In hopes of avoiding a European Union blacklist, the House of Assembly spent several hours in closed-door committee discussions this week to fine-tune the Economic Substance (Companies and Limited Partnerships) Act.
By press time today, legislators were still in committee and no announcement had been made about whether the act had passed.
Government and industry officials alike have said that the law is needed to protect financial services from the reputational damage that would come with inclusion on the EU blacklist of jurisdictions that allegedly don’t meet various anti-tax-avoidance standards.
But the law itself, which would introduce “economic substance” requirements for all companies and limited partnerships that are registered and tax resident in the Virgin Islands, is also expected to negatively impact the territory’s incorporation business, though it remains unclear to what extent.
Every HOA member who provided a contribution during this week’s sitting grudgingly voiced support for the act, but most also expressed serious concerns about the future of the financial services industry in the territory.
More than one lawmaker called the EU’s Dec. 31 deadline a bullying tactic.
“Why do we keep trying to please these people?” opposition member Archibald Christian (R-at large) asked the House. “But we have no choice. If our children and their children and their children are to survive, this is the road we have to travel for now.”
Another new opposition member, Ronnie Skelton, took the description one step further.
“You get the feeling that this is another form of slavery — economic slavery, which has been here for a while — but this one is basically one to send you back into the dark ages,” he said.
According to one section of the act, a legal entity (other than a pure equity holding entity) is considered to be in compliance with “economic substance requirements” with regard to the “nature and scale of the relevant activity” if there are an “adequate number of suitably qualified employees in relation to that activity who are physically present” in the territory and there are “physical offices or premises as may be appropriate for the BVI core income-generating activities,” among other stipulations.
Legislators and financial services stakeholders have said it’s difficult to determine what percentage of the approximately 400,000 companies registered in the territory will be affected by those mandates.
In any case, opposition member Julian Fraser (R-D3) and others said on Tuesday that many of the requirements are unrealistic for the VI.
“You would learn [from the act] that economic substance is actually the setting up of headquarters in the BVI for these companies that we have registered,” he said. “And those headquarters are not just an individual sitting behind a desk: They are actually supposed to perform. Will that ever happen? Can you see that happening, Madam Speaker?”
Mr. Fraser added that the law’s language concerning economic substance is too vague.
“No one in the public … knows exactly what this is all about,” he said. “And I would say [that is] due to no fault of the government’s, because it’s sad to say that I don’t think the government even knows what it’s all about.”
While it may be too soon to measure the true impact of the act, many HOA members spoke in decidedly negative terms.
“You could almost call this a category five economic storm potentially, if we don’t do what we need to do,” Mr. Christian said.
Communications and Works Minister Mark Vanterpool also labelled the EU as “bullying” the VI and other jurisdictions affected by the requirements, and said Premier Dr. Orlando Smith has been very concerned over the potential blacklisting.
“[This] is probably the first time I’ve seen him so worried in his attempt to address this matter — or any other matter,” Mr. Vanterpool said.
For his part, Deputy Premier Dr. Kedrick Pickering described the EU as “tightening the noose around our neck.”
Some legislators saw a silver lining, however.
Health and Social Development Minister Marlon Penn said members of the public need to be educated and informed about the “potential fallout” after this legislation, but also for the potential opportunities that could arise.
“[It’s] an opportunity to strengthen the BVI’s brand, an opportunity to be able to be there when the pendulum swings to the other side — with our people,” he said.
Earlier this month, Robert Briant, a partner at the law firm Conyers Dill & Pearman’s VI office, said the law 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.
Despite the VI’s attempts to stay off the blacklist, there’s no guarantee it will succeed.
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, according to Neil Smith, the executive director of government’s Office of International Business (Regulations).
“The technical group we speak to cannot be 100 percent sure that the member states will agree,” he said earlier this month.
In March, 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 are reportedly expected to be finalised by the end of the year.