[Audit Report on the Qualifying Certificate Program, Guam Economic Development Authority, Government of Guam (ReportNo. 01-I-419)]
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Title: Audit Report on the Qualifying Certificate Program, Guam
       Economic Development Authority, Government of Guam (Report
       No. 01-I-419) 

    N-IN-GUA-006-99-(B)-M
    
    September 30, 2001
    
    Mr. Chris Murphy
    Chairman, Board of Directors
    Guam Economic Development Authority
    ITC Building, Suite 511
    590 South Marine Drive
    Tamuning, Guam  96911
    
               Subject:   Audit Report on the Qualifying Certificate Program, Guam Economic
               Development Authority, Government of Guam (Report No. 01-I-419)
    
    Dear Mr. Murphy:
    
    This report presents the results of our audit of the Qualifying Certificate Program
    administered by the Guam Economic Development Authority.
    
    Please provide a response to this report by November 21, 2001.  The response should
    provide the information requested in Appendix 3 and should be addressed to our Pacific
    Field Office, 415 Chalan San Antonio, Baltej Pavilion - Suite 306, Tamuning, Guam
    96913. 
    
    Section 5(a) of the Inspector General Act (5 U.S.C. app. 3) requires the Office of Inspector
    General to list this report in its semiannual report to the U.S. Congress.  In addition, the
    Office of Inspector General provides audit reports to the Congress.
    
    Sincerely,
    
    
    Arnold E. van Beverhoudt, Jr.
    Audit Manager for Insular Areas
    
    
    cc:  Honorable Carl T.C. Gutierrez, Governor of Guam
    
         U.S. Department of the Interior   Office of Inspector General
    
    
                          EXECUTIVE SUMMARY
    
                   Qualifying Certificate Program,
                 Guam Economic Development Authority,
                          Government of Guam
                         Report No. 01-I-419
                            September 2001
    
    The Guam Economic Development Authority was established in August 1965 as a public
    corporation "to assist in the implementation of an integrated program for the economic
    development of Guam" and "to be a catalyst in the economic development" of Guam by
    "aiding private enterprise without unfairly competing with it."  The Authority is authorized
    to provide loans, issue revenue bonds, purchase mortgages, and function as the
    Government's financial advisor and as manager of industrial park leases.  In addition, the
    Authority encourages private sector investment by granting tax rebates and abatements to
    qualifying businesses under the Qualifying Certificate Program.
    
    The objective of our audit was to determine whether the Guam Economic Development
    Authority (1) effectively administered the Qualifying Certificate Program and (2) achieved
    the objectives for which the Program was established.  
    
    Although the Qualifying Certificate Program provided significant benefits to the Guam
    economy, we found that there was a need for improvements in the Program.  Specifically:
    
    The Government of Guam lost tax revenues of at least $769,650 and could lose future tax
    revenues totaling about $70.8 million because the Authority recommended the approval of
    Qualifying Certificates with unnecessarily generous tax benefits to hotel and tourist
  industry
    firms that may not have needed the level of tax benefits given.  
    
    The Authority improperly granted tax abatements of $459,777 to beneficiaries that were not
    in compliance with their Qualifying Certificates, apparently used surveillance fees of about
    $220,000 for purposes other than monitoring beneficiary compliance, and authorized
    beneficiaries to receive additional tax benefits of at least $815,990 while concurrently
    allowing the beneficiaries to not employ about 371 Guam residents.  
    
    Gross receipts taxes of more than $5 million and an undetermined amount of use taxes were
    abated improperly and without verification of the amount or eligibility.
    
    Legally mandated investments in Guam's economy totaling at least $2.3 million may not
    have taken place because the Authority did not include language in Qualifying Certificates
    requiring beneficiaries to reinvest tax benefits and, for those Certificates that included the
    reinvestment requirement, did not monitor the beneficiaries' compliance.
    
    We made 14 recommendations to the Chairman of the Authority's Board of Directors to
    address these issues by seeking changes to the Qualifying Certificate law, developing
    standard operating procedures for some of the Authority's activities, providing formal
    training to compliance monitoring staff, and coordinating with the Division of Revenue and
    Taxation and the Customs and Quarantine Agency regarding gross receipts and use tax
    abatements.
    
    AUDITEE COMMENTS AND OFFICE OF INSPECTOR GENERAL EVALUATION
    
    The Authority concurred with 8 of the report's 14 recommendations, partially concurred
  with
    1 recommendation, and expressed nonconcurrence with the other 5 recommendations. 
  Based
    on the response, we considered 6 recommendations unresolved and requested additional
    information for 8 recommendations.
    
                             INTRODUCTION
    
    
    BACKGROUND
    
    The Guam Economic Development Authority was established in August 1965 as a public
    corporation "to assist in the implementation of an integrated program for the economic
    development of Guam" and "to be a catalyst in the economic development" of Guam by
    "aiding private enterprise without unfairly competing with it."  The Authority is authorized
    to provide loans, issue revenue bonds, purchase mortgages, and function as the
    Government's financial advisor and as manager of industrial park leases.  In addition, the
    Authority encourages private sector investment by granting tax rebates and abatements to
    qualifying businesses under the Qualifying Certificate Program.
    
    Title 12, Chapter 58, of the Guam Code Annotated established the Qualifying Certificate
    Program to provide eligible businesses with financial assistance through rebates (refunds)
    of income taxes paid and abatements (forgiveness) of property taxes owed.  Under the
    original law, which was in effect from 1965 to 1994, the Government of Guam granted
  these
    tax benefits through Qualifying Certificate contracts with Guam-based corporations
  engaged
    or to be engaged in the service, manufacturing, agriculture, and fishing industries.  To be
    eligible under the Program, businesses had to either create new employment, replace
  imports,
    reduce consumer prices, or create vitally needed facilities.  The first Qualifying Certificate
    was issued in 1965, and three Qualifying Certificate beneficiaries have continued to receive
    tax benefits under the Program for more than 30 years.  During the period of
    December 31, 1989 to September 5, 1997, the Authority's Board of Directors imposed a
    moratorium on the issuance of Qualifying Certificates to hotels.
    
    In December 1994, the Guam Legislature amended the sections of the Guam Code
  Annotated
    establishing the Qualifying Certificate Program.  The amendments included expanding the
    available tax benefits by adding gross receipts taxes to the types of taxes eligible for
    abatement and adding domestic insurance, captive insurance, nonhotel-tourism related
    housing development, communication, and trust companies to the list of eligible industries. 
    The Guam Code Annotated provides that a Qualifying Certificate may be suspended,
    rescinded, or revoked by the Governor of Guam on the recommendation of the Authority
  for
    "failure to comply with any condition or obligation set out in the Certificate after having
    been notified by the Authority in writing of such failure to comply and after having been
    given by the Authority a reasonable period of time within which to correct such a failure."
    
    As of December 31, 1999, the Authority had 31 active Qualifying Certificates and
    10 Qualifying Certificate applications in process.  During fiscal years 1997, 1998, and
  1999,
    the Authority collected certificate surveillance fees totaling $683,605 and the 31 beneficiary
    companies received tax abatements and rebates totaling at least $18 million, as shown in
    Table 1.
    
    Table 1.  Qualifying Certificates, Surveillance Fees, and Tax Benefits
                for Fiscal Years 1997, 1998, and 1999
    
           Certificate               Certificates         Applications           SurveillanceTax Benefits    
    
           Categories              Outstanding          In Process         Fees Received***   Granted**** 
      
    
    Hotel                             15                 5                $636,355             $9,638,574* 
        Tourist Facility          3                          3                  24,000             1,221,871   
    Domestic Insurance        6                          0                  14,500             5,389,606   
    Captive Insurance         1                          0                   1,750                     0   
    Medical Facility          2                          0                   1,000                     0   
    Communications              4**                      0                   6,000             1,864,253   
                         Manufacturing                      0                 1                       0                     0   
    Housing                            0                 1                       0                     0   
    
        Total                         31                10                $683,605           $18,114,304   
    __________
    * Includes benefits for 20 Certificates of Exemption issued to contractors on one hotel
  development project as part of a hotel's Qualifying
    Certificate. 
    ** Includes three Qualifying Certificates issued to corporate shareholders.
    *** Consists of legally required fees collected from Certificate holders to defray the cost
  of performing monitoring.
    **** Consists of estimates, based on the best available information from the Department
  of Revenue and Taxation, of the value of tax
    rebates and abatements granted to Certificate holders.
    
    
    OBJECTIVE AND SCOPE
    
    The objective of our audit was to determine whether the Guam Economic Development
    Authority (1) effectively administered the Qualifying Certificate Program and (2) achieved
    the objectives for which the Program was established.  The original scope of the audit
    included a review of the Qualifying Certificates issued during fiscal years 1997, 1998,
  1999,
    and 2000 (through December 31, 1999).  We subsequently expanded the audit scope to
    include the applications for Qualifying Certificates in process, the monitoring actions taken,
    and the tax abatement and rebate transactions processed through June 30, 2000.  This is the
    second of three reports we plan to issue on the operations of the Guam Economic
    Development Authority.  The other two reports will cover (1) economic development loan
    programs and (2) bonds, leases, and financial activities.
    
    To obtain information on the processing and issuance of Qualifying Certificates and the
    administration of the Qualifying Certificate Program,  we interviewed officials and/or
    reviewed records at the offices of the Guam Economic Development Authority, the
    Authority's independent public accounting firm, the Guam Department of Revenue and
    Taxation, the Guam Customs and Quarantine Agency, the Guam Department of Public
    Works, and two beneficiary hotels.
    
    Our review was made, as applicable, in accordance with the "Government Auditing
    Standards," issued by the Comptroller General of the United States.  Accordingly, we
    included such tests of records and other auditing procedures that were considered necessary
    under the circumstances.
    
