The government of the British Virgin Islands is facing a significant shortfall in revenue collected from its financial services industry.
During the budget debate on 13 Dec., Premier and Finance Minister Andrew Fahie blamed international regulatory pressure for the smaller-than-expected income.
“This year, financial services – it is sad to say – dropped off by roughly $30 million because they are coming under a lot of pressure,” Fahie said.
In 2018, the BVI government collected $372.3 million in total revenue, with about 62% of that, $232 million, coming from the financial services sector. For 2020, the government projects only $201.4 million to come from that sector.
In his budget address delivered on 19 Nov., Fahie said that concerns about the industry appeared to be justified. “Prior to our taking office, there were already projections that clearly stated that in the coming years our financial services industry would be faced with some serious and unprecedented challenges. Case in point: up to September 2019, we recorded a 27.9% decline in new incorporations of companies and an 8.7% drop in revenue from the Registry of Corporate Affairs,” he said.
In the third quarter of this year, only 6,365 new companies were incorporated in the BVI, the worst quarter since statistics were first released in 2003.
Like the Cayman Islands, BVI had to introduce new economic substance rules in its legislation late last year to avoid inclusion in the European Union tax blacklist. The rules demand that registered companies must have a physical presence in the territory to be able to take full advantage of its zero-corporate tax regime.
Earlier this year, the BVI’s director of international business, Neil Smith, had expressed optimism about the impact of new economic substance rules. He suggested in an interview with BVI News that there was a trade-off between the expected decline in the total number of active companies and the growing number of people who would have to live and work in the islands to demonstrate economic substance.
Smith suggested that the population of professionals was likely to triple and lead to more economic activity and higher payroll tax revenue.
In the first six months of 2019, the number of active companies on the BVI register fell from 402,907 to 396,932, while income tax revenue of $51.8 million in the first nine months of 2019 was $1.3 million higher than projected.
Fahie said that although the timing suggested the financial services revenue decline was due to the imposition of economic substance on the industry, “other factors such as the rate of recovery [from 2017’s hurricanes Irma and Maria], an unprecedented level of uncertainty stemming from Brexit, increasing regulations, an unstable global macro-economic environment, reputational risk, new competitors, and changing client expectations can all be possible contributing factors”.
In addition, the risk of a public register of beneficial ownership, required by the UK government by the end of 2023, was a threat to the jurisdiction’s financial services model and revenue collection that must be monitored, he said.