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Pacific Islands Development Program, East-West Center

With Support From Center for Pacific Islands Studies, University of Hawai‘i


Guam Qualifying Certificate Program Scrutinized
‘Unnecessarily generous’ tax breaks made for hotels, tourism firms

By Louella Losinio

HAGTA, Guam (Marianas Variety Guam, Dec. 17, 2012) – With the government of Guam facing fiscal challenges, including a looming $43 million operational shortfall and possible layoffs, the Guam Economic Development Authority’s (GEDA) Qualifying Certificate program has once again come under scrutiny as certain quarters have called for a review of the program, citing the loss in much-needed GovGuam tax revenues.

Since the push by the Legislature for the Office of Public Accountability to audit the program, the OPA has started the process and has already met with Guam Economic Development Authority officials.

The last audit of the program conducted by the Department of Interior Inspector General occurred way back in 2001.

Vice Speaker Benjamin J.F. Cruz, who spurred the review of the QC program, said the reviews are necessary to measure the effectiveness of the program and to determine the revenue losses.

Cruz cited figures in the 2001 audit findings, which states the government lost tax revenues of at least $769,650 and could lose future tax revenues totaling about $70.8 million due to the approval of QCs with "unnecessarily generous tax benefits to hotel and tourist industry firms that may not have needed the level of tax benefits given."

Cruz said in the first year of the Calvo administration, around $15 million worth of tax rebates were issued within the first year.

Spike

"It looked like in the previous five or six years of the Camacho administration, there haven’t been that many, if any, maybe 3 or 4 million worth of QCs. Why was there a spike all of a sudden?" Cruz asked.

Cruz also questioned the fairness of the program, pointing out that GEDA has not been consistently awarding QCs to companies across specific sectors.

"The report also noted a point that was interesting. You had hotels next to each other, both are being built at the same time, but one was getting a QC and the other wasn’t," he said.

The Vice Speaker also questioned why some of the companies that were deemed not in compliance with the QC program continued to be part of the QC program. Six companies were reported as non-compliant for several years, from 2005 to 2010. Three of the companies listed had their QCs revoked while the rest were under review as of 2010.

In the next Legislature, Cruz said both the legislative and executive branches of government should be serious about looking at waivers and exemptions awarded to companies and check which of them are fraudulently filing their taxes, taking advantage of the program, and/or deserve to continue receiving these benefits.

Investments generated

Responding to the criticism of the QC program, GEDA Administrator Karl Pangelinan said GEDA goes through a financial auditing process annually. He said the lapse between the 2001 and current audit is not GEDA’s fault because in the past, OPA selects which GEDA program to audit.

"That (the lapse) was 10 years ago. The great minds here at GEDA, over time, have looked at that and started filling in some of those gaps. It has come to the point where our compliance arm is one of our strongest internal programs to date," Pangelinan stated.

The Qualifying Certificate program was created under Public Law 8-80 in 1965 as an economic incentive tool to encourage and facilitate investment activities that would spur economic growth on-island.

GEDA files list 126 QCs awarded to companies since 1965. Total investment generated by the program amount to at least $1 billion and has generated more than 10,000 jobs throughout the years. The figures for job generation, according to GEDA, only reflect the number projected by companies in their contract. Actual figures could go higher, Pangelinan said.

Currently there are 16 sectors covered by the program, including tourism, manufacturing, medical, insurance, base operating service contracts for the military, or small businesses operating on a military base on Guam, among others.

After the enactment of Public Law 31-207 last April, the program expanded its coverage to include companies engaged in green technology.

Pangelinan pointed out that the QC program is not a "one size fits all" type of program. "It is very unique from client to client. The companies apply voluntarily and all companies are not required to file an application for the QC program," Pangelinan said.

Assessment and reviews are done yearly to determine compliance of the companies under the program. GEDA’s internal compliance office utilizes indicators such as amount of investments, local purchases, and number of jobs generated.

"The problem is all that’s ever looked at is the amount that is rebated or the amount that is potentially rebated. We are currently going through an audit of the program and within the audit, we spent close to three hours with the OPA since they only knew the surface of the program. When we started to expose a lot of details about the program, I’m pretty comfortable in saying that they walked away knowing that there’s a lot more to this program than what’s being advertised or thrown out there in the media," Pangelinan said.

He emphasized that the GEDA program has strict compliance and enforcement processes. "So these companies know they have to be in compliance," Pangelinan concluded.

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