    As part of the audit, we evaluated the system of internal controls related to the financial and
    operational management of the Qualifying Certificate Program to the extent that we
    considered necessary to accomplish the audit objective.  Based on our review, we
  determined
    that the Authority generally achieved the purposes of the Qualifying Certificate Program. 
    However, we identified internal control weaknesses in the areas of the approval of
    Qualifying Certificates, the monitoring of beneficiary compliance, the abatement of gross
    receipts and use taxes, and the reinvestment of tax abatements.  These weaknesses are
    discussed in the Findings and Recommendations section of this report.  Our
    recommendations, if implemented, should improve the internal controls in these areas.
    
    PRIOR AUDIT COVERAGE
    
    During the past 5 years, neither the U.S. General Accounting Office nor the Office of
    Inspector General has issued an audit report on the Guam Economic Development
  Authority. 
    However, in November 1990, the Office of Inspector General issued the audit report
    "Followup Review of the Guam Economic Development Authority's Administration of the
    Qualifying Certificate Program" (No. 91-I-162).  The report discussed the status of
    recommendations contained in the October 1987 report "Guam Economic Development
    Authority's Administration of the Qualifying Certificate Program" (No. 88-04).  The
    followup report stated that, although 6 of the 10 prior recommendations had been
    implemented, the Authority continued to (1) issue Qualifying Certificates to ineligible
    businesses; (2) grant recipients the maximum level of benefits allowed without
  consideration
    of limiting tax benefits to the level necessary for businesses to recover the amount of capital
    invested; and (3) approve Qualifying Certificates for the hotel industry, which no longer
    needed tax benefits.  The followup report stated that the deficiencies related to the
  Qualifying
    Certificate Program resulted in potential lost revenues to the Government of Guam totaling
    at least $89.7 million.  The followup report made six recommendations, and based on our
    current review, we determined that four of the six recommendations had not been
    implemented.
                          FINDINGS AND RECOMMENDATIONS
    
    
    A.  APPROVAL OF QUALIFYING CERTIFICATES
    
    The Government of Guam lost tax revenues of at least $769,650 and could lose future tax
    revenues totaling about $70.8  million because the Guam Economic Development Authority
    recommended the approval of Qualifying Certificates with unnecessarily generous tax
    benefits to hotel and tourist industry firms that may not have needed the level of tax benefits
    given.  This occurred because the Authority interpreted the Qualifying Certificate law as
  not
    allowing the Authority sufficient flexibility in specifying the terms and conditions of
    Qualifying Certificates.
    
    Controlling Law
    
    On December 29, 1994, the Guam Legislature amended the 1965 law that established the
    Qualifying Certificate Program.  The statute (12 G.C.A. ï¿½ 58105) provides that no
    Qualifying Certificate shall be issued unless the Authority finds it will promote the general
    economic development by the creation of employment and either (1) the replacement of
    imports, (2) the reduction in consumer prices, (3) the creation of affordable housing or other
    vital facilities, (4) the creation of economic activity, or (5) the establishment of Guam as
  a
    financial/insurance center for the Pacific and increasing the availability or lowering the cost
    of insurance.  Additionally, the statute (12 G.C.A. ï¿½ 58109) requires that the Authority
    consider several factors and make specific findings on (1) the impact of the Beneficiary's
    proposed activities upon established businesses and markets in Guam, (2) the financial risk
    facing the Beneficiary in undertaking the proposed activities, (3) the location of the
  proposed
    activities, and (4) the importance of the proposed activities to the economy of Guam and
  to
    the official economic policies of Guam.  Lastly, the statute (12 G.C.A. ï¿½ 58110) requires
  that
    the Authority consider several factors as terms and conditions of the specific tax benefits,
    including limiting the benefits to a certain percentage, varying the rate of the tax benefit,
    limiting the benefit to a fixed dollar amount, and conditioning the tax benefits on the
    Beneficiary investing in or creating public improvements separate from the proposed
    activities.
    
    Based on the law, we believe that the Legislature granted the Authority sufficient flexibility
    to decide the terms and conditions of Qualifying Certificates and did not limit the Authority
    to granting Certificates only for the maximum allowable level of tax benefits.
    
    Projects in Tourist Areas
    
    During the period of September 5, 1997 to December 31, 1999, the Authority recommended
    issuing Qualifying Certificates, which did not appear to consider the factors in the statute,
    to two hotel expansion projects and one tourist attraction project.  In addition, as of
    June 30, 2000, the Authority was considering two additional hotel projects that had applied
    for Qualifying Certificates but which also did not appear to consider the statutory factors. 
    According to the Authority's Administrator, the legislation establishing the Qualifying
    Certificate Program required the Authority to issue certificates even in instances when the
    Authority did not believe they should be recommended.  The Administrator stated that the
    portion of the hotel industry located in the Tumon Bay and Agana Bay areas was well
    established and that incentives were therefore not necessary to attract new investments to
    these areas.  The Administrator also noted that a tourist attraction development at one of
    Guam's major tourist sites did not need a Qualifying Certificate in order to be financially
    viable.  However, as a result of the Authority's recommendations for approval, the
    Government of Guam lost tax revenues of at least $769,650 and may lose future tax
  revenues
    of about $28.5 million on the three projects.
    
    In addition to not considering the statutory factors, economic considerations did not justify
    the three Qualifying Certificates.  We identified 15 hotels that were constructed during the
    decade of the 1990s without receiving Qualifying Certificates.  Further, the low demand for
    Guam hotel rooms during the latter part of the decade, resulting from the Asian economic
    downturn, did not justify foregoing future potential tax revenues to increase the level of
  hotel
    construction.  Specifically, although the number of hotel rooms increased from 7,052  in
    1996 to 9,238 in 1999, the room occupancy rate decreased from 85 percent in 1996 to 61
    percent in 1999.   Further, by recommending Qualifying Certificates for hotel projects in
  the
    same general area as other hotels that were constructed and continued to operate without
    similar tax benefits, the Authority gave an unfair competitive advantage to the hotels with
    Qualifying Certificates and tax benefits -- a factor which the Authority should have
    considered in accordance with the statute (12 G.C.A. ï¿½ 58109).
    
        Hotel Construction Projects.  For comparison with hotel construction projects that
    benefitted from Qualifying Certificates, we identified two large resort hotels that were
    constructed during the 1990s and were operating in the Tumon Bay and Agana Bay tourist
    areas without receiving Qualifying Certificates.  A 455-room hotel was constructed at
    Tumon Bay without a Qualifying Certificate and tax benefits and has been in operation
  since
    1994. 
    
    Another hotel was constructed at Agana Bay without benefit of a Qualifying Certificate and
    tax benefits and has been in operation since 1992.  In 1996 this hotel constructed a water
    park, and as of June 2000, the hotel was constructing a 144-room addition -- both without
    the benefit of Qualifying Certificates or tax benefits.
    
    In contrast, in proximity to these hotels were other hotel projects that received or were
    considered for Qualifying Certificates by the Authority.  For example:
    
    In June 1998, the Government of Guam issued a Qualifying Certificate to a 500-room hotel
    for a project to construct an additional 292-room tower.  At the time, the hotel had almost
    8 years remaining on an existing Qualifying Certificate, which was extended for almost
    12 additional years under the new Qualifying Certificate.  The tax revenues lost by the
    Government as a result of the new tax benefits totaled at least $588,000 through June 30,
    2000 and will total an estimated $16.9 million through the almost 20-year life of the new
    Qualifying Certificate.
    
    In September 1997, the Government of Guam issued a Qualifying Certificate to a hotel for
    a water park that had already been constructed and had opened for operations in July 1997. 
      At the time, the hotel had 5 years remaining on an existing Qualifying Certificate, which
    was extended for 15 additional years under the new Qualifying Certificate.  The tax
  revenues
    lost by the Government as a result of the new tax benefits totaled  $181,650 through June
  30,
    2000 and will total an estimated $10.7 million through the 20-year life of the new
  Qualifying
    Certificate.
    
    Tourist Attraction Project.  In March 1999, the Board recommended approval of a
    Qualifying Certificate to a Guam-based company for development of tourist facilities at the
    site of one of Guam's most prominent tourist attractions.  The Board's recommendation for
    approval reversed the Administrator's  recommendation not to approve the application
    during a February 23, 1999 meeting of the Authority's Credit Review Committee.  In that
    meeting, the Administrator noted:
    
    Local residents can no longer visit the site free of charge. [The beneficiary] will now derive
    profit from local persons who were previously able to visit this historical cultural point free
    of charge.
    
    The certificate beneficiaries controlled only 6 percent of the project site and the
  Government
    of Guam owned the other 94 percent.
    
    On December 30, 1998, the Government of Guam authorized (and expended) $1.5 million
    to improve the site.
    
    [The developer's financial] projections and public hearing testimony indicate [the] project
    will be immediately profitable.
    
    [The net future value of the Government's $1.5 million] contribution based on the average
    20 year Q.C. [Qualifying Certificate] term is $3,623,000. . . .  The granting of a Q.C. on top
    of this contribution . . . would produce gross inequity between [the developer] and other
  Q.C.
    beneficiaries.
    
    Although at its February 23, 1999 meeting the Authority's Credit Review Committee
    recommended rejecting the application for Qualifying Certificate, on March 15, 1999 the
    Committee reversed its previous decision and recommended approval of the Qualifying
    Certificate for the tourist attraction project.  This action was taken after the beneficiary had
    made several minor concessions, such as agreeing to provide security for the complex,
    provide a local resident entrance fee, and contribute funds for cultural programs.  In our
    opinion, the Authority unnecessarily recommended approval of tax benefits that will result
    in the potential loss of at least $900,406 in tax revenues over the 20-year life of the
    Qualifying Certificate.  The location of the facilities should have been considered and the
    Authority should have made a specific finding of fact on that issue in accordance with the
    statute  (12 G.C.A. ï¿½ 58109).
    
