TAX STRUCTURE OF THE UNITED
Gizette L. Thomas
John P. deJongh, Jr.
T A B L E O F C O N T E N T S
Organization of the
Income Tax Laws in Effect
General Principles 4
Individual Income Tax 8
Corporate Income Tax 10
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
booklet is issued to provide generalized information concerning income and
other taxes of the
TAX STRUCTURE OF THE UNITED STATES
VIRGIN ISLANDS booklet has been prepared by the
contact information for the BIR for
9601 Estate Thomas
(340) 774-5865 – TELEPHONE
(340) 714-9345 – FAX
The contact information for
the BIR for
4008 Estate Diamond Plot 7-B
(340) 773-1040 – TELEPHONE
(340) 773-1006 – FAX
OF THE VIRGIN
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
Legislature power of the
non-voting delegate, who is elected by
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
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.
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
INCOME TAX LAWS IN EFFECT IN THE
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.
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
principles underscore the application of the IRC to the
SIGNIFICANT CHANGES MADE BY THE TAX REFORM ACT OF 1986
Tax Reform Act of 1986 (TRA) made several changes to the income tax laws
applicable to the
TRA allowed the
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)).
TRA extended the benefits of §936 of the IRC – the POSSESSIONS CORPORATION TAX CREDIT – to qualifying
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.
the IRC, Treasury Regulations, IRS Revenue Rulings and IRS Revenue Procedures
All references to the District
Director or to the Commissioner of Internal Revenue should be interpreted to
mean the Director of the
statutory notice of deficiency (a 90-day letter) issued in cases where
agreement on income tax matters is not reached.
Processing and Returns Branch for
all three islands is centrally located on
Computer Operations Branch is
responsible for the automated processing of all tax information on computer
systems located on both
The Audit Branch
has agents on
Delinquent Accounts and Returns Branch
is responsible for the collection of all unpaid internal revenue taxes of the
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
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 (
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
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
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
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.
the individual also has
CORPORATE INCOME TAX
TAX PROCEDURES FOR DOMESTIC AND FOREIGN
CORPORATIONS. A domestic corporation for
TEN PERCENT SURCHARGE. The
CONSOLIDATED RETURNS. A
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
RULING REQUIREMENTS FOR CERTAIN OUTBOUND
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
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
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
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
TAX-EXEMPT CHARITABLE ORGANIZATIONS. A charitable organization that
is a branch of a national charity such as the American Red Cross or the
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.
1023 and 1024 may be obtained form the BIR’s Office of Chief Counsel on
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
federal estate tax is not mirrored to the
VIRGIN ISLANDS INHERITANCE TAXES
FEDERAL GIFT TAX.
duties in the
MISCELLANEOUS LOCAL INTERNAL REVENUE TAXES
following local internal revenue taxes are codified in Chapters 3, 4 and 5,
Title 33 of the
GROSS RECEIPTS TAX
IN GENERAL. The
$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 30th 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.
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.
doing business in the
(both foreign and domestic) imported into the
EXEMPTIONS. The importation or manufacture of the following categories of merchandise is exempt from the VI excise tax: certain educational materials including books; most food stuff; coal; fuel oil; molasses used in the production of rum, animal and poultry feed; commercial fertilizers; motor vehicles requiring licensing for highway use; goods, merchandise and commodities brought into the Virgin Islands for disposition in the course of export trade; and certain sales to the US or VI Government. Certain specific tourist and construction items are exempt form excise taxes as well as from customs duties.
Importers of exempt items are required to complete FORM 721-TC – VI NON-TAXABLE EXCISE TAX RETURN for items exempted pursuant to Bill No. 14-0411 (Tourist and Construction Items) or FORM 721 EP VI – NON-TAXABLE EXCISE RETURN for items not exempted under Bill No. 14-0411.
