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Tax Incentives: How Do They Work?

To demonstrate how the U.S. Virgin Islands' tax exemptions apply, consider the hypothetical scenario of Sunseeker, Inc. Sunseeker, Inc. is a manufacturing company doing business exclusively in the USVI with annual sales of $1 million, which is a U.S. subsidiary of a U.S. corporation.  Sunseeker, Inc. exports its products to the United States and utilizes foreign components and parts. 

Sunseeker, Inc's Benefits

1. Gross Receipts Tax Exemption

Annual Gross Sales $1,000,000
Tax Due (at a 5% rate) $50,000
100% Gross Receipts Exemption

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).


2. Property Tax Exemption

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

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.


3. Excise Tax Exemption

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

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.


4. Reduction of U.S. Virgin Islands Customs Duties

Landed Cost for Foreign (non-US) items $150,000
U.S. Virgin Islands Customs Duties Due (6%) $9,000
Beneficiary's Liability at 1% Rate $1,500
Virgin Islands Customs Duty Reduction 

The Customs duty reduction applies to raw materials and component parts imported into the U.S. Virgin Islands from non-U.S. sources for the purpose of producing, creating or assembling an article. No customs duty applies to such materials and parts imported into the U.S. Virgin Islands from U.S. sources.


5. Duty-Free Imports into the United States

Landed Cost for Foreign (non-US) items $150,000
US Customs Duty (assuming an avg. of 70%) $10,500
US Customs Duty Reduction

Under General Note 3(a)(iv) of the U.S. Customs Law, items manufactured or produced in the U.S. 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.


6. Income Tax

Annual Gross Sales $1,000,000
Deducted Business Expenses $800,000
Taxable Income $200,000
Tax on $200,000 Taxable Income $42,000
Corporate Surcharge (10%) $4,200
Total Tax $46,200
90% Reduction $41,580
Net Tax (Effective Tax Rate of 2.31%) $4,620

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.

How the Sunseeker Scenario Adds Up

U.S. Virgin Islands Benefits

Net Tax (effective tax rate of 2.31%) $4,620
Gross Receipts Tax Exemption (100%) $50,000
Property Tax Exemption (100%) $2,250
Excise Tax Exemption (100%) $12,600
U.S. Virgin Islands Customs Duty Reduction $7,500
Duty Free Imports into the U.S. customs duty reduction $10,500
U.S. Virgin Islands Income Tax Reduction (90%) $41,580


NOTE: Corporate income tax rate reduced to 21% (from brackets with a maximum tax rate of 35%) and alternative minimum tax repealed from January 1, 2018.