    Timing of Application Filings
    
    Based on our review of 13 Qualifying Certificate application files, we concluded that the
    Authority had granted Qualifying Certificates and tax benefits to 10 of the businesses
    although it appears the businesses did not need the tax benefits to attract investors, as set
    forth in the statute  (12 G.C.A. ï¿½ 58100).  In each of these cases, the companies had
    essentially completed their financial and architectural planning and obtained building
  permits
    prior to applying for Qualifying Certificates.  For example:
    
    A hotel affiliated with a major chain did not file a Qualifying Certificate application for a
    600-room, 22-floor hotel complex until August 1998, although the necessary building
    permits had been approved by the Department of Public Works in 1996 and the project was
    already under construction.  The Qualifying Certificate was approved in April 2000, or
    10 months after the hotel had already started operations.  Based on the timing of the
    Qualifying Certificate application, we believe that the hotel would have been constructed
    even without a Qualifying Certificate and tax benefits.  Based on information in the
    Authority's files, we estimate that the Government will lose tax revenues of at least
    $24.3 million over the 20-year life of the Qualifying Certificate.  Additionally, the 1994
    Qualifying Certificate law (12 G.C.A. ï¿½ 58100) explicitly states that the program was being
    restructured to increase participation by people who live and work on Guam, as opposed
  to
    helping foreign entrepreneurs and off-island investors.
    
    Another business did not file a Qualifying Certificate application for a tourist attraction at
    Two Lovers Point until November 1998, or 8 months after it had received the necessary
    building permit from the Department of Public Works.  Prior to receiving the Qualifying
    Certificate, the company's Attorney was quoted in the Pacific Daily News on February 5,
    1999 as having stated that his company would invest in the project whether or not the
    company received a Qualifying Certificate.  Based on information in the Authority's files,
    we estimate that the Government will lose tax revenues of at least $900,406 over the
  20-year
    life of the Qualifying Certificate.
    
    In September 1999, the Authority's Board of Directors passed Resolution 99-040, which
    amended the Authority's standard operating procedures to require applicants to submit the
    application for a Qualifying Certificate with property appraisal within 90 days after the
    building permits had been issued by the Guam Department of Public works.  Although the
    establishment of this time requirement was a positive action, we recommend that the
    Authority further amend its standard operating procedures to include the requirement for
  a
    letter of intent to be submitted 180 days prior to the approval of building permits and amend
    its rules and regulations to include these requirements.  We believe that the lead time of 180
    days would help to ensure that businesses considered the need for tax benefits early in their
    investment planning process and did not file applications for Qualifying Certificates "after
    the fact" simply because the related tax benefits were available.
    
    Negotiation of Tax Benefits
    
    Although the Authority negotiated with Qualifying Certificate applicants on non-tax-related
    benefits, Authority records indicated that little negotiation was made with applicants to
  limit
    the amount and time period of tax benefits recommended on either new or modified
    Qualifying Certificates.  In addition, the Authority had not identified or estimated all direct
    and indirect costs to the Government of either new or renovation projects.  In our opinion,
    the Authority cannot effectively negotiate or recommend the granting of tax benefits,
    potentially worth millions of dollars, to businesses without identifying all related
    Government costs.
    
    Level of Tax Benefits.  During the period of October 1, 1996 to December 31, 1999, the
    Authority recommended issuing Qualifying Certificates to seven businesses, excluding
    insurance companies.  Of the seven businesses, the Authority proposed granting the
    maximum percentage of income tax rebates (75 percent) to all seven recipients and the
    maximum period (20 years in four cases and 19 years in one case) to five of the seven
    recipients.  In addition, in at least six instances, the Authority recommended that beneficiary
    firms receive extensions of existing tax benefits to include both the new project
    renovations/additions and the original hotel properties that had been included in prior
    Certificates.  As a result, the six beneficiaries received tax benefits on essentially the same
    properties for more than 25 years.  For example:
    
    A hotel first received a Qualifying Certificate in 1968, and when the hotel was subsequently
    sold, the Certificate was assumed by the new owner.  In 1979, the new owner applied for
  and
    received a new Certificate consequent to a major expansion.  In 1985, a third Certificate
  was
    issued consequent to a 100-room expansion.  Most recently, in 1998, a fourth Certificate
  was
    issued based on a 292-room expansion.  Each of the four Certificates encompassed the
  entire
    hotel and provided a rebate of 75 percent of corporate income taxes and abatement of 100
    percent of property taxes, and the final three Certificates also granted a rebate of 75 percent
    of income taxes on dividends.  Although the terms of the rebates/abatements varied slightly,
    with the three extensions the hotel will receive a total of at least 48 years of income tax
    rebates, 36 years of property tax abatements, and 15 years of dividend tax rebates.  As a
    result, and assuming additional extensions will not be granted, from June 1998 through June 
    2000 this hotel received tax benefits of at least $588,000 and from July 2000 through May
    2017 will receive an additional tax benefits estimated to total $16.9 million.  
    
    As of June 30, 2000, another beneficiary had an application under review to receive similar
    extended benefits (estimated to total $18 million in tax benefits).
    
    The Guam Code Annotated (12 G.C.A. ï¿½ 58132(c)) states, "The tax benefits applicable to
    the additional activities may be at rates or for a term different from those tax benefits
    applicable to the activities described in the original Qualifying Certificate, and the new
    Qualifying Certificate may include terms, conditions, rebates or abatements different from
    those in the original Qualifying Certificate."  The Authority's Administrator stated that the
    Authority should have "looked at the application more closely" before recommending the
    Qualifying Certificate discussed in the example above.  He further stated that in a similar
    application now under review, the Authority "is against" including existing facilities in a
  new
    Qualifying Certificate for an addition to the hotel.
    
    Cost/Benefit Analyses
    
    In arriving at the level and terms of tax benefits, the Authority did not adequately consider
    the estimated direct and indirect costs to the Government applicable to the capital projects. 
    The Authority's Administrator stated that the Authority did not have an economic model
  to
    estimate short- and long-term direct and indirect costs to the Government inherent in large
    development projects and to match these costs to potential economic benefits of the
  projects.
    Although the Guam Code Annotated (12 G.C.A. ï¿½ 58110) and the Authority's Qualifying
    Certificate Rules and Regulations allow the Authority to limit and vary the level and length
    of tax benefits, the Qualifying Certificate files we reviewed did not indicate that the
    Authority had considered recommending benefit rates and time periods at any levels below
    the maximums allowed.  As a result, the Authority could not ensure that the tax revenues
    foregone plus additional related infrastructure and social costs did not negate the economic
    benefits resulting from the development projects.  Additionally, although the Government
    had a voluntary program for beneficiary firms to contribute toward defraying such related
    infrastructure costs, the Authority could not provide information on the amounts, if any,
  that
    were contributed by the Qualifying Certificate beneficiaries.
    
    The Guam Code Annotated appears to give the Authority adequate legal authority to
    negotiate the level of Qualifying Certificate benefits, terms, and conditions with applicants. 
    However, because the Authority has not often issued Qualifying Certificates with tax
    benefits at levels less than the maximums allowable, it may be beneficial to amend the Code
    to clearly delineate the circumstances under which lower-than-maximum-level tax benefits
    can be granted.  In addition, the Authority could benefit from better information and
    analytical tools, such as economic models, to estimate and compare the costs of additional
    demand on public infrastructure (power, water, and sewer service) and government services
    (health, education, and police services) to determine the economic benefits to be provided
    by the Qualifying Certificates.
    
    Recommendations
    
    We recommend that the Chairman and the members of the Board of Directors of the Guam
    Economic Development Authority, along with the Administrator:
    
        1. Work with the Guam Legislature to amend Title 12, Chapter 58, of the Guam Code
    Annotated (the Qualifying Certificate Law) and related regulations to exclude from program
    eligibility tourism projects in established tourist areas of Guam, exclude previously existing
    facilities from eligibility for new Qualifying Certificates, require that businesses submit
    letters of intent to apply for Qualifying Certificates no less than 180 days prior to obtaining
    related building permits, and clearly define the circumstances under which lower than
    maximum-level tax benefits can be granted.
    
    We recommend that the Chairman of the Board of Directors of the Guam Economic
    Development Authority direct the Authority's Administrator to:
    
        2. Establish procedures and develop methods, such as economic models and
    procedures, to calculate the economic benefits of tax rebates and abatements by considering
    the costs to the Government, including the amount of taxes foregone and the indirect
    infrastructure and social costs involved.
    
        3. Adopt procedures to require that negotiations with Qualifying Certificate
    applicants are documented and that the negotiations include the use of all relevant analyses,
    as described in Recommendation 2, to ensure that the estimated direct and indirect costs to
    the Government do not negate the economic benefits of the Qualifying Certificates.
    
    Guam Economic Development Authority Response and Office of Inspector
    General Reply
    
    In the August 10, 2001 response (Appendix 2) to the draft report from the Authority's
    Chairman of the Board, the Authority concurred with Recommendations 2 and 3, and 
    partially concurred with Recommendation 1.  Based on the response, we requested
  additional
    information for Recommendations 2 and 3, and requested that the Authority reconsider
    Recommendation 1, which is unresolved (see  Appendix 3).  
    
    Recommendation 1.  Partial concurrence.
    
        Guam Economic Development Authority Response.  The Authority disagreed  with
    the part of the recommendation to amend the Qualifying Certificate law to exclude from
    program eligibility new tourism projects in established tourist areas of Guam.  As
    justification for continuing to approve Qualifying Certificates for tourism projects in
    established tourist areas, the Authority cited various natural and economic disasters, such
  as
    Typhoon Paka, the Korean Air Lines Flight 801 crash, and the Asian economic downturn,
    all of which affected the tourism market on Guam.  Although the Authority concurred with
    the part of the recommendation to exclude previously existing facilities from eligibility for
    new Qualifying Certificates, it disagreed with excluding established businesses undergoing
    qualified expansion projects.  The Authority also disagreed with the part of the
    recommendation to require applicants to submit letters of intent to apply for a Qualifying
    Certificate no less than 180 days prior to obtaining the related building permits.  According
    to the response, standard operating procedures that the Board approved in September 1999
    require an applicant to submit a letter of intent 90 days prior to receiving a building permit
    and submit the Qualifying Certificate application within 90 days of receiving the building
    permit.  To support the 90-day lead time, the Authority stated that investors preferred to
    maintain their confidentiality for competitive protection for as long as possible, but
    acknowledged that investors for construction-intensive projects usually announce plans
    6 months in advance.  The Authority concurred with the part of the recommendation to
    clearly define the circumstances under which lower than maximum tax benefits can be
    granted.   The Authority criticized the report by stating that it focused entirely on tax
  revenue
    generation and did not consider other economic aspects such as job generation, cash
    injection, circulation of money in the economy, and other taxes generated.  The Authority
    questioned the report's figure of 15 hotels constructed during the decade of the 1990s
    without Qualifying Certificates.  The Authority also stated that the finding gave "no
  credence
    . . . to the fact that all economic indicators provided by the Guam Visitors Bureau in the
  latter
    part of 1995 indicated that visitors to Guam would exceed 2 million by the year 2000."
    
