U.S. Department of Treasury in April released new regulations to govern the EDC program.
The new rules purport to give clarity to what is considered as a bona fide resident of the territory and what is V.I. source income for tax purposes. (See "EDC Regulations Are Out, Effects Being Determined").
Berry introduced her legislation at a Committee of the Whole hearing May 4, but senators voted to send the bill to the Economic Development, Planning and Environmental Protection Committee for further review.
All of the testifiers appearing before the committee Wednesday were in favor of the bill, however; an amendment and recommendations were offered to improve the legislation.
Attorney Tom Bolt told senators to delete a section of the bill that allowed EDC beneficiaries to provide loans of $1 million or more to borrowers in the Virgin Islanders who had been rejected by V.I. banks or were not approved for loans within 30 days of applying.
In its place, Bolt said, the EDC beneficiaries should provide only commercial loans in excess of $1 million to V.I. borrowers that were willing to repay the money at an interest rate that is five percentage points above the Federal Home Loan Mortgage Corporation's posted yield for the last business day of that month. The beneficiaries would be given 30 days to report the loan to the EDC, under Bolt's amendment.
Bolt said his amendment protects the banking sector, which he represents, and is acceptable by all the proponents.
Louis Willis, director of the V.I. Internal Revenue Bureau, told the committee, "The bureau supports all attempts to strengthen the EDC program and deter further abuse."
Willis, expressed support for Section 1 of the bill, which grants the EDC the power to limit the amount of new shareholders, partners, owners or beneficiaries that can be added to an existing benefit package. The section also lists the required information that must be provided by the new individuals.
Willis said. "The bureau fully supports this amendment as a regulatory measure."
Willis said he was also in support of another section of the bill that sought to allow beneficiaries to establish one or more single owner entities, such as single member limited liability corporations that could be disregarded for income tax and other tax purposes. Under this provision, the single owner would be allowed to receive the tax benefits of the EDC beneficiary on his or her individual tax return.
"The bureau supports this change," Willis said, but recommended that each new entity must first be approved by the EDC.
Willis added, "Without this additional requirement, the EDC and the bureau will not be able to ascertain the true owners of the benefits. The bureau requires that transparency be our goal at all times."
Frank Schulterbrandt, chief executive officer of the Economic Development Authority that oversees the EDC program, agreed with Willis that each new owner must be approved by the EDC.
"This will allow for continued transparency and disclosure to the administrators of the Economic Development Program from its beneficiaries," Schulterbrandt said.
Other changes that would be made by Berry's legislation, include:
– Partners in a partnership would be subject to tax only on distributive shares that are allocated to them. Currently, partners are taxed whether or not the shares are actually distributed.
– Increase the cap on what is considered a small business from $1 million to
$4 million in annual receipts to keep pace with inflation and to allow more
small businesses to enter the program.
– Beneficiaries who were approved as of June 7, 2004, would be granted an additional 10 years of tax exemption for locating their business in certain districts such as Frederiksted or Christiansted. Schulterbrandt said that portion of the bill needed to be clarified.
– Employers would be able to use a paid time-off policy rather than a traditional vacation and sick-leave policy. Schulterbrandt suggested that they add that section to EDC's rules and regulations instead of amending the law.
– A fee structure would also be set for applicants of the Small Business Program, requiring a $250 application fee and an annual compliance fee of $100. Currently, applicants in the Small Business Program pay the same rate as EDC beneficiaries although their program requirements differ and are extended for different periods of time.
The committee unanimously voted to keep the bill in committee. Sen. Neville James, committee chairman, said his committee would work with Berry in making the necessary changes and would vote on the bill again on June 20. Berry is not a member of the Economic Development committee.
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