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The Impact of Federal Tax Cuts on the US Virgin Islands

by Cherri Carty on March 14, 2018

In December, both houses of Congress passed and President Trump signed into law the “Tax Cuts and Jobs Act”, commonly known as the “tax reform bill.” The $1.5 trillion tax package reduced individual tax rates for the next eight years while cutting the top corporate tax rate to 21 percent indefinitely.

The tax bill will have a significant impact on businesses throughout the U.S. Virgin Islands and most other American territories. One potential problem area is a new 12.5 percent tax on all profits that come from intellectual property that foreign companies hold. While the intention of the tax is to bring these companies back to the United States, it does not consider the U.S. Virgin Islands part of the country, at least when it comes to tax purposes.

In other words, businesses here get treated similarly to those in non-U.S. Caribbean tax havens, even though USVI residents pay into Social Security and Medicare.

At the time, Sen. Marco Rubio of Florida called this a “glitch” in the bill and said that Congress would work to address it. However, as of mid-February, no changes have been made to reduce or eliminate the intellectual property tax for U.S. Virgin Islands-based businesses.

Reduction of excise taxes to have an impact

Another major factor in the tax bill has been the reduction of excise taxes on beer, wine and liquor. This will affect the U.S. Virgin Islands’ ability to service much of its debt through matching fund bonds, commonly known as “rum cover over” funds. These are essentially annual taxes the U.S. Department of the Interior collects from rum sales. Last year, these taxes totaled about $224 million.

However, the Government of the Virgin Islands realizes only a fraction of these funds in its actual coffers. Most of the money gets transferred to government bondholders. Last year, for example, the Territory only saw about $48 million out of the $224 million taxed. Many critics of the policy say the U.S. Virgin Islands Government relies far too heavily on matching fund bonds.

The provisions in the tax cut bill could significantly reduce the amount of revenue generated from beer, wine and liquor taxes. The U.S. Virgin Islands would not be able to rely as much on the matching fund bonds, which could lead to a further downgrade of its credit rating and potentially the Territory’s ability to service the bonds.

While it has been two months since the tax reform bill passed, analysts are still determining just how it will impact businesses of all sizes throughout the United States, including in American-held territories like the U.S. Virgin Islands. If you have questions about the steps you should take to properly plan for the future of your business, consult a dedicated tax planning attorney.

Adam N. Marinelli, is an associate attorney in the Corporate, Tax and Estate Planning Practice Group at BoltNagi, PC and concentrates his practice in tax matters. BoltNagi is a full service business law firm serving the U.S. Virgin Islands.

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