        Office of Inspector General Reply.  Although not specifically stated in the body of
    the report, we acknowledge that businesses participating in the Qualifying Certificate
    Program contribute significantly to the economy of Guam, both in terms of net taxes paid
    and employment opportunities for Guam residents.  However, we believe that the Authority
    should also attempt to maximize revenues for the Government of Guam to the greatest
  extent
    possible.  This is especially important at a time when the Government of Guam is
    experiencing serious financial problems and is having difficulty meeting day-to-day
    operating expenses.  The focus of this report has been to recommend changes to the
    Qualifying Certificate Program that should help to generate additional tax revenues from
    program participants.
    
    Coincidentally, as this report was being finalized for issuance in September 2001, the Bank
    of Hawaii had recently issued a report on the economy of Guam that painted a rather bleak
    picture for the near-term future of Guam's hotel/tourist industry.  The report cited statistics,
    provided by the Guam Visitors Bureau, which indicate that in the year 2000 there were only
    1.2 million (rather than the hoped for 2 million) visitors, on average only 63 percent of
    Guam's 10,050 existing hotel rooms were occupied, and average room rates had dropped
  to
    $100 per night from $130 per night in 1999.  All of these numbers suggest that, at least until
    a turnaround is experienced in the Asian (and primarily Japanese) economies, the Guam
    hotel/tourist industry may have reached a saturation point.  Even the Authority's response
    acknowledges that development in the primary Tumon tourist district may have reached a
    saturation point.  In that light, we made the recommendation that the Authority stop issuing
    Qualifying Certificates for new projects in established tourist areas of Guam.  We believe
    that this would be a prudent course of action, at least until such time as there are positive
    signs that the number of visitors to Guam is again on the increase and that the demand for
    additional hotel rooms and tourist facilities will also increase beyond existing capacities.
    
    We likewise believe that it would be a prudent course of action, in order to maximize tax
    revenues, to refrain from granting Qualifying Certificates to hotels and other tourist
  facilities
    that are already operational.  During the audit period, 10 of the 13 applicants that were
    approved for Qualifying Certificates in the hotel/tourist business were either already
    established on Guam or already committed to starting their projects, as evidenced by their
    having completed financial and architectural plans and secured building permits or leases. 
    These businesses hired employees and invested funds to maintain a predetermined level of
    service and paid the requisite taxes thereon, and would have done so even without receiving
    Qualifying Certificates.  Additionally, our audit disclosed (and we confirmed, despite the
    questions raised in the Authority's response) that 15 hotels were constructed during the
    decade of the 1990s without receiving Qualifying Certificates, that 11 of the 15 hotels met
    the Authority's 100-room minimum eligibility requirement, and that 6 of those 11 hotels
  also
    met the Authority's requirements to be classified as "First Class Hotels."  The other 5 hotels
    met lesser requirements for classification as "Business Class Hotels" or "Motels."
    
    Lastly, the amendments to the standard operating procedure that were approved by the
    Authority's Board on September 24, 1999 did not include any requirement for a letter of
    intent, as the Authority claimed in its response.  Since our recommendation ties the lead
  time
    of 180 days to the building permit issuance date, the recommended requirement for a letter
    of intent would involve only applicants who were constructing new or expanded facilities. 
    Because the Authority conceded, in its response, that investors for such projects generally
    announce construction plans about 6 months (180 days) in advance, we stand by our
    recommendation for a 180-day lead time for the submission of letters of intent. 
    
    Recommendation 2.  Concurrence.
    
        Guam Economic Development Authority Response.  The Authority stated that it
    will continue to refine, improve, and expand its existing economic model to more
  accurately
    quantify all direct and indirect costs of the Qualifying Certificate Program.
    
        Office of Inspector General Reply.  We acknowledge that the Authority uses an
    economic model for comparing the benefits to be gained by Guam with the tax incentives
    granted Qualifying Certificate recipients.  However, that model is flawed in that it does not
    include infrastructure impact costs that are to be borne by the Government to upgrade such
    utilities as power, water, and sewerage treatment.  Also absent from the existing model are
    the costs of other Government services, such as police and fire protection.  As a result, the
    actual cost to the Government for granting tax incentives is understated, and any decision
  to
    recommend approval for granting Qualifying Certificates based on the existing model will
    be made without complete information.
    
    Recommendation 3.  Concurrence.
    
        Guam Economic Development Authority Response.  The Authority stated that 
    since 1995, it had develop its own form for providing economic analyses of the costs and
    benefits of Qualifying Certificates and that this form considers the Government's permitting
    process through the Territorial Land Use Commission and the economic impact to Guam's
    infrastructure.  The Authority also stated that it will continue to improve its methods to
    provide a more comprehensive model that will account for other direct and indirect costs
  to
    the Government.
    
        Office of Inspector General Reply.  Our review of the analysis form used by the
    Authority for reviewing applications processed during the audit period disclosed that the
    form did not quantify any of the costs that may have been identified in the Territorial Land
    Use Commission's permitting process, nor does it address the economic impact to Guam's
    infrastructure as claimed by the Authority in its response.
    
         B.  COMPLIANCE WITH QUALIFYING CERTIFICATES
    
    The Guam Economic Development Authority improperly granted tax abatements of
    $459,777 to beneficiaries that were not in compliance with their Qualifying Certificates,
    apparently used surveillance fees of about $220,000 for purposes other than monitoring
    beneficiary compliance, and authorized beneficiaries to receive additional tax benefits of
  at
    least $815,990 while concurrently allowing the beneficiaries to not employ about 371 Guam
    residents.  This occurred because the Authority did not effectively monitor Qualifying
    Certificate beneficiaries to ensure that they complied with their contractual commitments,
    including their agreements to employ a specified number of Guam residents.  Instead, the
    Authority recommended that the Governor grant the beneficiaries temporary employment
    waivers.   Additionally, the Authority apparently did not use available financial resources
  to
    employ and train compliance staff.
    
    Legal Requirements
    
        The Guam Code Annotated (12 G.C.A. ï¿½ 58111) provides that a Qualifying Certificate
    can be suspended, rescinded or revoked by the Governor, upon the recommendation of the
    Authority, for fraud, noncompliance with the Certificate, bankruptcy, dissolution or death,
    or noncompliance with laws and rules.  Part II, Section 6, of the Authority's Rules and
    Regulations provides that when the Authority has determined that the terms and conditions
    of a Qualifying Certificate have been fulfilled by the recipient, the Authority "shall forward
    a ï¿½Certificate of Compliance' together with a copy of the recipients' corporate income tax
    return and certified financial statements to the Department of Revenue and Taxation." 
    Section 7a states, "When it has been determined by the Administrator that the terms and
    conditions stipulated on the Qualifying Certificate, a provision of law or a requirement
    imposed by these rules have not been met, then the Administrator shall notify the
  Beneficiary
    in writing of the specifics of the non-compliance and provide reasonable time limit in which
    to correct the discrepancy."
    
    Compliance Monitoring
    
    We examined the Authority's compliance monitoring for 25 of the 31 Qualifying
    Certificates active during fiscal years 1997, 1998, and 1999.  During the 3 fiscal years, the
    Authority (1) did not have a formal inspection program in place; (2) did not perform all
    required inspections; (3) did not prepare written inspection reports; and (4) issued
    Certificates of Compliance authorizing five beneficiaries to receive tax benefits, although
  the
    beneficiaries were not in compliance.  Further, the Authority used an estimated $220,000
  in
    surveillance fees for other Authority operations.  The Administrator stated that the
    Authority's compliance monitoring efforts were hindered by a shortage of trained personnel
    but that efforts were ongoing to improve the monitoring program.  In August 1999, the
    Authority increased its monitoring efforts, and we therefore extended the period of our
    review to evaluate these efforts.  Although significant progress was made, as of June 30,
    2000, additional improvements were still needed.  As a result of the deficiencies noted, the
    Government of Guam may lose tax revenues of at least $459,777.
    
        Inspections.  Section 3a of the Rules and Regulations requires that on-site inspections
    be performed at least semiannually, and Section 4 requires that detailed inspection reports
    be prepared within 15 working days of the dates of inspections.  Despite these requirements,
    during fiscal years 1997, 1998, and 1999, the Authority documented that it had performed
    only 31 of the 90 required on-site inspections.  Since only inspection dates were
  documented,
    we could not determine if the reports were prepared in a timely manner. 
    
    According to the Authority's Chief Financial Officer, beginning in August 1999, the
    Authority increased the amount of resources and the priority given to its compliance
    monitoring program.  Therefore, we extended our review to assess compliance monitoring
    efforts through December 31, 1999 and the Authority's actions through June 30, 2000
  related
    to identified monitoring issues.  Although the level and the effectiveness of monitoring
    activity increased during fiscal year 1999 and the first 3 months of fiscal year 2000, as of
    June 30, 2000, the Authority had not adopted a formal monitoring program, had performed
    only 6 of the 38 required inspections, and had not issued written monitoring reports on
    32 inspections performed during calender year 1999.  The Authority's Programs and
    Compliance Officer stated that the requirement for semiannual inspections could not be met
    with the available staff and that the procedures to formalize the compliance monitoring
    process were still in the draft stage.
    
