Taxation in the British Virgin Islands
|An aspect of fiscal policy|
Taxation in the British Virgin Islands is relatively simple by comparative standards; photocopies of all of the tax laws of the British Virgin Islands would together amount to about 200 pages of paper. Taxation in the British Virgin Islands is mostly notable for what is not subject to taxation. The British Virgin Islands has:
- no capital gains tax,
- no gift tax,
- no sales tax or value added tax,
- no profit tax,
- no inheritance tax or estate duty, and
- no corporation tax.
There is technically still income tax assessed in the British Virgin Islands for companies and individuals, but the rate of taxation has been set at zero. However, individuals are subject to a payroll deduction made of up to 8% for employees with 12% paid by employers, in relation to all salaries over US$10,000 per annum.
The absence of most major forms of taxation in the Territory has led to the country being included on most recognised lists of tax havens, although the jurisdiction prefers to style itself as a modern offshore financial centre.
There are a number of forms of taxation and revenue collection in the British Virgin Islands, but the majority of the Government's revenues are obtained directly from annual licence fees for offshore companies incorporated in the jurisdiction.
In 2005 the British Virgin Islands introduced a payroll tax in relation to employment and "deemed employment" within the British Virgin Islands. The legislation was brought in at the same time as income tax in the Territory was reduced to zero. The numbers were not in fact a perfect balance, and the Government (deliberately) reduced the amount of tax revenue it received by moving to the payroll tax system.
The tax is paid at a graduated rate depending upon the size of the employer. The current rates (as at June 2007) are 10% for small employers and 14% for larger employers. 8% of the total remuneration is deduction from the employee, the remainder of the liability is met by the employer. The first US$10,000 of remuneration are free from payroll tax.
Certain limited transactions in the British Virgin Islands are still subject to stamp duty. The main application of the stamp duty legislation relates to transfers of real estate, or transfers of shares in companies which own real estate. The rate of stamp duty on such transactions varies according to the status of the transferee; if the transferee is a Belonger, then stamp duty on land transfers is assessed at 4%; if the transferee is a Non-Belonger, it is assessed at 12%.
The legislation also includes a number of "rump" taxes that were imposed many years ago and subsist only due to a lack of attention in relation to updating legislation; the amounts involved are tiny, and are never enforced in practice. For example, charterparties are technically subject to stamp duty at a rate of 50¢ in the British Virgin Islands, but despite the flourishing bareboat charter industry stamp duty is rarely if ever paid by charterers.
Separately, the British Virgin Islands also imposes various documentary duties which are described as being distinct from stamp duty on various classes of instrument:
- Cheque duty is assessed at 10¢ on each negotiable instrument (including traveller's cheques) presented for payment within the Territory.
- Trust instruments are assessed with trust duty of US$200 (unless they are charitable trusts or bare trusts).
The reason for not referring to these documentary taxes as stamp duty was that under the old International Business Companies Act (Cap 291), companies incorporated under that Act were exempt from stamp duty, and so to retain the payment obligations for those companies, they were referred to as 'cheque duty' and 'trust duty' respectively.
Land tax and house tax
Real estate in the British Virgin Islands is subject to nominal taxation. Because the amounts payable are so small, it is not uncommon for householders to not pay the tax at all, and then discharge all back taxes and penalties when they come to sell their property. The total tax on residential properties rarely exceeds US$100 per annum. The tax costs more to collect than it raises. During the Territory's last review of taxation, considerations were made to amend the law to reduce the amount of taxation collection due to a perception that it penalised second home owners (but not to abolish the taxes).
As with stamp duty, land tax rates are considerably higher for foreigners than for Belongers.
- Belongers pay annually:
- US$3.00 for the first acre, or part thereof, and
- US$1.00 for each subsequent acre, or part thereof.
- Non-Belongers pay annually:
- US$50 for the first half acre, or part thereof,
- US$150 for the second half acre, or part thereof, and
- US$50 for each subsequent half acre.
House tax is paid at the same rate for all persons, and is it assessed at 1.5% of the annual rental value of the house. There is a general perception that rental values for owner-occupied homes tend to be assessed as being lower than their actual true market rental value.
Imports into the British Virgin Islands are, subject to certain limited exceptions, subject to import duty. Although this raises a modest amount of government revenue, it tends to be used as a political tool, and to prevent excessive competition with local retailers from the nearby U.S. Virgin Islands.
EU Withholding tax
In common with most British Overseas Territories, the British Virgin Islands had the EU withholding tax imposed upon it in relation to interest payments in the jurisdiction which are payable to natural persons who are resident within the European Union. The withholding tax is not mandatory; depositors can elect not to pay it by agreeing to full disclosure of their account information to the revenue authorities in their country of residence. The implication is that the withholding tax is only applied to those who are not properly declaring their income in their home countries. However, payment of the withholding tax does not exempt the income from any applicable income taxes in the home jurisdiction; there is no double taxation relief under the relevant legislation.
The amounts raised by the EU withholding tax to date have been extremely modest. There are two likely reasons for this; firstly, for an Offshore Financial Centre, the British Virgin Islands has an underdeveloped banking infrastructure compared to (for example) the Cayman Islands or Jersey and so comparatively modest sums are deposited in the Territory's banks; secondly, the withholding tax only affects deposits held by natural persons - because most offshore tax structuring involves the use of either an offshore company or an offshore trust, this usually takes it outside the scope of the tax.
The EU Withholding tax was abolished in favour of disclosure of information with effect from 1 January 2012.
Miscellaneous other taxes
The British Virgin Islands has a number of other minor taxes and levies. These include:
- Car tax, under the Self-Drive vehicles (Rentals) (Taxation) Act (Cap 210)
- Hotel tax, under the Hotel Accommodation Taxation Act (Cap 205)
- Petroleum income tax, under the Petroleum Income Tax Act (Cap 209)
- Passenger tax, under the Passengers Tax Act (Cap 208)
- A tax is assessed on charterers, although it is characterised as a "permit" under the Cruising Permits Act (Cap 207)
In addition there are a huge number of miscellaneous Governmental fees and charges which are levied pursuant to the Statutory Rates, Fees and Charges Act, 2005.
- Compared to, for example, the tax code of the United States, which is approximately 70,000 pages. "How Confusing is the Tax Code? Even the IRS Chief Gets Help". 2010-04-21.
- Income Tax Act (Cap 206); income tax was reduced to zero when the payroll tax was introduced. Foreign earned income was previously taxed on a remittance basis.
- See for example, OECD list of uncooperative tax havens (2000), the Dorgan-Levin-Feingold bill, and the official IMF list.
- "Deemed employment" broadly encompasses (i), partners in a partnership, (ii) directors or (iii) shareholders of a company who are actively involved in running the business and are not solely passive investors.
- Payroll Taxes Act 2004
- A small employer (defined in the Act as a "class 1 employer" is one which has a payroll of less than US$150,000, a turnover of less than US$300,000 and fewer than 7 employees or "deemed employees" in total.
- Stamp Act (Cap 202)
- Cheque Duty Act (Cap 201)
- Trustee Act (Cap 303)
- Land and House Tax Act (Cap 207)
- Computer equipment being one notable one.
- Customs Duties Act (Cap 105)
- Mutual Legal Assistance (Tax Matters) (Amendment) Act 2005
- The amounts collected have never exceeded US$100,000 in total; it is not clear whether it actually costs more to collect and police the tax than it actually raises.
- Mutual Legal Assistance (Tax Matters) (Automatic Exchange of Information) Order, 2011