HOTEL ROOM TAX
HIGHWAY USER’S TAX
highway user’s tax is imposed in the
Automobiles that are imported for use as taxicabs are exempt from the imposition of the highway user’s tax. However, when such a vehicle is first registered in the Virgin Islands as a private vehicle, the person registering and licensing the vehicle must pay the highway user’s tax no mater what period of time has elapsed since the vehicle was imported for use as a taxicab. Qualified charitable organizations are granted an exemption from the tax on up two motor vehicles at a time.
A five percent tax is imposed on the gross receipts derived form performances and entertainment including theatrical performances, motion pictures, boxing matches, circuses and concerts but not dances. However, no tax is imposed where the performance or entertainment is sponsored by a recognized religious, charitable, civic, educational or other organization not giving or promoting the performance or entertainment for profit. Also no tax is imposed on businesses that pay VI gross receipts tax on their receipts form the performance or entertainment.
The entertainment tax is dire the business day following the performance or entertainment if a BIR employee is no assigned to collect the tax at the performance or entertainment. The entertainment tax should be reported using FORM 720-ENT – ENTERTAINMENT TAX RETURN.
tax of 14 cents per gallon is imposed upon sale of gasoline and diesel fuel
manufactured, sold or consumed in the
Fuel sold to the Virgin Islands Government or fuel used to fuel aircraft, motorboats, yachts, or any other motor vehicle not operating on the public highways or for industrial or other purposes not connected with the fueling of motor vehicles is exempt form this tax.
TELEPHONIC LONG DISTANCE TAX
The surtax shall be paid by the company and not separately listed on the customer’s bill. The surtax is filed on forms provided by the BIR and is due within 30 days following the last of the calendar month concerned.
following taxes are codified in Chapter 21 Title 32 of the
GROSS REVENUE TAX
INVESTMENT ALTERNATIVE TAX
An investment alternative tax is imposed on the gross revenue of a casino licensee. The tax, in the amount of 2.5 percent of gross revenue is due within 30 days following the last day of the fiscal year. Casino licensees must make partial payment of the investment alternative tax to the BIR on or before the 15th day of the first, fourth, seventh and tenth month of each year. The amount of the partial payment is determined by calculating 1.25% of the estimated gross revenues for the three months period immediately preceding the fist day of the due date months. Casino licensees are exempt from paying the investment alternative tax on gross revenues received during the fist fiscal year. An investment tax credit against the investment alternative tax is available for casino licensees who purchase bonds issued by the Casino Reinvestment Development Authority or who make approved eligible investments.
LOCAL TAXES NOT ADMINISTERED BY THE
following local taxes and fees are administered by offices other than the
REAL PROPERTY TAX
property tax is generally lower in the
Property used solely for farming with sales to the public is entitled to a 95 percent exemption.
Lieutenant Governor’s Office is responsible for the administration of the real
property tax. Inquiries may be directed
to the Office of the Lieutenant Governor, Tax Assessor’s Office, #18 Kongens
Every corporation organized under the laws of the Virgin Islands and every foreign corporation qualified to do business in the Virgin Islands is required to pay by June 30th of each year a franchise tax of $1.50 for each one thousand dollars of capital stock used in conducting business in the Virgin Islands with the minimum payment of $150.00.
Pursuant to Chapter 5, Title 13 of the
Foreign Sales Corporation (FSC) franchise taxes range form $400.00 for a small FSC to up to $25,000.00 for a FSC having gross receipts in excess of $500 million a year. However, a FSC may reduce its franchise tax liability by an amount equal to 50 percent of the wages paid in the previous year to VI resident employees up to a maximum reduction of 50 percent of the franchise tax liability per year.
regarding the franchise tax should be directed to Office of the Lieutenant
Governor, Corporation Division, 52E-1 Estate Thomas,
Every individual, partnership, firm or corporation engaged in any profession, trade and craft, business or occupation must obtain an annual license form the Department of Licensing and Consumer Affairs, Property and Procurement Building, #1 Subbase Room 205, St. Thomas, VI 00802, (340) 774-3130 or Golden Rock Shopping Center, Christiansted, VI 00820, (340) 773-2226 and pay a fee for the license. The details and costs may be found in Chapter 9, Title 27 of the VI Code.