        Certificates of Compliance.  During fiscal years 1997 and 1998, the Authority
    determined that five beneficiaries were not in compliance with their Qualifying Certificates
    but did not issue notices of noncompliance in a timely manner.  Further, in three instances
    in fiscal year 1997 and four instances in fiscal year 1998, the Authority issued Certificates
    of Compliance although the recipients were not in compliance with requirements of their
    Qualifying Certificates.  Based on these incorrectly issued Certificates of Compliance, as
  of
    June 30, 2000 the beneficiaries had improperly received abatements of property taxes
  and/or
    rebates of income taxes totaling $459,777.  The Authority subsequently recommended
    granting waivers to two beneficiaries for another eight instances of noncompliance during
    fiscal years 1998 and 1999 (see "Temporary Employment Waivers" in this finding).
    
        Surveillance Fees.  The Guam Code Annotated (12 G.C.A. ï¿½ 58144 and 58145)
    provides for the recovery of extraordinary costs incurred to "process the application or
    monitor the Beneficiary's performance of the terms and conditions of the Qualifying
    Certificate" and for a periodic adjustment of fees "upon demonstration to the Authority by
    the Administrator that the cost of performing the services covered by the fees is greater than
    the amount of the fees." Although there was no specific legal requirement to restrict the use
    of the surveillance fees to compliance monitoring, the cited provisions clearly allow the use
    of the fees to finance the Authority's monitoring efforts, particularly since Authority
  officials
    cited the lack of adequate staff to effectively carry out the monitoring program.  Despite
    these factors, during fiscal years 1997, 1998, and 1999, the Authority used only $463,706
    of the surveillance fee collections totaling $683,605 to cover the costs of the compliance
    process.  The approximately $220,000 balance of the surveillance fees was apparently used
    to fund other Authority operations.  According to the Deputy Administrator and the Chief
    Financial Officer, the Authority needed these funds for nonmonitoring expenses because
    other funding sources were inadequate to cover the Authority's operating expenses.
    
    Temporary Employment Waivers
    
    During fiscal year 2000, the Authority recommended that the Governor retroactively
  approve
    temporary employment waivers for seven beneficiaries included in our review.  The seven 
    beneficiaries requested the waivers after the Authority issued a total of 21 letters of
    noncompliance to them during fiscal year 1999.  The letters notified the beneficiaries that
    they had not met the minimum employment levels required in their Qualifying Certificates. 
    According to the Qualifying Certificates, six of the seven beneficiaries were required to
    employ a total of 1,777 Guam residents.  However, the Authority determined that during
    fiscal year 1999, the six beneficiaries employed an average total of only 1,504 Guam
    residents, or 273 fewer than required by the Qualifying Certificates.
    
    As of June 30, 2000, the Governor had approved four waivers and was considering two
  other
    waiver recommendations.  The written justifications for the waivers stated that six of the
    waivers were necessary because of declining economic conditions on Guam and that the
    other waiver was necessary because of damage from the December 1997 Typhoon Paka. 
    Further, the waivers retroactively approved the beneficiaries' receipt of fiscal year 1998 tax
    abatements totaling $481,495.  However, we noted that the four businesses whose waivers
    had expired had still not hired the required number of employees.  As a result of the
  waivers,
    the Government of Guam lost tax revenues of at least $815,990, and as of June 30, 2000,
    the six beneficiaries employed 371 fewer employees than required in their contracts, as
    shown in Table 2.
    
        Table 2.  Qualifying Certificate Waivers of Employment Requirements  
    
                             Number of       Average No.              Date             Calender Year     Number
  of               Difference
     Effective         Employees     of Employees            Waiver              Period Of        
  Employees                      From No. 
    Date of QC       Required         in  FY 1999           Requested              Waiver          at
  06/30/00                   Required  
    
    10/24/86                      280        274      11/26/99*                                                                
     1999                272          8    
    06/12/87                      360        330       02/16/00**                                                             
     1999/2000            283         77    
    04/11/91                      327        219      11/09/99*                                                                
    1998/1999            223        104    
    05/01/96                      150        133       01/12/00**                                                             
     1999/2000            140         10    
    09/05/97                      520        422      10/19/99*                                                                
    1998/1999            364        156    
    05/01/98                      140        126      01/13/00*                                                                
     1999                124         16    
    
       Total                               1,777            1,504                                                                      
                              1,406             371    
    __________
    * Waivers were approved by the Governor of Guam on March 22, 2000.
    ** Waivers were approved by the Authority but, as of June 30, 2000, were still awaiting the
  Governor's approval.
    
    According to Authority records, in one instance a beneficiary with a required employment
    level of 520 fell below the required level for the first time in January 1998.  Subsequently,
    the beneficiary's employment level steadily dropped to 440 by January 1999 and to 390 by
    January 2000.  During the period of March 3, 1999 to November 26, 1999, the Authority
    issued six letters of noncompliance to the beneficiary.  On October 19, 1999, the beneficiary
    applied for a temporary employment waiver for calender years 1998 and 1999.  On
    November 30, 1999, the Authority recommended that the waiver be approved because of
    "Guam's current economic condition" and the beneficiary's operating losses following a
    large investment in facility expansion.  The Governor approved the waiver on March 22,
    2000.  Because of the waiver, the beneficiary received tax benefits of at least $237,825 for
    fiscal year 1998 and at least $90,825 for fiscal year 1999.  The 2-year retroactive waiver
    expired on December 31, 1999, but the beneficiary continued to reduce the number of
    employees rather than increase employment in compliance with the Qualifying Certificate.
    As of June 30, 2000, the beneficiary's total employment was 364, or 156 (30 percent) below
    the required level.
    
    In our opinion, the Authority should have either negotiated with the beneficiaries to reduce
    the value of the tax benefits received or suspended the Qualifying Certificates until such
  time
    as the beneficiaries meet the hiring levels.  Under the law, the Governor of Guam upon
    recommendation of  the Authority also could revoke or the beneficiaries could relinquish
    their certificates.  By granting waivers to the noncompliant beneficiaries, the Authority
    unilaterally gave up at least 371 jobs the beneficiaries had agreed to provide to Guam
    residents while allowing the same businesses to continue receiving their full tax benefits. 
    We believe that these actions also could have provided the beneficiaries a competitive
    advantage versus other similar businesses by allowing them to reduce their operating costs
    while continuing to receive the tax benefits.
    
    Recommendations
    
    We recommend that the Chairman of the Board of Directors of the Guam Economic
    Development Authority direct the Authority's Administrator to:
    
        1. Develop and submit to the Board for adoption policies and standard operating
    procedures to ensure that the Authority limits the use of surveillance fees to pay personnel
    and other expenses related to monitoring the compliance of beneficiaries with the
    requirements of their Qualifying Certificates and tracks surveillance costs to determine if
    surveillance fees need to be adjusted.
    
        2. Finalize and submit to the Board for adoption formal procedures for the
    compliance monitoring program.
    
        3. Provide training to compliance monitoring staff to ensure that all aspects of the
    monitoring process are performed in a consistent and timely manner.
    
        4. Develop and submit to the Board for adoption regulations to quantify the cost to
    the Government of Guam and to the Guam workforce of temporary waivers and require
    negotiations to ensure that beneficiaries either give up a portion of their benefits in
  exchange
    for waivers of certificate requirements or suspend certificate benefits pending correction of
    the noncompliance issues.
    
    Guam Economic Development Authority Response and Office of Inspector
    General Reply
    
    In the August 10, 2001 response (Appendix 2) to the draft report from the Authority's
    Chairman of the Board, the Authority concurred with Recommendations 2 and  3, and did
    not concur with Recommendations 1 and 4.  Based on the response, we requested additional
    information for Recommendations 2 and 3, and requested that the Authority reconsider
    Recommendations 1 and 4, which are unresolved (see  Appendix 3).  
    
    Recommendation 1.  Nonconcurrence.
    
        Guam Economic Development Authority Response.   The Authority stated that the
    recommendation was unnecessary because the costs of the monitoring function exceeded
  the
    revenues from surveillance fees.  Furthermore, Authority stated that the annual salaries and
    benefits of the division manager and the four full-time staff personnel exceeded the average
    annual surveillance fee collections. 
    
        Office of Inspector General Reply.   The Authority's response allocated 100 percent
    of the salary and fringe benefit costs for the compliance division manager and staff to
    Qualifying Certificate monitoring activities and concluded that those costs exceeded
    surveillance fee collections.  However, in addition to the Qualifying Certificate Program,
  the
    compliance division was also responsible for performing compliance monitoring activities
    for the Authority's loan and leasing programs.  Because the surveillance fees were collected
    solely under the Qualifying Certificate Program, we believe that, for comparative purposes,
    only the costs associated with Qualifying Certificate compliance monitoring efforts should
    be considered.  Therefore, we estimated that the Authority applied about $220,000, almost
    one-third of the surveillance fees collected, to other operations. 
    
    Recommendation 2.  Concurrence.
    
        Guam Economic Development Authority Response.  The Authority agreed that  the
    adoption of formal standard operating procedures for compliance monitoring is essential,
  and
    stated that it had drafted standard operating procedures for compliance monitoring of the
    Qualifying Certificate Program.  The Authority stated that the standard operating
  procedures
    will add to the already-developed and approved procedures for the underwriting process,
  as
    developed by the Authority's Industry Development Division.  The Authority also stated
  that
    its objective was to obtain Board approval of the compliance monitoring procedures before
    the end of fiscal year 2001.
    
        Office of Inspector General Reply.  The response did not specifically state when the
    Administrator will finalize and submit the compliance monitoring procedures to the Board
    for approval.
    
    Recommendation 3.  Concurrence.
    
        Guam Economic Development Authority Response.  The Authority agreed that
    formal training was needed for maintaining professional development in all aspects of the
    work place.  However it disagreed that compliance monitoring was not done in a consistent
    and timely manner as a result of not having training opportunities.  The Authority stated
  that
    monthly reports were provided to the Board on a timely basis and that annual compliance
    reports were completed in accordance with Part 2 of the Rules.  The Authority also stated
    that the economic hardship experienced by the entire Government of Guam minimized
  some
    costly training opportunities, but that cross-training, statutory review, program evaluation,
    and assessment training were provided to the compliance staff.
      
        Office of Inspector General Reply.  Although we commend the Authority for
    providing informal, on-the-job training opportunities to the compliance staff, the response
    did not indicate if and when formal training would be provided.
    
