TAX STRUCTURE OF THE UNITED STATES VIRGIN ISLANDS

Gizette L. Thomas

Acting Director

John P. deJongh, Jr.

Governor

T A B L E O F C O N T E N T S

Foreword 1

Organization of the Virgin Islands Government 2

Income Tax Laws in Effect in the United States Virgin Islands 4

General Principles 4

Individual Income Tax 8

Corporate Income Tax 10

Partnerships 12

Withholding from Wages, Social Security & Unemployment Taxes 13

Pension, Profit Sharing and Employees Benefit Plans 14

Charitable Organizations 14

Estate Taxes 15

Gift Taxes 16

Custom Duties 17

Miscellaneous Local Internal Revenue Taxes 17

Gross Receipts Tax 17

Excise Tax 19

Hotel Room Tax 21

Highway User’s Tax 21

Entertainment Tax 22

Fuel Tax 23

Telephonic Long Distance Tax 23

Gross Revenue Tax 23

Investment Alternative Tax 24

LOCAL TAXES NOT ADMINISTED BY THE VI BUREAU OF INTERNAL REVENUE

Real Property Tax 25

Franchise Tax 25

License Fees 26

Stamp Tax 27

Workmen’s Compensation 27

Special Aids to Businesses 28

Economic Development Program 28

Foreign Sales Corporations 29

Exempt Companies 30

Exempt International Banking Facilities 30

Captive Insurers 31

F O R E W O R D

This booklet is issued to provide generalized information concerning income and other taxes of the United States Virgin Islands. It contains information that was current at the time of publication.

The TAX STRUCTURE OF THE UNITED STATES VIRGIN ISLANDS booklet has been prepared by the Virgin Islands Bureau of Internal Revenue (BIR) – Office of the Chief Counsel. While every effort has been made to ensure that the information contained in this publication is complete and accurate, it is not intended to be a substitute for the provisions of the statues themselves or for court decisions, regulations, or rulings interpreting applicable statutory provisions in light of specific facts. Requests for rulings covering Virgin Islands taxes should be addressed to the Director at the BIR’s St. Thomas office.

The contact information for the BIR for St. Thomas and St. John is:

Virgin Islands Bureau of Internal Revenue

9601 Estate Thomas

St. Thomas, Virgin Islands 00802

(340) 774-5865 – TELEPHONE

(340) 714-9345 – FAX

The contact information for the BIR for St. Croix Office is:

Virgin Islands Bureau of Internal Revenue

4008 Estate Diamond Plot 7-B

Christiansted, VI 00820-4421

(340) 773-1040 – TELEPHONE

(340) 773-1006 – FAX

ORGANIZATION OF THE VIRGIN ISLANDS GOVERNMENT

The organization of the Government of the United States Virgin Islands (the Virgin Islands) rest upon the Revised Organic Act of 1954, 48 U. S. C. §1397, 68 Stat 497, in which the US Congress declared the Virgin Islands to be an unincorporated US territory. The executive power of the Virgin Islands is vested in the Governor who, together with the Lieutenant Governor, is elected by qualified Virgin Islands voters for a four year term. The Governor is limited to two consecutive terms.

The Virgin Islands Bureau of Internal Revenue (the BIR) is responsible for the administration of the internal revenue laws of the Virgin Islands. The Director of the BIR is appointed by the Governor, with the advice and consent of the Virgin Islands Legislature, and serves at the discretion of the Governor.

The Legislature power of the Virgin Islands is vested in a unicameral legislature consisting of 15 senators: seven from St. Croix, seven for St. Thomas and one Senator – at – Large who must have certain ties to St. John. Senatorial elections are held every two years.

A non-voting delegate, who is elected by Virgin Islands’ voters for two year term, represents the Virgin Islands in the United States House of Representatives. The delegate can sit and vote in committee.