As part of the Virgin Islands Government Stop Tax Evasion Program (STEP), in order to get a new or renewal license, the taxpayer must complete and file FORM LIC1 – APPLICATION FOR TAX FILING AND PAYMENT STATUS REPORT – LICENSING with BIR and receive a favorable tax filing and payment status report letter. Every individual, partnership, firm or corporation applying for a Coastal Zone Management Permit form the Virgin Islands Department of Planning and Natural Resources must complete and file FORM CZM – APPLICATION FOR TAX FILING AND PAYMENT STATUS REPORT – CZM with the BIR and similarly obtain a favorable report letter.
stamp tax of two percent of the value of the property being transferred is
imposed by the
are sold by the Recorder of Deeds in the Office of the Lieutenant Governor, at
#18 Kongens Gade,
Compensation is mandatory for every employer of one or more employees in the
Further information can be obtained form the Department of Finance, Government Insurance Fund, 76 Kronprindsens Gade, St. Thomas, VI 00802, (340) 774-4750 Ext. 2255 or the Department of Finance, Government Insurance Fund, 4008 Estate Diamond Lot 48, Christiansted, VI 00820-4421, (340) 773-1105.
SPECIAL AIDS TO BUSINESSES
ECONOMIC DEVELOPMENT PROGRAM
Development benefits are granted to certain businesses that locate in the
Beneficiaries may be exempted form such Virgin Islands taxes as real property taxes, gross receipts taxes and certain excise taxes. Specifically, a beneficiary is exempt form excise taxes on (i) building materials, machinery, equipment and supplies for use in construction of the physical plant and (ii) raw materials and component parts brought into the Virgin Islands for the purpose of producing, creating or assembling an article, good or commodity as a result of industrial or manufacturing processing of such raw materials and component parts. In addition, beneficiaries may receive a reduction of up to 90 percent of income taxes and reduced withholding tax rates on dividend and interest payments. Finally, beneficiaries may be subject to reduced customs duties on the importation of raw materials.
To qualify fir benefits, the business must generally be engaged in assembly, processing of raw materials or products, manufacturing, agriculture, mariculture, transportation, utilities, hotel or guest house operations, recreation or be a designated service business serving customers outside the Virgin Islands.
FOREIGN SALES CORPORATION
enacted by the
are exempt form payment of income tax and form the locally enacted gross
receipts, excise tax and custom duties.
In addition, FSCs are exempt from the withholding provisions of §§1441
and 1442 of the IRC as they apply in the
order for a FSC to receive the above exemptions, it must hold both directors
and shareholders meeting in shareholders meeting in the
Information on the US Virgin Islands as a location for FSC is available from the Lieutenant Governor’s Office, #18 Kongens Gade, St. Thomas, VI 00802, (340) 774-2991.
US Virgin Islands Exempt Companies Act of 1986, located in Chapter 14, Title 13
of the VI Code is authorized under § 934 (b)(1) and §934(b)(3) of the IRC and
became operation in February 1987, with the signing of the Tax Implementation
Agreement between the United States and the Virgin Islands. Under this Act, foreign owned companies with
EXEMPT INTERNATIONAL BANKING FACILITIES
exempt international banking facilities are authorized under §934(b)(1) of the
IRC. Chapter 21, Title 9 of the VI Code
provides complete tax exemption for exempt international banking facilities
except for a $1000.00 annual franchise tax and a $4,000.00 annual license fee. These banks may generally carry out the same
activities as other VI banks except that they may no serve VI persons. Like other exempt companies, they must have
less than 10 percent
that underwrite insurance or conduct reinsurance business with respect to risks
that are situated exclusively outside the