New Tax Break for Virgin Islands Service Income: "REVIVE VI Act" Aims to Boost Local Economy

The "What"

The "Restore Economic Vitality and Investment in the Virgin Islands Act," or "REVIVE VI Act," changes the tax rules for certain income earned in the U.S. Virgin Islands. Specifically, it excludes some service income earned there from being counted as "global intangible low-taxed income" (GILTI) for tax purposes. The goal is to encourage businesses to invest and create jobs in the Virgin Islands by offering this tax break.

Island Time, Tax Time

This bill is all about tweaking the tax code to give the Virgin Islands a potential economic boost. It does this by making it more attractive, tax-wise, for certain businesses to operate there. Here’s the deal: If a company’s income meets the definition of "Qualified Virgin Islands Services Income," it won't be included when calculating GILTI. This means less of that income is subject to U.S. taxes.

To qualify, the income has to be:

• Payment for work done in the Virgin Islands by a corporation set up under VI law (SEC. 2 (a)(1)(A)).
• Directly from services performed inside the Virgin Islands by people working for that corporation (SEC. 2 (a)(1)(B)).
• Connected to a real business operating within the Virgin Islands (SEC. 2 (a)(1)(C)).

So, a software developer based in St. Thomas, working for a company incorporated in the Virgin Islands, and providing services to that company? Their income could qualify. A stateside consultant flying in for a week? Probably not.

Who Benefits, and How?

This bill aims to help:

• Corporations operating in the Virgin Islands: They could see a lower tax bill, making the VI a more appealing place to do business.
• The Virgin Islands economy: More business activity could mean more jobs and overall economic growth.
• Virgin Islands residents: More jobs and a stronger economy are the intended ripple effects.
• Certain U.S. shareholders: If they own part of a foreign corporation that earns this type of income in the VI, they might see a tax benefit, too. But, there's a catch – they had to have acquired their interest in the foreign corporation before December 31, 2023 (SEC. 2 (a)(2)(B)). This likely targets existing investors rather than incentivizing new ones to jump in solely for this tax break.

The Fine Print (and Potential Pitfalls)

While the goal is to help the Virgin Islands, there’s always the risk of loopholes. The bill does tell the Secretary to create rules to prevent abuse (SEC. 2 (b)). Think of it like this: the bill sets up a new lane on the highway, but the Secretary is supposed to put up guardrails to keep people from driving off-road to cheat the system. For example, a company shouldn't be able to just set up a shell corporation in the VI to funnel money through and avoid taxes. The effectiveness of those "guardrails" will be key.

These changes kick in for tax years starting after this bill becomes law (SEC. 2 (c)). So, if it passes in 2024, the changes would likely start affecting tax calculations in 2025. The complex nature of these tax code changes makes it hard to know the exact impact, but the intent is clear: make the Virgin Islands a more attractive place for certain kinds of business, and boost the local economy in the process.