The Judicial power of the Virgin islands is vested in the District Court of the Virgin Islands and the Territorial Court of the Virgin Islands, as provided in the Revised Organic Act of 1954. The District Court of the Virgin Islands functions as a United States federal district court in all causes arising under the Constitution, treaties, and laws of the United States and also has original jurisdiction in all causes arising in the Virgin Islands where exclusive jurisdiction has not been conferred upon the Territorial Court. The District Court of the Virgin Islands also functions as an appellate court for appeals from the decisions of the Territorial Court. Appeals from the decisions of the District Court of the Virgin Islands are made to the US Court of Appeals for the Third Circuit, which is based in Philadelphia, Pennsylvania.

The US Tax Court does not have jurisdiction to hear tax cases arising under the income tax laws of the Virgin Islands. However, a VI taxpayer can file a timely petition in the District Court of the Virgin Islands prior to payment of any asserted income tax deficiency, similar to the procedure that applies in the US Tax Court.

The Virgin Islands tax system incomes income, gross receipts, excise, highway user’s, hotel room, real property, entertainment, franchise, fuel, gift, inheritance, and stamp taxes. Other fees and licenses requirements are also in effect for such services as registering vehicles, obtaining driver’s licenses and obtaining business licenses.

Whenever the Virgin Islands tax laws require the filing of tax returns, statements, notices or schedules, the form or other documents should be directed to the Bureau of Internal Revenue, 9601 Estate Thomas, St. Thomas, Virgin Islands 00802 or 4008 Estate Diamond Plot 7-B, Christiansted, Virgin Islands 00820-4421, unless otherwise indicated in this or another BIR publication or release. All checks must be made payable to the Virgin Islands Bureau of Internal Revenue.

INCOME TAX LAWS IN EFFECT IN THE VIRGIN ISLANDS

GENERAL PRINCIPLES

The sources of the Virgin Islands taxing authority include the Internal Revenue Code of 1986 (the IRC) and the Naval Service Appropriations Act of 1922, which established the principle that the IRC applies in the Virgin Islands under a “MIRROR SYSTEM” whereby the “VIRGIN ISLANDS” is substituted for the “UNITED STATES” wherever necessary to give the IRC the proper effect in the Virgin Islands and vice versa.

Specifically, the Naval Service Appropriations Act provided in pertinent part that “the income tax laws in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that proceeds of such taxes shall be paid into the treasuries of said islands.” Consequently, the income tax provisions of the IRC, the Treasury Regulations promulgated thereunder, and Revenue Rulings and Revenue Procedures issued by the Internal Revenue Service (the IRS) are generally applicable in the Virgin Islands with certain limitations.

Three principles underscore the application of the IRC to the Virgin Islands. First, the effect of the Naval Service Appropriations Act was to create a separate taxing structure in the Virgin Islands by mirroring the provisions of the IRC. Second, for purposes of applying the IRC to the Virgin Islands, a domestic corporation is a corporation incorporated in the Virgin Islands, while a foreign corporation is one chartered elsewhere, including the United States. Third, provisions of the IRC are no mirrored if to do so would produce a clearly erroneous result, such as the provisions which deal specifically with the territories (i.e. IRC §§934 and 936).

SIGNIFICANT CHANGES MADE BY THE TAX REFORM ACT OF 1986

The Tax Reform Act of 1986 (TRA) made several changes to the income tax laws applicable to the Virgin Islands. First, TRA provided that the Revised Organic Act of 1954 would be treated as if it had been enacted before the IRC, so that the IRC controls in cases of conflict. TRA specified that the Revised Organic Act of 1954 will have no effect on any person’s liability to the United States.

Second, the US Treasury Department was also given the authority to specify sections of the IRC that would no be mirrored in the Virgin Islands, but it has not done so to date.

Third, TRA allowed the Virgin Islands to enact non-discriminatory local income taxes in addition to those contained in the mirror system. However, the Virgin Islands Legislature has no enacted such taxes to date.

Fourth, TRA gave the Virgin Islands the authority to reduce or rebate all or part of the VI tax liabilities of individuals and corporations attributable to VI source income or income effectively connected with a VI trade or business, other than the VI tax liabilities of citizens or residents of the United States who are not bona-fide residents of the Virgin Islands (IRC §934(b) (1)).

