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By Mar-Vic Cagurangan

Reforming the Qualifying Certificate program

The Qualifying Certificate Program, created under Public Law 8-80, was designed as an economic incentive tool to encourage investment in activities that “would strengthen the island economy and enrich its growth.” It applies to more than a dozen industries. Incentives offered by the program include a 75 percent rebate of corporate income tax for up to 20 years, 75 percent rebate of corporate dividends tax for up to five years, up to 100 percent abatement of real property tax for up to 10 years on property utilized by the QC beneficiary to operate its business, among others.

The program, however, has been under scrutiny for many years, with occasional proposals for reform due to irregularities such questionable exemptions granted to favored companies. Critics also say certain categories, including the thriving insurance, wholesale and hotel development industries, must be stricken out of the list.

In December 2017, the Office of Public Accountability reported that the government of Guam had a foregone potential revenue of $210 million from 2014 to 2016— or an average of $70 million a year— resulting from gross receipt tax exemptions, some which did not have transparent data. The OPA report prompted Gov. Eddie Calvo on Tuesday ordered a moratorium on renewals of qualifying certificates in an ongoing effort to fund emergency funds that can bridge the revenue gap created by the federal tax cuts.

For the continuation of our Campaign 2018 Q&A series, we asked gubernatorial candidates to share their thoughts on the QC program.

Following are their responses.

Ray Tenorio (R)

Running mate: Tony Ada

Qualifying Certificates strengthen our island economy. QCs are proven policy and standard practice in virtually every state and territory, as well as the Asia-Pacific region. In order to proactively grow our economy in focused industries, Guam must incentivize investment to make Guam attractive compared to our competitors. Our islands’ Qualifying Certificate program has been an effective tool in building our economy in areas such as healthcare and tourism. The program has created thousands of jobs while infusing billions of dollars into our island.

It is also prudent that leaders consistently examine the QC program to ensure investments deliver the intended opportunities and results. Our taxpayers rightfully deserve a return on investment for those deferred tax dollars. The recent Special Hotel QC, for example, addresses our islands need for more hotel rooms and caps the tax benefits at a percentage of a company’s investment. As leaders. we will continue to examine the QC program by industry and engage the public and the Legislature in examining its application with certain industries and corresponding reasonable tax benefits. This will ensure the QC program benefits our taxpayers as well as long-term investors.

Lou Leon Guerrero (D)

Running mate: Joshua Tenorio

The Qualifying Certificate program is relevant and can be a powerful tool for economic growth when used correctly. The QC program exists to foster new industries, create good paying jobs, and expand the circle of economic growth on Guam. This mission cannot be accomplished unless we determine how much tax revenue is lost and how much economic growth is returned as a result of that investment.

It is disturbing that audits conducted by the Office of Public Accountability indicate that the total tax revenue forgone by QC recipients is “unknown.” Audits also indicate that the amount of economic growth secured through QCs is also “unknown.”

These weaknesses are caused by the fact that government agencies are operating in silos. Fixing this will require effective management, monitoring, and communication between GEDA and the Department of Revenue and Taxation.

Anyone who suggests we can make fundamental changes to this program without having the right data or a willingness to work together is wrong. Once we clearly understand the benefits we must refocus our economic strategy. This will allow us to target QCs where there is the highest potential for job growth and negotiate the best economic outcome.

Carl Gutierrez (D)

Running mate: Fred Bordallo

Qualifying certificates, known in other places around the world as “tax holidays,” can be both beneficial and are considered a necessary and useful marketing tool in places where tourism is a major contributor to an economy. This program is the biggest windfall for Guam if we use it to attract new industry and diversify business on our island.

The Gutierrez Bordallo team understands the real advantage we have with this program. The U.S. government let this legislation slip through the cracks many years ago during a one year waiting period for the initial legislation. Due to their inaction, we are now the only territory that can rebate federal taxes. This means that Guam is the only jurisdiction in the U.S. that has this program, with no other territory or state allowed this provision. This provision would undoubtedly be taken away if we were to change our status with the federal government, so it is a precious tool for us to take full advantage of.

Our team knows that we need to use the qualifying certificate program more prudently. The law is good as it stands. It was intended to attract new businesses and not intended to be given in perpetuity. We would propose offering specific certificates for specific areas, rather than the existing program that blankets the island. Our team would look to offer higher percentage incentives, through tax breaks if businesses planned to build in areas outside of Tumon. If we are going to build our economy, we need to provide businesses with incentives to develop other villages for a more diversified market and an expanded tourist experience.

Dennis Rodriguez (D)

Running mate: Dave Cruz

The Qualifying Certificate program is still relevant, although there need to be several modifications to its current structure. We’re going to level the playing field by reforming the Qualifying Certificate program and by working with the legislature to repeal the tax holidays that insurance companies and banks currently enjoy. My administration will fully comply with the law I authored, PL 32-233 that requires GEDA to develop specific policy, regulations, criteria and measurable goals ensuring the appropriate stimulation of legitimate investment of new economic development projects already satisfactorily established on Guam. This ensures the government not unnecessarily waive needed revenue for an industry specific project category that already exists or satisfactorily established.

We are going to make sure everyone is paying their fair share. At the same time, we are going to roll back the tax increases this administration put into place and we’re going to look at lowering income taxes on the poor and the middle class to stimulate economic growth and therefore expand the tax base. The collateral effects of inspiring a larger more productive better paid workforce is that there will be a larger tax base, in other words, more revenue.

Frank Aguon (D)

Running mate: Alicia Limtiaco

The Qualifying Certificate program for many years has contributed toward attracting national and foreign companies and corporations to establish their businesses on Guam, in an effort to provide jobs for our people and to expand the island's economic base. This program has proven to have served its purpose in the past, and with a more focused application, could continue to benefit Guam and our people in the future.

With a maturing economy, Guam is now in a position to revisit the Qualifying Certificate program and consider setting limitations on the granting of real estate and income tax abatement to businesses providing services within the primary industries on Guam, i.e. tourism. The QC benefits should continue to be extended to individuals or businesses that will contribute toward the development of new industries, or the expansion of existing and small industries, i.e. aquaculture, agriculture, luxury-line cruise ship activities, fisheries, non-existent telecommunications services, and others.

With modern technology and processes, it is conceivable that Guam can further promote industries and economic activities that will provide for long-term island sustainability.

It is essential that the QC program continue to serve as a tool that will attract external investment funds from new businesses, and further serve as additional financial incentives to encourage the expansion of business activities within smaller island industries on Guam.

 

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