    Recommendation 4.  Nonconcurrence.
    
        Guam Economic Development Authority Response.  The Authority stated that the
    law already provides it with the authority to negotiate the specific conditions of Qualifying
    Certificates.  The Authority also asserted that it acted in accordance with the Qualifying
    Certificate law when issuing the temporary waivers.  With regard to the related finding, the
    Authority stated that the correct legal citation for the finding is 12 G.C.A. ï¿½ 58126, and not
    12 G.C.A. ï¿½ 58111.
    
        Office of Inspector General Reply.   We cited 12 G.C.A. ï¿½ 58111 because this
    provision lists the grounds, most notably noncompliance, for which a Qualifying Certificate
    can be suspended, rescinded, or revoked.  Such remedial action can be taken when the
    certificate holder has not corrected its noncompliance with the Qualifying Certificate law,
    applicable rules and regulations, or any condition or obligation in the Certificate after
  having
    been notified by the Authority in writing of such failure to comply and after having been
    given by the Authority a reasonable period of time within which to correct such failure. 
  This
    provision of the law was therefore cited as the criteria for actions the Authority should take
    in enforcing compliance with the terms and conditions of Qualifying Certificates.  In
    contrast, 12 G.C.A. ï¿½ 58126, which was cited by the Authority, relates to actions (issuance,
    modification, renovation, and suspension) on Qualifying Certificates that may be
    recommended by the Board to the Governor of Guam and the timetable for the Governor's
    approval or disapproval of such action.
    
    The Authority processed temporary waivers from employment or other conditions in the
    Qualifying Certificates as modifications to the Certificates.  In our opinion, it was not a
  good
    policy for the Authority to routinely recommend such modifications to ease the Certificate
    terms and conditions without negotiating corresponding reductions of tax benefits granted
    to the certificate holders whenever the holders did not meet the requirements it had agreed
    to at the time the Qualifying Certificates were issued.  The temporary waivers cited in the
    finding were granted primarily to certificate holders who were chronically in a
    noncompliance status.  By definition, the Qualifying Certificate is a contract between the
    Government of Guam and a beneficiary who has qualified for tax rebates and/or abatements
    in return for meeting certain employment, investment, and other requirements.  The
    seemingly routine retroactive approval of waivers by the Authority, as disclosed in the
    finding, negated the rationale for the beneficiary to comply with its obligations (i.e., the
    terms and conditions of the Qualifying Certificate) and reduced compliance monitoring to
    a "window-dressing" process.  There should be a penalty (such as relinquishment or
    reduction of tax benefits) associated with the waiver of Certificate requirements, especially
    in the case of chronically noncompliant beneficiaries.
    
         C.  ABATEMENT OF GROSS RECEIPTS AND USE TAXES
    
    Gross receipts taxes of more than $5 million and an undetermined amount of use taxes were
    abated improperly and without verification of the amount or eligibility.  This occurred
    because the Guam Economic Development Authority did not ensure that the Guam
    Department of Revenue and Taxation and the Guam Customs and Quarantine Agency
    correctly granted Qualifying Certificate abatements of gross receipts and use taxes. 
  Because
    of an oversight, the Authority had not initiated action to coordinate and develop monitoring
    procedures with these two agencies to ensure that gross receipts and use taxes were abated
    only on eligible expenditures.  In addition, the Authority had misinterpreted a Board of
    Director's resolution and thought it had removed the requirement to monitor contractor
    claims for gross receipt tax abatements.
    
    Gross Receipts Taxes
    
    The Guam Code Annotated (12 G.C.A. ï¿½ 58127.5) provides that gross receipts taxes may
  be
    abated for periods of up to 20 years (renewable for additional 20-year periods) for qualified
    insurance companies.  The Code (12 G.C.A. ï¿½ 70105(a)) also provides that contractors
    working on hotels, other tourist facilities, or affordable housing developments may also
    receive gross receipts tax abatements.  In both instances, eligibility for the abatements is to
    be evidenced by Qualifying Certificates issued by the Authority.
    
    Of the 31 Qualifying Certificates active as of December 31, 1999, 6 Certificates included
  the
    abatement of gross receipts taxes for insurance companies and 1 included the abatement of
    gross receipts taxes for 20 contractors working on a hotel expansion project.  To evaluate
  the
    abatement process and determine the amount of gross receipts taxes abated, we reviewed
    available records at the Business Privilege Branch of the Department of Revenue and
    Taxation.
    
        Insurance Companies.  During fiscal years 1998 and 1999, Revenue and Taxation
    officials incorrectly accepted and processed claims for gross receipts tax abatements from
    four of the six insurance company beneficiaries based on copies of the beneficiaries'
    Qualifying Certificates that were attached to gross receipts tax returns.  The Supervisor of
    the Business Privilege Branch said she did not know that the Authority issued Certificates
    of Compliance which were required before tax abatements should be approved.  The
  Deputy
    Tax Commissioner, Department of Revenue and Taxation, stated that the Department did
  not
    have procedures for administering gross receipts tax abatement claims and that he had
    understood that the Authority would draft such procedures.  In addition, until May 2000,
    Authority personnel had not coordinated with Revenue and Taxation gross receipts tax
    personnel to assist in processing gross receipts tax abatement claims.  Further, according
  to
    the Authority's Compliance and Internal Auditing Supervisor, the Authority had not
  prepared
    or adopted procedures to either monitor or process the actual granting of gross receipts tax
    abatements.  As a result, Revenue and Taxation officials incorrectly authorized abatements
    of gross receipts taxes totaling at least $2,902,598, including $677,802 to three beneficiaries
    whom the Authority had determined were not in compliance with their Qualifying
    Certificates, as shown in Table 3.
    
    Table 3. Insurance Company Gross Receipts Taxes Improperly Abated
    
        Effective          Amount of                    Taxes Abated Although         Tax Revenue    
      Date of QC      Taxes Abated                                                             Not in Compliance  
  Unauthorized*                      At Risk of Loss  
    
         12/02/97          $679,528                 $171,313                                                       $508,215 
                           $679,528       
         01/01/98         1,008,749                  478,774                                                        292,605 
                           771,379**   
         01/01/98         1,281,112                    -                                                          1,281,112   
                         1,281,112       
         10/01/98            170,579                  27,715                                                        142,864 
                               170,579       
    
        Total                     $3,139,968                  $677,802             $2,224,796 $2,902,598       
    __________
    * The Authority had not made a determination of compliance or issued certificates of
  compliance on these
    abatements.  Therefore, some or all of these amounts may retroactively be determined to
  be authorized.
    ** This company subsequently declared bankruptcy.
    
        Construction Companies.  On June 5, 1998, the Authority issued a Qualifying
    Certificate to a corporation for a major hotel expansion project.  Through the Qualifying
    Certificate, 20 different contractors received special certificates authorizing each contractor
    to receive a tax abatement for work related to the expansion project.  The contractors were
    required to certify that all tax abatements received were passed on to the hotel.  Based on
    documents obtained from the Department of Revenue and Taxation, as of March 31, 2000,
    11 of the 20 contractors had made a total of 55 claims for abatement of gross receipts taxes. 
    Only 1 of the 55 abatement claims was supported by a Certificate of Compliance issued by
    the Authority.  Instead, the 11 contractors submitted gross receipts tax returns with copies
    of the Qualifying Certificates and claimed tax abatements of at least $2,116,966.  As of the
    time of our review, Revenue and Taxation had processed and approved the tax returns
  related
    to abatements totaling $432,782 but had not yet processed the tax returns for the remaining
    $1,682,184 in claimed abatements.
    
    According to Authority personnel, the Authority had not implemented a compliance review
    process because they thought that a Board of Director's resolution exempted the contractors
    from all monitoring requirements.  However, although Board of Director's
    Resolution 99-030, approved on June 23, 1999, exempted the contractors from complying
    with four Qualifying Certificate requirements, the resolution added a requirement that the
    contractors were to submit statements prepared by independent accountants documenting
  the
    amount of expenditures qualifying for the gross receipts tax abatements.  As of
    June 30, 2000, the Authority had not received any of the required independent accountants'
    statements.  Without a review process for the tax abatement claims, the validity of the
  claims
    could not be determined and there was a potential for a contractor to claim abatements for
    taxes based on revenues from sources other than the hotel expansion project.  For example,
    we noted that 4 of the 11 contractors who submitted claims had included gross receipts tax
    abatements totaling $21,788 more than the Authority had initially authorized based on the
    approved construction contracts provided to the Authority.
    
         Use Taxes
    
    The Guam Code Annotated (11G.C.A. ï¿½ 28103 and ï¿½ 28104) provides that an excise tax of
    4 percent will be levied on the use or consumption of all property brought into Guam.  In
    accordance with the Code (11G.C.A. ï¿½ 28105(e)), the tax is collected by the Guam Customs
    and Quarantine Agency on behalf of the Department of Revenue and Taxation.  The Code 
    (12 G.C.A. ï¿½ 70105 (b)) also provides for an exemption (abatement) for property to be used
    to construct, furnish, and equip hotels and tourist facilities.  Lastly, the Code
    (11 G.C.A. ï¿½ 28105(f)) authorized the Department of Revenue and Taxation to promulgate
    rules and regulations to enforce the use tax law.
    
    During fiscal years 1997 and 1998, the Authority issued Qualifying Certificates to two
    beneficiaries granting them the right to receive use tax abatements on the hotel renovation
    projects.   The Director of the Guam Customs and Quarantine Agency stated that Customs
    did not determine and could not provide information on the total amount of use taxes abated
    for the two beneficiaries because the agency collects information only on taxes collected. 
    The Director also said that, as of June 30, 2000, the Department of Revenue and Taxation
    had not provided rules and regulations for collection of the use tax, as required by the Guam
    Code Annotated.
    