Fifth, TRA gave the Virgin Islands the authority to reduce or rebate the tax on all non-US income of certain qualified foreign corporations, generally defined as a corporation where less than 10 percent of total voting power of the corporation’s stock and the total value of the corporation’s stock is owned by one or more US persons (IRC§934(b) (3)).

Sixth, TRA extended the benefits of §936 of the IRC – the POSSESSIONS CORPORATION TAX CREDIT – to qualifying US corporations operation in the Virgin Islands.

Finally, the enactment of §932 of the IRC altered the way that US individuals are taxed in the Virgin Islands, as more fully discussed on pages 8 and 9.

TAX ADMINISTRATION

Utilizing the IRC, Treasury Regulations, IRS Revenue Rulings and IRS Revenue Procedures gives the Virgin Islands the benefit of a sophisticated and successful income tax system. Further, it enables VI taxpayers to used the hundreds of IRS forms and accompanying instructions in print for filing returns, preparing supporting schedules, filing claims, making payments and so forth. Only a few of these forms have been modified for local use. In particular, the forms for transmitting payroll withholding, Form 501VI and 941VI, and the form for informing employees of the amount of tax withheld, Form W2-VI, have been modified for use in the Virgin Islands. Any questions in interpreting Federal forms for use in the Virgin Islands should be referred to the BIR.

All references to the District Director or to the Commissioner of Internal Revenue should be interpreted to mean the Director of the Virgin Islands Bureau of Internal Revenue. Similarly, all references to the Internal Revenue Service, the Federal Depository, and similar references should be interpreted as the BIR. Directions in forms or in instruction pamphlets that refer to District Directors, the Commissioner of Internal Revenue, the Internal Revenue Service, Federal Depository, and so forth are appropriate for use in the Virgin Islands.

A Virgin Islands taxpayer has the same appeal rights concerning disputed income taxes as his or her counterpart does in the United States. The taxpayer is entitled to a “one level of appeal” hearing, at which the standards and guidelines for settlement are substantially similar to those in the United States.

A statutory notice of deficiency (a 90-day letter) issued in cases where agreement on income tax matters is not reached. Since the US Tax Court does no have jurisdiction to hear VI income tax cases, the taxpayer may take his or her case directly to the District Court of the Virgin Islands without first paying the deficiency.

The Processing and Returns Branch for all three islands is centrally located on St. Thomas. The primary responsibilities of this branch are the processing of all tax returns and the depositing of all revenues received by the BIR. St. Croix has its own daily deposit functions. Excise tax collections are also carried out separately on each island. Other processing functions such as the issuance of tax clearance letters for the STOP TAX EVASION PROGRAM (STEP) have also been decentralized to the St. Croix District. The Department of Finance accepts payment for the BIR on St. John and in Frederiksted, St. Croix.

The Computer Operations Branch is responsible for the automated processing of all tax information on computer systems located on both St. Thomas and St. Croix. The primary services rendered by the BIR’s computer branch are transmittal of taxpayer refunds to the Department of Finance for issuance, billing of outstanding liabilities and provision of current management information.

The Audit Branch has agents on St. Thomas and St. Croix. The agents receive IRS training. Audit procedures and forms are generally the same as those of the IRS. This branch is responsible for the classification and examination of income tax and local tax returns.

The Delinquent Accounts and Returns Branch is responsible for the collection of all unpaid internal revenue taxes of the Virgin Islands, other than real property taxes, stamp taxes and franchise taxes. Collection of these taxes is discussed subsequently in this publication of pages 24 through 27. Revenue Officers in the Delinquent Accounts and Returns Branch receive IRS training and collection procedures and forms are generally the same as those used in the United States, including levies, liens and seizures. The Delinquent Accounts and Returns Branch posts revenue officers on both St. Thomas and St. Croix with revenue officers form St. Thomas assigned to cover St. John as well.

The Criminal Investigations Division is responsible for the investigation of tax fraud and tax evasion cases. Criminal cases are referred to the Department of Justice for prosecution. The special agents of the Criminal Investigation Division receive IRS training at Glenco, Georgia.

