With less than a month to spare, Premier Dr. Orlando Smith on Tuesday announced Cabinet’s approval of a draft law designed to keep the Virgin Islands off a European Union blacklist set to take effect early next year.
“It is planned that the House of Assembly will be asked to consider the new legislation at the sitting [next Thursday], with the intention that the legislation will be in force by Dec. 31, the deadline set by the European Union,” Dr. Smith promised, adding that the government has been in discussions with the EU on the effort for the past 18 months.
The territory, however, has fallen behind other offshore jurisdictions scrambling to avoid the blacklist, and passing the law in time will require urgent consultations with financial services stakeholders and unusually quick action from a fractured House of Assembly.
BVI Finance Limited — the largely government-funded private organisation tasked with promoting the financial sector — circulated the draft to industry professionals on Tuesday, though it hasn’t yet been provided to the general public.
Government and industry officials alike have said that the law is needed to protect financial services — which bring in some 60 percent of government’s revenue — from the reputational damage that would come with inclusion on the EU blacklist of jurisdictions that allegedly don’t meet certain anti-tax-avoidance standards.
However, the law itself is also expected to negatively affect the territory’s incorporation business, which is the backbone of the financial industry here.
The extent of that impact still remains unclear.
Robert Briant, a partner at the law firm Conyers Dill & Pearman’s VI office, was still reviewing the law on Tuesday afternoon, but he said it appeared to be in line with the expectations of industry stakeholders, who have been closely monitoring similar drafts circulated in other offshore jurisdictions affected by the EU mandate.
“Its effect on business in the BVI will be negative, and the question is how negative,” said Mr. Briant, who nevertheless agreed that the law is needed because he believes any disadvantages would be heavily outweighed by the negative effects of blacklisting.
The bill would require many of the approximately 400,000 companies registered in the territory to demonstrate “economic substance” — a loosely defined term that VI leaders and others have criticised — but Mr. Briant said it is difficult to estimate how many entities would be hit by that requirement or how many of the ones that are affected might decide to take their business elsewhere.
In spite of such pressures, Neil Smith, the executive director of government’s Office of International Business (Regulations), agreed that the effects of not passing the law would be much worse.
A blacklisting “has the potential to be quite devastating,” he said, explaining that the draft law would negatively affect the industry “but it wouldn’t be catastrophic.”
Estimates suggest that inclusion on the blacklist could lead to a 20 to 80 percent drop in financial services business in the territory, according to Mr. Smith.
“The legislation we pass, if successful, would mitigate that to 10 or 20 percent,” he added.
BVI Finance Limited Chairman Ken Morgan said that the agency agrees that the legislation is needed. Being blacklisted, he explained, could have “very detrimental effects” in terms of VI companies’ ability to enter into contractual agreements, conduct banking and carry out other business on the global stage.
Messrs. Morgan and Smith both said that the law could create opportunities for diversifying the financial sector.
“Obviously the industry is changing, and we’ve said for years that the old incorporation bubble that has served the BVI so well for so many years is a changing thing,” Mr. Morgan said, adding, “I think there are going to be a lot of opportunities providing we create the right framework here in the BVI in terms of the labour market and the ability to do business here.”
Passing the legislation by the Dec. 31 deadline is contingent on unusually fast work by a fractured HOA, where recent defections mean the government has a slim majority of seven to five.
Meanwhile, other jurisdictions, which are also affected by the EU requirement, have pulled ahead of the VI.
In the Cayman Islands, for example, a draft law was released in early October, and consultations followed. In Jersey, initial proposals were published in August, with subsequent consultations leading up to the legislature’s debate on the law this week.
Here, Cabinet did not approve a payment to a United Kingdom lawyer to draft the legislation until Sept. 12, and no open industry-wide consultation has been held.
Nevertheless, Mr. Smith said that the VI government has done its best, explaining that the EU didn’t define “economic substance” until summer.
“We weren’t able to consult as we would have liked to because of the tight timelines,” he said. “We did consult with industry, but just not the whole industry. … We have people we know from various sectors and we consulted with those.”
He added that the government does “everything in its power” to protect the industry.
“Sometimes protecting the industry means that you can’t necessarily allow them to operate as they currently do,” he said.
Mr. Morgan, the BVI Finance chairman, said BVIF has been working closely with government and the private sector on the ongoing efforts and is comfortable with the level of consultations carried out.
Even if the law is passed in the VI by the Dec. 31 deadline, the territory might not stay off the blacklist.
Though VI government officials have been meeting regularly with EU “technical people” as they hash out the way forward, the final decision rests with EU member states, Mr. Smith explained.
“The technical group we speak to cannot be 100 percent sure that the member states will agree,” he said.
In a Tuesday statement, Dr. Smith stressed the government’s collaboration with the EU and explained the draft law’s origins.
“The EU is compiling a list of non-cooperative jurisdictions on the basis of certain criteria it has set covering tax transparency, fair taxation and compliance with the [Organisation for Economic Cooperation and Development’s] Base Erosion and Profit Shifting (BEPS) requirements,” he explained.
As part of that process, the organisation screened 92 countries last year, including large nations such as the United States and China. Following an extension due to Hurricane Irma, the EU accepted the VI’s commitment to comply in March, Dr. Smith said.
The same month, EU finance ministers decided to place the VI on a “grey list” of jurisdictions they believe don’t abide by the continent’s anti-tax-avoidance standards.
The ministers have given the territory until the end of the year to address their concerns or face a full blacklisting.
Exact sanctions for blacklist members haven’t been decided by EU member states, but discussions are under way and they reportedly are expected to be finalised by the end of the year.
The VI currently meets EU criteria when it comes to transparency, anti-BEPS measures and the general principles of “fair taxation,” the premier explained.
“However, the EU required further assurances from the BVI and other low- or zero-corporate-income-tax jurisdictions, including Bermuda, the Cayman Islands and the Crown dependencies, on the issue of ‘economic substance,’” he said.
The draft law would therefore introduce “economic substance” requirements for all companies and limited partnerships that are registered and tax resident in the VI.
Under the law, the premier explained, corporate service providers registering a company “that falls under the scope of the legislation will have to know where the company or limited partnership is tax resident and must be ready to relay that information” to VI authorities.
If a company or LP is tax resident here, the premier added, “it must demonstrate ‘economic substance’” — and will “have the opportunity to upskill those who work in the financial services sector through providing value-added services and increased sophistication of the sector.”
Such entities also would be required to carry out “core income generating activities” in the territory, he explained.
A version of this article originally appeared in the Dec. 6, 2018 print edition.