    Although specific information was not available to determine the amount of use tax
    abatements, we estimated that the amount of use tax eligible for abatement for one of the
  two
    hotel projects was about $180,000, based on an estimated cost for furniture and fixtures of
    $4.5 million and taxed at a 4 percent rate.  According to a Customs official, Customs
    personnel authorized companies to receive, without payment of the use tax, otherwise
  taxable
    property based on photocopies of their Qualifying Certificates.  There were no procedures
    to ensure that the recipients of the tax abatements were in compliance with the Qualifying
    Certificates or that the furniture and fixtures were destined for projects included in the
    Qualifying Certificates.  Although the unavailability of appropriate documents prevented
  us
    from specifically identifying potential improper abatements, in our opinion, the lack of
    adequate internal control procedures may have allowed otherwise taxable furniture and
    fixtures to avoid taxation.
    
    Recommendations
    
    We recommend that the Chairman of the Board of Directors of the Guam Economic
    Development Authority direct the Authority's Administrator to:
    
        1. Coordinate with the Department of Revenue and Taxation to develop and
    implement procedures to ensure that gross receipts tax abatements are granted only to
    applicants who comply with their Qualifying Certificate requirements.  
    
        2. Coordinate with the Director of the Customs and Quarantine Agency to develop
    and implement procedures to ensure that use tax abatements are granted only to applicants
    who comply with their Qualifying Certificate requirements. 
    
        3. Develop and implement procedures to ensure that contractors submit the required
    independent accountants' statements, that the statements are matched with tax abatement
    claims before Certificates of Compliance are issued, and that the original Qualifying
    Certificate beneficiaries are notified of the amount of tax abatements received by each
    subcontractor covered under the primary Qualifying Certificates.
    
        4. Review the questioned gross receipts tax and use tax abatements discussed in this
    finding to determine whether the tax abatements were allowable and, if not allowable,
    apprise the Department of Revenue and Taxation of the need to collect the improperly
  abated
    taxes.
    
    Guam Economic Development Authority Response and Office of Inspector
    General Reply
    
    In the August 10, 2001 response (Appendix 2) to the draft report from the Authority's
    Chairman of the Board, the Authority concurred with Recommendations 1 and 2, and did
  not
    concur with Recommendations 3 and 4.  Based on the response, we requested additional
    information for Recommendations 1 and  2, and requested that the Authority reconsider
    Recommendations 3 and 4, which are unresolved (see  Appendix 3).  
    
    Recommendations 1 and 2.  Concurrence.
    
         Guam Economic Development Authority Response.  The Authority stated that it
    is critical for all agencies to meet regularly to develop and implement procedures not only
    for the issuance of gross receipts tax exemptions, but for other tax incentives offered by the
    Qualifying Certificate Program.  The Authority also stated that it has regularly coordinated
    with the Department of Revenue and Taxation to discuss program guidelines and the
    compliance status of each beneficiaries.  The Authority further stated that Qualifying
    Certificate Program guidelines and policies only require the Authority to coordinate with
  the
    Department of Revenue and Taxation, but that the Authority will "make a more concerted
    effort to involve the Customs and Quarantine Agency in its meetings and to better establish
    program control measures."
    
         Office of Inspector General Reply.  Had good coordination occurred between the
    Authority and the Department of Revenue and Taxation, there would not have been the
    situation where beneficiaries were able to file for and obtain the abatements from Revenue
    and Taxation without input from the Authority as to the beneficiaries' compliance status. 
    Apparently, there was inadequate communication between the two agencies as to the
    requirements for abatement filing.  This is why we believe that the Authority should ensure
    that the coordination procedures are formalized in writing and approved by the Department
    of Revenue and Taxation, the Custom and Quarantine Agency, and the Authority's Board. 
    
    Recommendation 3.  Nonconcurrence.
    
         Guam Economic Development Authority Response.  The Authority agreed that
    procedures are needed to ensure that the accountants' statements are matched to tax
    abatement claims, and stated that this practice has been addressed in draft standard
  operating
    procedures.  However, the Authority disagreed that a Certificate of Compliance must be
    issued prior to the tax abatement claims.  The Authority indicated that if the beneficiary is
    found to be in noncompliance at the year-end review, the tax incentives must be reimbursed
    with penalties.
    
         Office of Inspector General Reply.  Beneficiaries are already required to submit
    detailed monthly reports to the Compliance Division, therefore the monthly accountants'
    financial statements should not be an undue burden for the beneficiaries to submit or for the
    Authority to review.  Additionally, we found no indication during the audit that the
  Authority
    had matched the accountants' statements with the contractors' abatements.
    
    Recommendation 4.  Nonconcurrence.
    
         Guam Economic Development Authority Response.   The Authority stated that the
    recommendation should be addressed to the Department of Revenue and Taxation, but
  stated
    that it "does take note of this issue and will separately discuss the issue" with the
  Department
    of Revenue and Taxation.  The Authority also stated that the Qualifying Certificate law
    authorizes the Tax Commissioner of Guam to issue rules as deemed necessary to implement
    the procedures outlined in Chapter 58 of the Qualifying Certificate law.
    
         Office of Inspector General Reply.  The issue is not the need for the issuance of
    rules to implement the procedures outlined in the Qualifying Certificate law
    (12 G.C.A. Chapter 58), but the need for the Authority to coordinate with the Department
    of Revenue and Taxation regarding the questioned tax abatements discussed in the finding. 
    We have revised the recommendation to require that the Authority review the questioned
    gross receipts tax and use tax abatements to determine whether the tax abatements were
    allowable and, if not allowable, to apprise the Department of Revenue and Taxation of the
    need to collect the improperly abated taxes.
    
         D.  REINVESTMENT OF TAX BENEFITS
    
    Legally mandated investments in Guam's economy totaling at least $2.3 million may not
    have taken place because the Guam Economic Development Authority did not include
    language in Qualifying Certificates requiring beneficiaries to reinvest tax benefits and, for
    those Certificates that included the reinvestment requirement, did not monitor the
    beneficiaries' compliance.  This occurred because the Authority's (1) procedures did not
    require and staff neglected to include the necessary language in Certificates amended after
    passage of the law requiring benefit reinvestment and (2) management was unclear on how
    to determine compliance with the reinvestment requirement.
    
    Reinvestment Requirement
    
    The Guam Code Annotated (12 G.C.A. ï¿½ 58142) requires that each recipient of a Qualifying
    Certificate, except insurance carriers, invest in the Guam economy no less than 50 percent
    of any taxes rebated or abated for a period of 5 years following the rebate or abatement. 
    Beneficiaries are also required to provide reports identifying the amounts reinvested during
    each fiscal year.  The law became effective on December 29, 1994, and the Authority
  should
    have included this requirement in all applicable Qualifying Certificates issued or amended
    after that date.
    
    During the period of December 29, 1994 to December 31, 1999, the Authority issued or
    amended eight Qualifying Certificates that appear to be subject to the reinvestment
    requirement law.   We determined that the Authority included the required language in six
    new Qualifying Certificates that were issued during this period.  However, the Authority
  did
    not include the requirement in two Qualifying Certificates that were amended in November
    1995 and June 1998, respectively.  The Authority's Deputy Administrator and the Chief
    Financial Officer could not explain how this oversight occurred.  However, we noted that
  the
    Authority's Rules and Regulations and standard operating procedures for issuance of
    Qualifying Certificates did not include a requirement to ensure that the required
  reinvestment
    clause was included in all new and amended Qualifying Certificates.  The Authority's
    Administrator stated that the Authority could amend the Certificates to include the 50
  percent
    reinvestment requirement.
      
    Based on tax information available as of June 30, 2000, we determined that the two
    beneficiaries with amended Qualifying Certificates had received rebates and abatements for
    fiscal years 1997 and 1998 that totaled $3,626,027 and that the beneficiaries may receive
    substantial future rebates and abatements.  As a result of not including the reinvestment
    clause in the two amended Qualifying Certificates, Guam's economy may lose additional
    investments of at least $1,813,013 as follows:
    
         -  Effective November 28, 1995, the Authority issued an amendment to a hotel's
    existing Qualifying Certificate, incorporating the hotel's new expansion and existing
    facilities for an additional 5 years.  The amended Certificate did not include a clause
    requiring the hotel to reinvest 50 percent of tax benefits.  We determined that the hotel
    received corporate income tax rebates of $2,945,060 for fiscal years 1997 and 1998, and we
    estimated that the hotel should have reinvested about $1,472,530 of the tax benefits in the
    island's economy.
    
         -  Effective June 5, 1998, the Authority issued a new Qualifying Certificate to another
    hotel, incorporating the hotel's new expansion and existing facilities for an additional
    20 years.  The new Qualifying Certificate did not include a clause requiring reinvestment
  of
    50 percent of tax benefits.  We determined that the hotel received tax abatements and
  rebates
    of at least $680,967 for fiscal years 1997, 1998 and 1999,  and we estimated that the hotel
    should have reinvested about $340,483 of the tax benefits in the island economy.
    
    Reinvestment Monitoring
    
    The Authority was unable to document that any of the six beneficiaries with the
  reinvestment
    clause in their Qualifying Certificates had actually reinvested the required 50 percent of
  their
    tax benefits because none of the six beneficiaries had submitted the required reinvestment
    reports.  Of the six beneficiaries, the Authority had determined that four were not in
    compliance with their Qualifying Certificates for fiscal years 1997, 1998 and 1999. 
    Therefore, only two beneficiaries were authorized to receive and did receive tax benefits. 
    Although the Authority began monitoring the reinvestment clause in August 1999, the
    Deputy Administrator and the Chief Financial Officer said that the law was ambiguous. 
  The
    two officials said that there are many ways to "reinvest" and that there was not a clear
    definition in the law of the type of "reinvestment" that was to occur.  They also said that
    without more detailed guidance, the Authority would find it difficult to enforce the
    reinvestment requirement.  However, if the Authority does not enforce the reinvestment
    provision, the beneficiaries' 5-year reinvestment period could expire without any
    reinvestment occurring.  As a result of not effectively monitoring and enforcing the
    reinvestment clause for the six beneficiaries, Guam's economy could lose at least $526,633
    of additional investments, as shown in Table 4.
    