INDIVIDUAL INCOME TAX

GENERAL. Individuals who are bona fide residents of the Virgin Islands on the last day of the tax year (GENERALLY DECEMBER 31) file Form 1040( See Appendix: Exhibit 1) with the Virgin Islands and pay tax on their worldwide income to the Virgin Islands. If a VI resident taxpayer has non-VI source income, he or she must also complete VI Form 1040 INFO (NON-VIRGIN ISLANDS SOURCE INCOME OF VIRGIN ISLANDS RESIDENTS) (See Appendix: Exhibit 2) and attach it to Form 1040 before filing it with the BIR.

The VI tax liability for all other US citizens or residents with VI income is computed as a fraction of the taxpayer’s total liability, based on the ratio of adjusted gross income. Such individuals must file signed identical returns with the United States and the Virgin Islands by April 15 of the following year (assuming a calendar year taxpayer), using IRS FORM 8689 (See Appendix: Exhibit 3) to figure out what portion of income tax must be paid to the Virgin Islands. This form must be attached to both returns. The US return should be filed with the IRS Center, Philadelphia, PA 19255 and the VI return should be filed with the BIR in St. Thomas. When this procedure is followed, both a taxpayer’s payment s to the Virgin Islands and VI employer withholdings are credited against his or her US tax liability.

Section 932 of the IRC provides that the United States will be treated as including the Virgin Islands for purposes of determining the US tax liability of US citizens or residents with Virgin Islands income, and the Virgin Islands will be treated as including the United States for purposes of determining VI tax liability. In effect, this ensures that US citizens who do not reside in the Virgin Islands are not treated as non-resident aliens by the Virgin Islands for tax purposes. IRS Publication 570 – TAX GUIDE FOR INDIVIDUALS WITH INCOME FROM US POSSESSIONS, discusses the filing requirements of VI residents and US residents with VI income.

In addition, taxpayers who fall under §932 of the IRC can exchange Virgin Islands and US real estate free of tax under the like-kind exchange rules of IRC §1031.

TEMPORARY WORKERS. Persons who perform any work in the Virgin Islands receive VI source income and this must pay tax to the Virgin Islands on their VI source income using FORM 8689 as described above.

TAX PROCEDURES FOR NON-RESIDENT ALIEN INDIVIDUALS. Individuals who are not US citizens or residents of the United States or the Virgin Islands must continue to file for FORM 1040NR (See Appendix: Exhibit 4) with the Virgin Islands and pat tax to the Virgin Island on VI income, taking a foreign credit where applicable for the taxes paid.

PUERTO RICO RESIDENTS. US citizens who reside in Puerto Rico and have Virgin Islands or Virgin Islands and US source income must file FORMS 1040 and 8689 with the BIR and the IRS reporting only the Virgin Islands and US source income.

Puerto Rico residents who are resident aliens with Virgin Islands income are required to file FORM 1040 with the BIR. While the law is unclear regarding the filing requirements of Puerto Rico resident aliens with Virgin Islands and US income, the BIR suggests those individuals file FORMS 1040 and 8689 with the BIR and the IRS Philadelphia Service Center.

If the individual also has Puerto Rico income, deductions must be prorated by the percentage of the Virgin Islands and US adjusted gross income to the total adjusted gross income. The individuals are allowed the full personal exemption(s) deduction, however, Puerto Rico residents who work in the Virgin Islands are not entitled to the EARNED INCOME CREDIT.

CORPORATE INCOME TAX

TAX PROCEDURES FOR DOMESTIC AND FOREIGN CORPORATIONS. A domestic corporation for Virgin Islands income tax purposes is one that is organized under the laws of the Virgin Islands. A foreign corporation is one that is not organized in the Virgin Islands, including a corporation organized in the United States. A domestic corporation pays income taxes on its worldwide income to the Virgin Islands, generally using FORM 1120 (See Appendix: Exhibit 5). A foreign corporation pays VI income taxes only on its VI income and its income VI source income and its income effectively connected with a Virgin Islands trade of business, using FORM 1120F (See Appendix: Exhibit 5A). The subchapter S election of corporations organized in the US is not valid in the Virgin Islands, therefore, such corporations are deemed foreign corporations required to file FORM 1120F.

