Retailers or vendors that incorporate in the U.S. Virgin Islands and base servers in a technology park there can save up to 90% on their corporate income taxes. However, the deal only makes sense for those with big profits says one source on the project.
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The U.S. Virgin Islands conjures up images of white beaches, blue skies and soft Caribbean breezes. Now, for e-commerce companies, the Virgin Islands also can mean significant tax breaks.

Tortola_Road_Town_PanCompanies that deliver digital content or services through servers based in a technology park in St. Croix, part of the U.S. Virgin Islands, can save up to 90% on their federal and state income taxes. With the federal corporate income tax as high as 35% of profits, and several states raising state income taxes during the recession, that can mean a reduction from around a 40% tax rate to about a 4% rate, says Steve Rohrlick, chief marketing officer and channel manager for eCommerce Island, a company that markets the benefits of locating in the U.S. Virgin Islands Research and Technology Park in St. Croix.

What’s more there is plenty of broadband network capacity, as a Global Crossing undersea fiber-optic cable makes landfall at St. Croix. In fact, the technology park is located within Global Crossing facilities on the island that have been certified by the U.S. National Security Agency because of the military and government uses of that Global Crossing network.

The U.S. Virgin Islands have long offered tax breaks to manufacturing companies as a way to lure business to the territory and that has been extended in recent years to companies that sell digital content or deliver web-based services, Rohrlick says. In April 2008, the U.S. Internal Revenue Service issued a ruling that online retailers selling software or vendors offering Internet-based services, including software-as-a-service e-commerce technology vendors, from within the Virgin Islands would pay income taxes to the Virgin Islands, and not the IRS. The Virgin Islands, hoping to lure e-commerce companies, has offered a 15-year tax holiday on up to 90% of corporate income taxes to companies that place servers in the St. Croix technology park, Rohrlick says.

He says eCommerce Island has only begun publicizing these tax breaks recently after lining up several service providers, such as Adveniat Corp. for web hosting and JetPay for payment processing. To qualify for the tax breaks, he says, a company must set up a subsidiary in the U.S. Virgin Islands and place servers in the technology park. Those two steps are designed to ensure that any transaction conducted through those servers would qualify for the Virgin Islands tax break, and not be subject to claims by the U.S. government or any of the 50 states.

Six companies have signed contracts so far and two more are before a Virgin Islands governing board for approval, Rohrlick says. He says a company can figure that operating servers in the Virgin Islands will cost 15-25% more than in the mainland U.S., and that typically a company must anticipate future profits of at least $500,000 to $1 million per year for the tax break to outweigh the costs. “It only makes sense for companies of a certain size that are profitable,” he says. “The only reason to spend a little more on operating expenses is if it would be offset by what you pay in taxes.”

The U.S. Virgin Islands is particularly appealing these days as other countries that offer tax benefits, such as Switzerland, Ireland and Singapore, have come under increased scrutiny, says Eric Ryan, a partner in the DLA Piper law firm who represents the government of the U.S. Virgin Islands. “They are us,” Ryan says of the U.S. Virgin Islands. “It’s the only place where U.S. commercial law prevails, and yet it’s a tax haven.”

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