        Table 4.  Required Investment of Abated/Rebated Taxes
    
             Effective Date of                          Amount of Abated                        Reinvestment
  Amount
          Qualifying Certificate                                   or Rebated Taxes                                      
             at Risk of Loss       
    
                  05/01/96                  $192,720                                           $96,360             
                  09/05/97                             860,546                                 430,273             
    
            Total                         $1,053,266                                          $526,633             
    
    
    In our opinion, if the Authority had acted in an expeditious manner to resolve questions
    regarding the reinvestment law and enforced the reinvestment provision, Guam's economy
    would have benefitted from additional investments.  Further inaction could deprive the
    economy of additional reinvestment opportunities.  Although the exact definition of the
    5-year reinvestment period is unclear, we presume that the period applies to the tax benefits
    received on a year-by-year basis.  Therefore, it is possible that the 5-year period could act
    as a statute of limitations that relieves the beneficiaries of having to comply with the
    reinvestment requirement for each year in order to receive that year's tax benefits.
    
    Recommendations
    
    We recommend that the Chairman of the Board of Directors of the Guam Economic
    Development Authority direct the Authority's Administrator to:
    
        1. Request that the Guam Legislature amend the Guam Code Annotated
    (12 G.C.A. ï¿½ 58142) to clarify the types of reinvestment to be required of Qualifying
    Certificate beneficiaries and the meaning of the 5-year reinvestment period.
    
        2. Amend the Qualifying Certificates that were issued after December 29, 1994, to
    include the reinvestment requirement mandated by the Guam Code Annotated.
    
        3. Develop and implement rules and regulations and standard operating procedures
    to ensure that the Authority includes the reinvestment clause in all new and amended
    Qualifying Certificates and has a process to monitor compliance with the reinvestment
    requirement.
    
    Guam Economic Development Authority Response and Office of Inspector
    General Reply
    
    In the August 10, 2001 response (Appendix 2) to the draft report from the Authority's
    Chairman of the Board, the Authority concurred with Recommendations 1 and 3, and did
  not
    concur with Recommendation 2.  Based on the response, we requested additional
  information
    for Recommendations 1 and 3, and requested that the Authority reconsider
    Recommendation 2, which is unresolved (see  Appendix 3).  
    
    Recommendation 2.  Nonconcurrence.
    
        Guam Economic Development Authority Response.  The Authority stated that
    because the 5-year moratorium was lifted and the first Qualifying Certificate was issued in
    the summer of 1996, all Certificates include the reinvestment requirement in accordance
  with
    the Qualifying Certificate law. The Authority claimed that only one Qualifying Certificate
    (No. 219) did not include the reinvestment provision, but that the Certificate included the
    requirement that the recipient "comply with all laws of Guam and the rules and regulations
    of its various agencies, including and not limited to those set out in the [Qualifying
    Certificate] law, and in applicable rules and regulations."  The Authority concluded that
    because of this general requirement, a specific reinvestment provision was  not needed.
    
        Office of Inspector General Reply.  Despite the Authority's statement, two (not one)
    Qualifying Certificates did not include the reinvestment provision.  The second such
    Certificate (No. 169) was an amendment to a prior Certificate that was essentially a new
    Certificate because it contained completely new terms and conditions  and became effective
    on November 28, 1995, after the December 29, 1994 effective date of the revised
  Qualifying
    Certificate law (P.L. 22-159).  Therefore, this Qualifying Certificate also should have
    included the reinvestment provision required by the new law.  We acknowledge that the
    general compliance provision contained in Qualifying Certificate No. 219 requires the
    beneficiary to comply with provisions of the Qualifying Certificate law and applicable rules
    and regulations.  However, in our opinion, it would be preferable for the Authority to
  amend
    the two Qualifying Certificates (Nos. 219 and 169) to specifically include the reinvestment
    provision.
    
                                                            APPENDIX 1
    
    
                 CLASSIFICATION OF MONETARY AMOUNTS*
    
    
    
    
    
                                 Finding Area                             
    
                           Unrealized
                            Revenues  
                          Funds to Be
                             Put To  
                           Better Use  
                                
                                
    A. Approval of Qualifying Certificates
              Projects in Tourist Areas
              Timing of Application Filings
              Negotiation of Tax Benefits
    
            769,650
    
      $28,528,822
        24,266,430
        17,966,784
    
    
    B. Compliance with Qualifying Certificates
        Compliance Monitoring                                    
        Temporary Employment Waivers
    
    
            634,340
    
             459,777
    
    
    C.  Abatement of Gross Receipts and Use Taxes
        Gross Receipts Taxes
    
    
          5,019,564
    
    
    D.  Reinvestment of Tax Benefits
               Reinvestment Requirement
               Reinvestment Monitoring 
    
    
       _________
    
          1,472,530
             265,948
    
    
         Total
       $1,403,990
      $77,979,855
    
    __________
    *All amounts represent local funds.
                                                            APPENDIX 2
                                                                 
    
    
             GUAM ECONOMIC DEVELOPMENT AUTHORITY RESPONSE
    
    
    Graphic images of response not included in text file.
                                                            APPENDIX 3
                                                                 
                STATUS OF AUDIT REPORT RECOMMENDATIONS
    
                                          Finding/Recommendation Reference:     A.1
                 Status:      Unresolved.
                                Action Required:            Reconsider the recommendation and provide a
  response indicating
                                concurrence or nonconcurrence.  If concurrence is indicated, provide the
                                target date for working with the Legislature to amend the Qualifying
                                Certificate law and related regulations accordingly.
    
                                          Finding/Recommendation Reference:     A.2
                 Status:      Management concurs; additional information requested.
                                Action Required:            Provide the target date for the Administrator  to
  establish procedures and
                                develop methods to include costs to the Government in the economic
                                analysis of Qualifying Certificates.
    
                                          Finding/Recommendation Reference:     A.3
                 Status:      Management concurs; additional information requested.
                                Action Required:            Provide the target date for the Administrator to
  adopt procedures to
                                document negotiations on Qualifying Certificates.  We request that a
                                copy of the procedures be submitted to this office.
    
                                          Finding/Recommendation Reference:     B.1
                 Status:      Unresolved.
                                Action Required:            Reconsider the recommendation and provide a
  response indicating
                                concurrence or nonconcurrence.  If concurrence is  indicated, provide  the
                                target date for the Administrator to develop and submit to the Board for
                                adoption  policies and standard   operating procedures on limiting and
                                tracking  the use of surveillance fees. 
    
                                          Finding/Recommendation Reference:     B.2
                 Status:      Management concurs; additional information requested
                                Action Required:            Provide the target date for the Administrator  to
  finalize and submit
                                formal compliance  monitoring procedures for Board adoption.  We
                                request that a copy of the Board-approved procedures be submitted to this
                                office. 
    
                                          Finding/Recommendation Reference:     B.3
                 Status:      Management concurs; additional information requested.
                                Action Required:            Provide the target date for the Administrator to
  provide formal training
                                to compliance staff.
    
                                          Finding/Recommendation Reference:     B.4
                 Status:      Unresolved.
                                Action Required:            Reconsider the recommendation and  provide a
  response indicating
                                concurrence or nonconcurrence.  If concurrence is indicated, provide the
                                target date for the Administrator to develop and submit  to the Board for
                                adoption regulations on  quantifying the cost of temporary waivers and
                                requiring negotiations.  We request that copies of the Board-approved
                                regulations be submitted to this office.                             
    
                                          Finding/Recommendation Reference:     C.1
                 Status:      Management concurs; additional information requested.
                                Action Required:            Provide the target date for the Administrator  to
  coordinate with the
                                Department of  Revenue and Taxation to establish procedures for
                                granting gross receipts tax abatements only to beneficiaries who comply
                                with their Qualifying Certificate requirements. We request that a copy of
                                the procedures be submitted to our office.              
    
                                          Finding/Recommendation Reference:     C.2
                 Status:      Management concurs; additional information requested.
                                Action Required:            Provide the target date for the Administrator to
  coordinate with the
                                Customs and Quarantine Agency to establish procedures for granting use
                                tax abatements only to beneficiaries  who comply with their Qualifying
                                Certificate requirements.  We request that a  copy of the procedures be
                                submitted to our office. 
    
                                          Finding/Recommendation Reference:     C.3
                 Status:      Unresolved.
                                Action Required:            Reconsider the recommendation and  provide a
  response indicating
                                concurrence  or nonconcurrence.  If concurrence is  indicated, provide the
                                target date for the  Administrator to establish procedures for the
                                submission of audited financial statements  by contractors, the matching
                                of the statements with gross receipts tax abatement claims, and the
                                notification of Qualifying Certificate beneficiaries of the abatements
                                received.   We request that a copy of the  procedures be submitted to our
                                office.
    
                                          Finding/Recommendation Reference:     C.4
                 Status:      Unresolved.
                                Action Required:            Respond to the revised recommendation,
  indicating concurrence or
                                nonconcurrence.  If concurrence is indicated, provide the target date for
                                the Administrator to review the gross receipts and use tax abatements
                                questioned in  the finding to determine if they are allowable and, if not
                                allowable, coordinate with the Division of Revenue and Taxation to
                                collect the lost revenues.
    
                                          Finding/Recommendation Reference:     D1
                 Status:      Management concurs; additional information requested.
                                Action Required:            Provide the target date for the Administrator  to
  request the Legislature
                                to amend the Guam Code to clarify the types of  reinvestment to be
                                required of Qualifying Certificate beneficiaries and the meaning of the 5-
                                year  reinvestment period.
    
                                          Finding/Recommendation Reference:     D.2
                 Status:      Unresolved.
                                Action Required:            Reconsider the recommendation and  provide a
  response indicating
                                concurrence  or nonconcurrence.  If concurrence is indicated, provide the
                                target date for the  Administrator to amend Qualifying Certificates issued
                                after  December 29, 1994 to include the reinvestment requirement
                                mandated by the Guam Code.
    
                                          Finding/Recommendation Reference:     D.3
                 Status:      Management concurs; additional information requested.
                                Action Required:            Provide the target date for the Administrator to
  establish rules and
                                regulations and standard operating procedures  to include the
                                reinvestment clause in all new and amended Qualifying Certificates and
                                a process for   monitoring compliance with the investment requirement.