TEN PERCENT SURCHARGE. The Virgin Islands imposes a ten (10) percent surcharge on the total Virgin Islands income tax liability of all corporations, both domestic and foreign. This surcharge was authorized by the US Congress in 1976 and first enacted by the Virgin Islands Legislature for calendar year 1985. It is found in §581, Chapter 16 Title 33 of the Virgin Islands Code. The surcharge is due when regular tax payments (estimated and final) are due. For example, a corporation that falls within the 15 percent bracket under the IRC would owe tax at a 16.5 percent rate (15 percent plus 1.5 percent) and would pay 110 percent of the amount otherwise due under the Internal Revenue Code as estimated tax payments and with the extension request and/or final return. This ten percent surcharge cannot be claimed as a deduction by the corporate taxpayer.

CONSOLIDATED RETURNS. A Virgin Islands corporation cannot file a consolidated income tax return with a related US tax entity.

SALE OF VI REAL PROPERTY BY FOREIGN CORPORATIONS. The Foreign Investment in Real Property Tax Act of 1980 is applicable to foreign corporations owning real property interests in the Virgin Islands, as well as to non-resident alien individuals. Under this Act as applicable to the Virgin Islands, a foreign corporation (or non-resident alien individual) pays tax attributable to gain from the sale of VI real property to the BIR under the terms of §897 of the IRC. IRC §1445 provides for a withholding tax on a disposition of VI real property occurs after January 1, 1985, if the disposition does not meet one of the specific exceptions set out in IRC §1445. US corporations, trusts, and partnerships, but not individuals, are subject to the withholding rules.

Requests for reduced withholding pursuant to the treasury regulations promulgated under IRC §1445, should be directed to Office of the Chief Counsel on St. Thomas at 9601 Estate Thomas, St. Thomas, VI 00802 or St. Croix at 4008 Estate Diamond Plot 7-B, Christiansted, VI 00820-4421.

FOREIGN SALES CORPORATION. The 1984 Tax Equity and Fiscal Responsibility Act and subsequent legislation passed by the Virgin Islands Legislature make the Virgin Islands an attractive location for US exporters desiring to form Foreign Sales Corporation (FSC). US exporters can earn tax-exempt income by using VI FSC to perform some outside the United States that an US company might otherwise perform, such as solicitation and advertising. Special rules allow small exporters to qualify for FSC benefits without meeting all the FSC tests. FSC’s are discussed in more detail on page 29.

RULING REQUIREMENTS FOR CERTAIN OUTBOUND TRANSACTIONS. Section 367 of the IRC, which requires a ruling where a reorganization occurs between a domestic and a foreign subsidiary or parent, must be considered whenever a liquidation, merger, or other form of reorganization occurs between a VI corporation and its foreign subsidiary or parent, including a US corporation. Ruling requests should be directed to the Director of the Virgin Islands Bureau of Internal Revenue at 9601 Estate Thomas, St. Thomas, VI 00802.

PARTNERSHIPS

Virgin Islands partnerships and foreign partnerships within the Virgin Islands income file their FORM 1065 – US PARTNERHIP RETURN OF INCOME with the BIR. If the partnership is engaged in a trade or business in the Virgin Islands, then each member, whether a resident or non-resident of the Virgin Islands, must report his or her share of partnership income to the BIR. If the partnership is created or organized in a jurisdiction other than the Virgin Islands but has VI income, it must file a FORM 1065 and report that income. In such a case the partnership’s resident or non-resident partners must report their share of VI income to the BIR following the filing procedures set out in IRC §932 if they are individuals.

