At the opening of a two-day conference at Fort Burt Hotel in December 2004, the then Chief Minister, Dr. D. Orlando Smith told a group of business executives that the implementation of the payroll tax meets the crucial test of sustainability, sufficiency and fairness.

His comments came against the backdrop of amplified criticisms from the business community for a review of the new tax measures before its implementation in January 2005, one month after Smith’s remarks.

The payroll tax replaced the Pay As You Earn (PAYE) system and was geared to net International Business Companies or IBCs, which at the time were companies from around the world that are established in the VI for global investment purposes, but who were not being taxed.

Prior to the payroll tax, each IBC registered in the VI paid an annual fee which made up a large percentage of Government’s revenue.

Almost three years later, Dr. Smith’s National Democratic Party (NDP) is out of office, the Virgin Islands Party (VIP) is back in Government and a review of the payroll tax is currently being undertaken by a Payroll Tax Committee.

Among the terms of reference, the ten-member committee chaired by Ian Smith will identify inconsistencies within the Payroll Tax Act and make recommendations for amendments.

Surprisingly, the Committee, if deemed to be so fit, can repeal the Payroll Tax Act.

A payroll tax review was promised by the VIP prior to the 2007 elections, but at no time was an indication given of implementing a new tax regime.

At the time of implementation, it was widely accepted that the new tax was implemented in response to pressures from the Organisation of Economic Cooperation and Development (OECD) and the European Union (EU) to eliminate onshore taxation by 2005.

In fact, under new international rules, agreed to by the UK Government, the VI was no longer permitted to allow IBCs to operate here tax-free, while income taxes were being imposed on other businesses.

Under the new regime, small businesses were required to pay a two percent payroll tax and other businesses six percent, while sole owners and employees eight percent, with $7,500 deductible.

However, the Chamber of Commerce and Hotel Association (CCHA) was up in arms over the fact that its recommendations for what it termed as a very crucial issue affecting all working individuals in the Territory were being ignored.

The CCHA had urged the NDP government to carefully examine the pros and cons of any form of substitute tax, since any new tax needed to be equitable and don’t adversely burden any particular stakeholder in the Territory.

 Among the recommendations flowing from the CCHA, was for the flat rate eight percent for employees be amended to reflect a more equitable and progressive form of contribution by introducing a tier system.

Additionally, the CCHA had recommended that a tax credit system be seriously considered and implemented for businesses that invest in education, health and the environment.

One would suspect that most of the recommendations put forward by the CCHA are still on the table for reconsideration, but the Payroll Tax Committee must first be prepared to meet with various members of the wider community. This will ensure that whatever decision is made following the review, will gain wider acceptance, since most if not all would have had some input in the process.

The business community might not be the only advocate keenly observing the reform of the payroll tax, but the wider community should pay close attention, especially at this time when the economy is being battered by external forces, including high oil prices, the cost of food and cutbacks in flights to the Territory.

There is no announced timeframe for the review, but one would envision sufficient time for all stakeholders to make recommendations on the tax regime if the Committee goes the route of a wide consultations. Whether there was sufficient time to observe the payroll tax since its implementation, is a debate that can swing either way.

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