General Information - Tax Incentives: How Do They Work?
To demonstrate how the Virgin Islands' tax exemptions and other investment incentives apply, consider the hypothetical scenario of Sunseeker, Inc. Sunseeker, Inc. is a manufacturing company doing business exclusively in the Virgin Islands with annual sales of $1 million, which is a U.S. subsidiary of a U.S. corporation and has made an election to be a qualifying possession corporation with the Internal Revenue Service under section 936 of the IRC. Sunseeker, Inc. exports its products to the United States and utilizes foreign components and parts.
Sunseeker, Inc.'s Benefits for Tax Year 2007 |
| 1. Gross Receipts Tax Exemption: |
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| Annual gross sales | $1,000,000 |
| Tax Due (at a percent rate) | $40,000 |
| 100% gross receipts exemption | $40,000 |
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| This exemption does not extend to the gross receipts of businesses operated by concessions on the premises of beneficiaries, and may be further narrowed in a beneficiary's contract with the Economic Development Commission (EDC). |
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| 2. Property Tax Exemption: |
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| Real property market value (land, buildings) | $300,000 |
| Assessed value (60% market value) | $180,000 |
| Tax due (1.25% assessed value) | $2,250 |
| 100% property tax exemption | $2,250 |
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| The real property tax exemption applies only to the property owned by the beneficiary and used in the specific business or industry for which an Economic Development Contract has been granted. |
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| 3. Excise Tax Exemption: |
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Value of imported materials, components
| $300,000 |
| Excise tax assessed on 1.05% market value | $315,000 |
| Excise tax imposed (4% for most items) | $12,600 |
| 100% excise tax exemption | $12,600 |
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| The excise tax exemption applies to equipment, raw materials and component parts used for manufacturing or assembling a product and to building materials, machinery and equipment for use in constructing the beneficiary's physical plant. Other items used by a beneficiary, such as hotel furnishings, are not exempt from excise tax. |
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| 4. Reduction of Virgin Islands Customs Duties: |
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Landed cost for foreign (non-U.S.) items
| $150,000 |
| Virgin Islands customs duties due (6%) | $9,000 |
| Beneficiary's liability at 1% rate | $1,500 |
| Virgin Islands customs duty reduction | $7,500 |
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| The Customs duty reduction applies to raw materials and component parts imported into the Virgin Islands from non-U.S. sources for thc purpose of producing, creating or assembling an article. No customs duty applies to such materials and parts imported into the Virgin Islands from U.S. sources. |
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| 5. Duty-Free Imports into the United States |
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| Landed cost for foreign (non-U.S.) items | $150,000 |
| U.S. customs duty (assuming an avg of 70%) | $10,500 |
U.S. customs duty reduction | $10,500 |
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| Under General Note 3(a)(iv) of the U.S. Customs Law, items manufactured or produced in the Virgin Islands for export to the United States may contain up to 70% of the finished product (50% for textiles, apparel and leather) on foreign materials, components, or parts and avoid U.S. customs duties. |
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| 6. Income Tax: |
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| U.S. customs duty reduction | $10,500 |
| Annual gross sales | $1,000,000 |
| Deducted business expenses | $800,000 |
| Tax on $200,000 taxable income | $61,250 |
| Corporate surcharge(10%) | $6,125 |
| Total tax | $67,375 |
| 90% reduction | $60,638 |
| Net tax (Effective tax rate of 3.37%) | $6,737 |
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| A 90% exemption also applies to the individual income tax liability of V.I. resident stockholders on income derived from dividends of the corporation or, for S corporation or partnership distributions. |
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| How the Sunseeker Scenario Adds Up |
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| Virgin Islands Benefits: |
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| Net tax (Effective tax rate of 3.37%) | $6,737 |
| Gross receipts tax exemption (100%) | $40,000 |
| Property tax exemption (100%) | $2,250 |
| Excise tax exemption (100%) | $12,600 |
| Virgin Islands customs duty reduction | $7,500 |
| Virgin Islands income tax exemption (90%) | $60,638 |
| Total | $122,988 |
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| U.S. Benefits: |
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| U.S. customs duty exemption | $10,500 |
IRC Section 936 reduction in U.S.
Corporate Income Taxes (2007 ) | $25,975 |
| Total | $36,475 |
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Note:
Calculated on $193,263 in net income after taxes, minus 4% withholding tax (or $7,730) on dividends paid to U.S. parent corporation with 35% corporate income tax bracket. |