WITHHOLDING FROM WAGES, SOCIAL SECURITY

& UNEMPLOYMENT TAXES

GENERAL RULE. The VI law covering the withholding on wages by employers and remittance to the Virgin Islands Government is the same as the United States as it relates to the dates for remittance, amounts to be remitted, the calculation of withholding amounts, and the notification to employees of the amounts withhold by January 31 of the following year. Taxpayers should consult CIRCULAR E (PUBLICATION 15) for the applicable amounts and dates. The withholding and remittance of social security (FICA) and Federal unemployment taxes (FUTA) also follow the same procedures as the United States.

REMITTANCE OF INCOME TAX WITHHOLDING. Income tax withheld from wages paid for services performed in the Virgin Islands, whether by a VI employer, a US employer or and employer base elsewhere are remitted to the VI Bureau of Internal Revenue. Deposits are made during the quarter as required by Circular E are made to the BIR on FORM 501VI – WITHHOLDING TAX DEPOSIT. FORM 941VI – EMPLOYER’S QUARTERLY WITHHOLDING TAX RETURN must be filed by the last day of the moth following the quarter. At this time, the employer must pay the amount due on the return minus the credit given for any deposits made. IRS FORMS 941 AND 501 CANNOT BE USED FOR THIS PURPOSE. Also, all payments must be made directly to the BIR. There is no procedure in place for deposits to be made to a bank or to the IRS and then transferred to the BIR.

RULES FOR FICA AND FUTA. FICA and FUTA are in force in the Virgin Islands but remitted to the IRS Center, Philadelphia, PA 19255 not to the BIR. IRS Circular SS (PUBLICATION 80) sets out the procedures for handling FICA and FUTA taxes.

FORM W-2 VI AND FORM W-3SS. By January 31, each employer must give a wage and tax statement to each employee who earned wages for services performed in the Virgin Islands during the preceding year. In the Virgin Islands, a special FORM W-2VI MUST BE USED. Similarly, FORM W-3SS also a special form used in the Virgin Islands must be used to transmit COPY FORM A of FORM W-2VI to the SOCIAL SECURITY ADMINISTRATION while COPY 1 must be used to transmit COPY 1 of FORM W-2VI to the BIR.

Self-employed residents of the Virgin Islands must use FORM 1040SS to report self-employment income and pay self-employment tax to the IRS Center, Philadelphia, PA 19255. Form 1040SS may be obtained at the Federal Building, Room 216 Veterans Drive, Charlotte Amalie, St. Thomas, Virgin Islands, 00802, (340) 774-7870 or at both of the BIR offices.

PENSION, PROFIT SHARING AND EMPLOYEE BENEFIT PLANS

The Virgin Islands is considered to be a state for the provisions of the Employee Retirement Income Security Act of 1974. Generally, the IRS must approve a plan falling within the purview of the Act. Additionally, all provisions governing employee benefits are mirrored to the Virgin Islands. For example, a VI employer can set up a “cafeteria plan” under IRC §125 if the plan otherwise qualifies.

CHARITABLE ORGANIZATIONS

TAX-EXEMPT CHARITABLE ORGANIZATIONS. A charitable organization that is a branch of a national charity such as the American Red Cross or the American Lutheran Church does not need to file an application for tax-exempt status with the BIR for recognition as a charitable organization. Such an organization should, however, provide the BIR with a copy of the national organization’s exemption letter from the IRS in order to obtain a letter exempting the organization form certain VI taxes. Other organizations can apply for tax-exempt status under IRC §501(c) (3) by fling FORM 1023. Upon receiving a favorable determination letter, contributions to the organization are deductible as charitable contributions.

Under current practice as developed between the BIR and the IRS, the BIR reviews and forwards each completed Form 1023 to the IRS for final approval to ensure that charitable deductions are allowable to both VI and US contributors. Once the IRS issues a letter granting tax-exempt status, the BIR issues a similar letter granting exemption from certain VI taxes, including the gross receipts tax, excise tax and entertainment tax which are separately discussed in this publication on pages 15 to 20. IRS approval takes four to five months on average but can take longer. FORM 1024 is used to apply for tax exemption by organizations that do no qualify as charities such as business leagues.

