RT Park having trouble competing with P.R.
Published: August 12, 2013
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ST. THOMAS - The Fiscal Year 2014 budget testimony of David Zumwalt, director of the University of the Virgin Islands Research and Technology Park on St. Croix, has raised serious concerns about the ability of the territory to compete with Puerto Rico when it comes to tax incentives designed to attract wealthy residents and entrepreneurs.
The park has lost about four prospective tenants, who cited the attractiveness of Puerto Rico's new tax incentive structure when they pulled out of agreements with the St. Croix business park to start knowledge-based businesses, Zumwalt said.
In FY 2012, for which the technology park requested no money in appropriations from the government, the RT Park secured seven new tenants.
The same number of new tenants was projected for FY 2013, but only two tenants have been added.
Puerto Rico luring away prospective tenants deflated the RT Park board's budgetary optimism and left the business park with an expected decrease of almost $835,000 in commercial revenues, or 44 percent, from original budgeted levels drawn up in August 2012, according to Zumwalt.
The purpose of the RT Park is to foster a sustainable, globally competitive technology sector in the territory's economy. Its tenants do not have to have offices at the St. Croix facility, but they use a technological connectivity infrastructure set up with the park's creation to grow knowledge-based businesses and employ Virgin Islanders, according to Zumwalt.
"At present, RT Park tenants generate almost $160 million in aggregate annual revenues in the territory, employ over 200 people, and are forecasting an aggregate 2 percent growth in employment in the coming year," Zumwalt said.
However, the drop in tenants necessitates the park's supplemental budget request of $400,000 to sustain the park for the remainder of FY 2013, and an appropriation of $800,000 for FY 2014 to cover operating costs, Zumwalt testified.
"The primary reason for the drop in tenant application activity has to do with emerging competition from Puerto Rico in the forms of the 'Act 20' and 'Act 22' legislation enacted there last year," Zumwalt said.
Act 22 provides a total exemption from income taxes, including taxes on interest and dividend income and all long-term capital gains accrued after residency is established.
Act 20 provides export services businesses with a 4 percent corporate tax rate, a 100 percent exemption from taxes on export-related dividends or profit distributions and a 100 percent exemption from property taxes for a term of 20 years.
Exacerbating the situation, the impacts to the RT Park are precursors to the potential impacts to the Economic Development Commission program, as the two entities have similar goals in terms of recruiting startups and entrepreneurs, according to Zumwalt's testimony.
"In my opinion, Acts 20 and 22 take direct aim on the U.S. Virgin Islands' RT Park and EDC incentive programs," Zumwalt said.
Zumwalt said that the acts were passed in Puerto Rico in early 2012, but the commonwealth stepped up its marketing efforts to tout them late last year, which is when the RT Park began to realize the impact the legislation would have on prospective tenants.
"Act 22 is different than what we offer here in the Virgin Islands because it goes after individuals with high net worth. The EDC program and our program are only geared toward businesses," Zumwalt told The Daily News after the budget hearing. "Puerto Rico has now added a new program that says that, if you are a high net worth individual, it will make it very easy for you to relocate to Puerto Rico, and that is attractive because, in our case, the companies that come into the park tend to be owned by very high net worth individuals."
However, Zumwalt was hesitant to suggest that the territory should mimic Puerto Rico.
"We don't have a corresponding program like that in the Virgin Islands, and I am not making the case that we should," Zumwalt said.
V.I. Labor Commissioner Albert Bryan Jr., who also is the chairman of the V.I. Economic Development Authority board, said the Economic Development Authority has not noted a decline in applications because of Puerto Rico's new legislation. Only one prospective applicant so far has mentioned Puerto Rico in its decision not to partake in the EDC program, but the close competition is causing the authority to examine ways to make the EDC program more attractive, according to Bryan.
"I think it does have an effect on us, because we are in such direct competition with Puerto Rico," Bryan said. "We are working with the Chamber of Commerce to examine ways to make the program more competitive. For example, we are looking at having longer benefit periods, because in order to get higher level investments, we might need to extend the benefit periods."
Bryan said that Puerto Rico, unlike the Virgin Islands, has not tested its program in the courts and risks having the extreme benefits challenged at the federal level.
Through several lawsuits, the Virgin Islands had defended the integrity of its incentive program, he said.
"Our program has the advantage of being tried and true," Bryan said.
"I don't think the IRS has really decided how they are going to deal with it," he said, referring to Puerto Rico's programs.
Further, the economic benefits of the total exemptions in Puerto Rico's incentive program may be negligible, according to Bryan.
"We are still looking primarily at job creation. I don't think it would be beneficial for us to attract new investments by giving away everything as Puerto Rico has done," he said.
- Contact Amanda Norris at 714-9104 or email firstname.lastname@example.org.