Board Certified Attorney & CPA
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USVI Taxation

Virgin Islands & Territorial Taxation.

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The United States Virgin Islands & the "Mirror Code"

The United States Virgin Islands (including Saint Thomas, Saint John and Saint Croix) is one of the most unique jurisdictions to practice tax law or engage in tax litigation. Fortunately, Mr. DiRuzzo has the necessary admissions and experience to represent his clients in all aspects of United States Virgin Islands tax law.

Why is the United States Virgin Islands such a unique jurisdiction for tax law and tax litigation? For starters, it is a territory and not a state, and this alone raises highly complex issues of taxation.

The Mirror Code

The United States acquired the United States Virgin Islands from Denmark in 1917, and in 1921 Congress made the income tax laws of the United States applicable to the Virgin Islands with the enactment of the Naval Service Appropriation Act of July 12, 1921, (codified at 48 U.S.C. § 1397) under which the United States income tax laws represent the Virgin Islands income tax laws, with the only difference being that United States Virgin Islands residents pay tax to the United States Virgin Islands rather than to the United States.

In order to effectuate the Naval Service Appropriation Act, the courts have judicially constructed the “Mirror Code” where one substitutes the words “Virgin Islands” to replace “United States” in the Internal Revenue Code. However, there are some provisions of the Internal Revenue Code that are not “mirrored” because they apply in full to the United States Virgin Islands and its residents.

The United States Virgin Islands Residency & Filing Obligations

With the Tax Reform Act of 1986,  Congress enacted I.R.C. § 932, which draws a clear distinction between individuals who are bona fide United States Virgin Islands residents and those who are not. A United States resident who derives income from the United States Virgin Islands, but who is not a bona fide United States Virgin Islands resident, must file two tax returns, one with the IRS and the other with the Virgin Islands Bureau of Internal Revenue. I.R.C. § 932(a). Such individuals pay tax on United States Virgin Islands source income to the United States Virgin Islands and tax on non-United States Virgin Islands source income to the IRS. I.R.C. § 932(b). In contrast, a bona fide United States Virgin Islands resident files a return only with the Virgin Islands Bureau of Internal Revenue and pays tax on all income, regardless of its source, to the United States Virgin Islands. I.R.C. § 932(c). By paying the Virgin Islands Bureau of Internal Revenue the tax on all worldwide income, a bona fide United States Virgin Islands resident is relieved of any income tax liability to the United States, even on non-United States Virgin Islands source income.

The United States Virgin Islands Tax SALT (“State and Local Tax”) Compliance

In addition to taxes imposed by application of the Internal Revenue Code to the United States Virgin Islands, there are various local level tax compliance obligations and tax liabilities that individuals and business may be subject to in the United States Virgin Islands.  For example, Section 43 of Title 33 to the United States Virgin Islands Code (“V.I.C.”) imposes a Gross Receipts Tax (in contrast to income taxes) upon every individual, firm, corporation and other association doing business in the United States Virgin Islands.

The United States Virgin Islands Economic Development Program

The tax laws applicable to the United States Virgin Islands have also permitted the United States Virgin Islands to reduce the tax liability of certain United States Virgin Islands taxpayers. Since 1921 the policy has stood in order to promote investment in, and the economic development of, the United States Virgin Islands. This policy was again congressionally endorsed with the enactment of I.R.C. § 934 in 1960, which authorized the United States Virgin Islands to reduce the tax owed to it.

In the 1960’s the United States Virgin Islands created the Economic Development Program to attract business-people to establish new businesses in the United States Virgin Islands. The United States Virgin Islands then created the Economic Development Commission (“EDC”) to oversee the Economic Development Program. The Economic Development Program presents an opportunity for approved beneficiaries to receive a ninety percent (90%) income tax credit, pursuant to I.R.C. § 934.

Numerous taxpayers have moved to the United States Virgin Islands to participate in the Economic Development Program, and many have come under heightened IRS scrutiny as a result. Mr. DiRuzzo routinely represent clients in matters involving tax law and tax litigation against the IRS and Virgin Islands Bureau of Internal Revenue resulting from the United States Virgin Islands Economic Development Program.