Forms 1023 and 1024 may be obtained form the BIR’s Office of Chief Counsel on St. Thomas or St. Croix. Exempt organizations are required to file FORM 990 – RETURN OF ORGANIZATION EXEMPT FORM INCOME TAX with the BIR and the IRS by the 15^th day of the fifth month after the organization’s accounting period ends.

HOMEOWNERS’ ASSOCIATIONS. FORM 1120H is used by homeowners’ associations to request a partial tax exemption and must be filed with the BIR annually. Exemption is automatic with the filing; a letter of approval from the BIR is not issued.

FEDERAL ESTATE TAX

The federal estate tax is not mirrored to the Virgin Islands but is administered by the IRS. Federal estate tax returns are filed with and any taxes owed are paid to the IRS Center, Philadelphia, PA 19255 and not to the Virgin Islands. Federal estate tax is payable by all US estates having a value that exceeds the total of exemptions granted by the IRS. Certain exemptions for non-US situs assets apply to persons who are born or naturalized in the Virgin Islands and who die while resident in the Virgin Islands (or another possession).

VIRGIN ISLANDS INHERITANCE TAXES

Although a Virgin Islands inheritance tax is set out in Chapter 1, Title 33 of the VI Code, effectively all inheritances after 1984 is exempt form taxation. Specifically, under Section 5 of Chapter 1, an inheritance is exempt form the payment of inheritance taxes if the decedent, when living, would have been considered a “a non-resident not a citizen of the United States” under 26 USC §2501(c), if the decedent was a resident of the Virgin Islands, or if the decedent owned property in the Virgin Islands at the time of his or her death. The liberal exemption form inheritance tax applicable when the decedent resided or owned property in the Virgin Islands if effective for inheritances resulting from an individual who died after September 18, 1984.

GIFT TAXES

FEDERAL GIFT TAX. US citizens residing in the Virgin Islands who make gifts in excess of annual exclusion (generally $10,000.00 per recipient) must file a Federal gift tax return with the IRS Center, Philadelphia, PA 19255. Again, a limited exemption may apply for gifts of VI assets by VI residents who were naturalized or born in the Virgin Islands.

VIRGIN ISLANDS GIFT TAX. Similar to the Virgin Island inheritance tax, although Virgin Islands law contains gift tax provisions in Chapter 2, Title 33, VIC, all gifts are effectively exempt form the tax. Specifically, a person is exempt form gift tax if he or she is considered a “non-resident not a citizen of the United States” under 26 USC §2501(c), or if the person was a resident of the Virgin Islands at the time the gift is made. The exemption from gift tax is effective for gifts made after September 18, 1984.

CUSTOM DUTIES

Custom duties in the Virgin Islands are imposed under the US custom law and are administered by the Custom Service, a division of the US Treasury Department. Custom duties are generally imposed at the rate of six percent ad valorem on all articles, good, merchandise and commodities that ate manufactured or those originated outside the territorial sovereignty of the United States and are brought into the Virgin Islands. However, the Virgin Islands Legislature has the authority to reduce the custom duties and has exempted certain tourist and construction items from all custom duties. Certain other exemptions apply including exemptions stemming from Danish law.

MISCELLANEOUS LOCAL INTERNAL REVENUE TAXES

The following local internal revenue taxes are codified in Chapters 3, 4 and 5, Title 33 of the Virgin Islands Code.

GROSS RECEIPTS TAX

IN GENERAL. The Virgin Islands gross receipts tax is a tax on total receipts form the conduct of a business within the Virgin Islands without reduction for cost of goods sold or services or any other expenses. A taxpayer’s tax year for gross receipts tax purposes should generally follow the taxpayer’s fiscal year for income tax purposes.

$5,000.00 – PER-MONTH EXEMPTION. The gross receipts tax falls into the following two categories:

1. Those businesses with annual gross receipts of $150,000 or more and

2. Those businesses with annual gross receipts of less than $150,000.

Businesses in the fist category pay a tax of four (4) percent on their entire gross receipts with businesses in the second category pay a tax of four (4) percent on receipts in excess of $5,000.00 per month. The $5,000.00 per month exemption is lost if not used in one month. For example, a business with gross receipts of $3,000.00 in one month and $7,000.00 in a second month would owe tax on $2,000.00 times four percent, or $80.00, while a business with gross receipts of $5,000.00 in each month would owe no tax.

