Tax leak: Why Guam is missing out on a windfall from defense contracts
Updated: Jun 4, 2021
In 2014 alone, the Office of Inspector General assessed $414 million in taxes owed to the government of Guam
For the government and the business sector, the military buildup promises economic salvation. However, the amount of defense spending on Guam is not reflected in the local tax revenue indicating a loss of millions of dollars in potential revenue.
Vice Speaker Tina Rose Muña Barnes is requesting Public Auditor Benjamin Cruz for an audit on taxes collected on military contracts. That is, if they were collected at all.
The contract undertakings are part of DoD's preparation for the relocation of 5,000 Marines from Okinawa to Guam. The troop realignment program is projected to cost about $8 billion, of which Japan has agreed to shoulder $2.8 billion.
In 2019 alone, the Department of Defense poured a total of $1.7 billion into Guam for construction projects and corresponding payroll, according to a report released this year by the Office of Local Defense Community Cooperation.
The military investments on the island accounted for 63 percent of DoD's $2.7 billion total spending in fiscal 2019 for five U.S. territories, which also included American Samoa, the Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands.
The defense spending on Guam comprised 28.4 percent of the island's gross domestic product, the highest of any U.S. state or territory, according to the report released in January.
"In order to rebuild a stronger, more prosperous Guam, we need to ensure our government processes are efficient and effective," Muña Barnes said. "For too long, the government of Guam has lost millions of dollars in uncollected taxes on military contracts - millions of dollars that could have gone to provide critical services to our people."
In 2014 alone, the Office of Inspector General assessed $414 million in taxes owed to the government of Guam. The OIG’s estimate was based on a sample of 40 contracts totaling $117 million from the 2010 contract awards. But as far as the OIG is concerned, neither the federal government nor the contractors were to blame for the tax leak.
The Guam Department of Revenue and Taxation enforces Guam’s tax laws and collects tax revenues, including the business privilege tax from federal contractors who conduct business for the U.S. military.
“We found, however, that DRT has an inadequate procedure for identifying all federal contractors and for subsequently collecting the BPT from those contractors," Deputy Inspector General Mary Kendall said in a Sept. 24, 2014 report. "In addition, DRT is relying on an incomplete list of federal contractors to identify contractors that could be subject to the BPT."
According to U.S. tax law, the federal government is immune to state or local taxation. However, “prime contractors and subcontractors shall not normally be designated as agents of the government for the purpose of claiming immunity from state or local sales or use taxes.” This means, they are not automatically exempt from paying local taxes unless exemption is provided under the local law.
In the case of Guam, tax incentives are offered to Base Operating Service contractors. However, OIG said DRT did not follow through on the BPT process to validate whether contractors were exempt.
“Without a complete procedure to identify and maintain a record of federal contractors subject to the BPT and to collect the BPT from those contractors, GovGuam could be losing much-needed revenue, we found that DRT did not collect taxes from six contracts,” the report stated.
“By failing to address long-standing tax collection deficiencies, such as the case with BPT, Guam has been deprived of the revenues it desperately needs to fund public education, health, safety, and other programs for its people.”
It was not clear as of this writing if the issue raised by OIG has since been resolved or if the $414 million in outstanding taxes had been collected. (Email and phone calls to DRT were not returned as of press time.)
Meanwhile, the Department of Defense and other federal agencies continue to invest in Guam.
A DoD report released in April identified the programs and operations funded with appropriated amounts made available for military construction on Guam in 2020.
The report said the DoD obligated $529.3 million and expended $365.1 million. Other federal agencies de-obligated $15.5 million and expended $25.9 million.
The DoD identified 134 military construction projects and programs, totaling $333.3 million, with estimated completion costs of $1.1 billion. Other federal agencies identified 37 projects and programs, totaling $25.9 million, with estimated completion costs of $1 million on three ongoing projects and programs.
The DoD also identified operating expenses of $94.4 million. Other federal agencies identified operating expenses of $37,721. On top of these, there were a total of 223 contracts, grants, agreements and other funding mechanisms totaling $424.1 million.
Another huge project anticipated to be built on Guam is a $1.6 billion integrated air defense capability, which is identified as a priority for the Indo-Pacific Command under its $27.3 billion strategic plan for the region.
Adm. Philip Davidson, chief of INDOPACOM, stated in a report that the planned Aegis Ashore system on Guam is expected to be completed by 2026.
In a letter sent to Cruz, Muña Barnes cited several audits conducted by the Department of Interior's Office of Inspector General in 1998, 2008 and 2014.
Unless the holes in the system are plugged, OIG said, Guam will continue to experience a massive tax leak.