GROSS RECEIPTS TAX EXEMPTIONS. Commissions earned on sale of VI lottery tickets, gross income of banks, gross income of franchised bus operators, receipts of certain costume jewelry manufacturers and receipts form farming and fishing are not subject to the gross receipts tax. Reverse osmosis water production plant operators may be eligible for a partially exempt form the gross receipts tax. The tax does not apply to premiums on insurance written or on airline tickets but commissions earned by insurance agents and travel agents are subject to the gross receipts tax. Also, Economic Development beneficiaries may be exempt form the gross receipts tax as discussed more fully on pages 28 and 29.

FILING REQUIREMENTS. Businesses with gross receipts of more than $120,000.00 per year are required to file monthly reports of FORM 720VI – GROSS RECEIPTS MONTHLY TAX RETURN.

Such businesses receive gross receipts tax returns from the BIR to pay their gross receipts tax for one year. Businesses with gross receipts of $120,000.00 or less per year are instead required to file an annual report with the BIR by the 30^th day following the last day of the ear concerned on FORM 720B – GROSS RECEIPTS ANNUAL TAX RETURN. For a calendar year business the return is due on January 30 of the following year.

A business that is exempt form payment of the gross receipts tax is required to file a return. Beneficiaries of the territory’s Economic Development Commission Program are required to file FORM 720VI monthly, indicate their gross receipts and write EDC BENEFICIARY EXEMPT across the bottom of the return. Tax-exempt charitable organizations, homeowners’ associations and other entities and individuals that receive business receipts but are not required to pay gross receipts tax should still monthly or annually returns depending on whether or not their actual annual gross receipts exceed $120,000.00.

RELATED ENTITIES OR INDIVIDUALS. Corporation sharing more than 50 percent common ownership businesses owned by the same taxpayer or members of a family and other related businesses only get one $5,000.00 per month exemption for all related businesses and must combine all receipts from all businesses to determine whether the $150,000.00 threshold has been reached.

EXCISE TAX

IN GENERAL. All persons, firms, and corporations doing business in the Virgin Islands except those that are specifically exempted must pay excise tax on all goods, merchandise, or commodities manufactured in or brought into the Virgin Islands for sale or disposition in the course of a trade or business for processing or manufacturing or for any other business purpose. The excise tax is based on the invoice of such merchandise, plus a mark-up of five percent. Rates of tax depend upon the applicable category and range form two percent to twenty-five percent.

Drugs, medicine and clothing are taxes at two percent; tires are taxes at five percent; self-propelled vehicles, firearms, ammunition and bicycles are taxes at ten percent; US beers are taxes at $1.55 per case; foreign beers at $2.08 per case; liquor at $6.00 per case or $2.50 per wine gallon, whichever is greater; cigarettes at 25 percent; tobacco (exclusive of cigars) at 20 percent; some leather goods and perfumes at three percent; rums at $4.70 per case or $1.96 per wine gallon whichever is greater and carbonated drinks at a rate of three percent plus $0.36 per case. Under the Anti-liter and Beautification Act of 1990, the “catch-all” rate for other items is four percent unless and exemption applies.

Contractors doing business in the Virgin Islands on government projects are liable for excise tax on their imports. For equipment imported under a lease or rental agreement for a period of 180 days or fewer, the excise is based on the actual rental charge or on approximate arms-length rental charge.

PAYMENT. Cargo (both foreign and domestic) imported into the Virgin Islands for business purposes is cleared by the US Customs Service and the BIR. An importer is required to pay excise tax on cargo to the BIR at the time of entry unless the importer has a qualifying excise tax bond or rider to its Customs bond. Most merchants have such bond or riders which give them the 15^th day of the following month to pay the BIR. Payment of the excise tax is submitted using FORM 721VI – EXCISE TAX RETURN.

EXEMPTIONS. The importation or manufacture of the following categories of merchandise is exempt from