‘QC program fails to meet goals’

The government’s tax incentive program has failed to meet its intended goal to promote economic development in the past five years of its implementation, according to a report released yesterday by the Strategic Economic Development Council.

In a presentation during yesterday’s Saipan Chamber of Commerce meeting, SEDC-qualifying certificate ad-hoc committee chairman Stephen A. Brock said that for the first five years since its inception, the QC program only generated $2.6 million in fresh investments.

“Has QC program achieved its stated goals?

Two of nine companies were new investors, and seven of nine companies declined to accept it after approval. The program has not met its goals and objectives to promote economic development in the Commonwealth,” said Brock.

He cited that of $305.1 million potential investment, only $2.6 million “non-retroactive credit” was accepted.

He said that of the nine applicants who were granted qualifying certificates, only four accepted and only one of them is non-retroactive or a new investor: Sand Castle Saipan.

In the SEDC report, Sand Castle Saipan was even listed as “debatable” as to whether it is a new investor or not.

The three retroactive QC recipients are Tinian Dynasty and Casino, Hard Rock Café, and Tony Roma’s & Capricciosa.

Five companies, meantime, were granted QCs but they chose not to accept them.

They included SPEC Spring Water, Inc. Hyatt Regency Saipan, Rota Resort & Country Club, Fiesta Resort Hotel & Spa, formerly Dai-Ichi Hotel Saipan, and Saipan World Resort in 2004.

World Resort gave up its 2004 QC for a bigger tax break this year for its $25.5 million expansion program.

Recently, World Resort received its 10-year tax rebate amounting to $5.5 million under the QC program.

SPEC Spring Water, a new investor planning to put up a $1.6-million business on Rota, eventually withdrew its proposal.

In his representation, Brock said that the program as embodied in Public Law 12-32 or the Investment Incentive Act of 2000, is good but the process “is where we need to look at together to improve.”

“What’s causing someone not to accept a gift? There’s must be something wrong with it,” he said.

The committee cited seven reasons why the QC program is not working:

* Wrong mindset or understanding of the program by the administering agency itself, the Commonwealth Development Agency;

* CDA’s “erroneous” understanding that it would erode the current tax base;

* “Add-ons” or additional requirements imposed on an applicant;

* Lack of flexibility to negotiate between parties;

* Application fee from $2,500 to $10,000 is potential barrier to applicants;

* QC approval ultimately resides in one individual, the governor; and

* Conflict in existing language on confidentiality.

Brock said that there is a problem if CDA itself believes that “it’s not the time to be very generous to businesses in the CNMI.”

On the fear of tax erosion, Brock said the committee believes that this position does not consider the multiplier effect of the investment increase in tax base.

“The committee believes this position erroneously assumes the current level of our tax base will remain constant if further investments are not made,” he said, while citing the departure of Japan Airlines, HSBC, Continental Airlines “to some degree,” and others.

Further, he said the committee found “add-ons” which are outside the scope or authority of the QC law.

For instance, the QC is not a proper venue to discuss wage issue, he said.

The lack of flexibility, he said, prohibits applicants from discussing even a small change “on an existing application that has been decisioned” without having to post another $10,000 and present a new application.

The fee structure, instead of being a uniform, varies based on type of activity.

The committee recommends having only one fee structure.

The committee also recommends the review of policy giving the governor veto power over CDA board without the ability for an override in some form.

This setup brings an appearance of politics entering into decision, it said.

It said that instead of disapproval in case of inaction from the governor in 45 days, the committee recommends amending this to result in approval if there is no action within 45 days.

Further, it said that it is unclear as to the purpose of the governor’s representative during the discussion prior to the CDA board making formal recommendation to the governor.

On confidentiality, the committee said the current language restricts the board or a CDA employee from releasing an applicant’s confidential information, except on the direct authorization of the CDA board.

The absence of civil or criminal penalties on the release of applicants confidential information can contribute to companies being wary of applying for QCs, it said.

The committee said the SEDC and CDA should jointly study and compare QC program that have been successful in other areas, to amend it or create an entirely new incentive program.

“Sense of urgency must be prevalent in all actions due to importance and impact to economic activity in the CNMI,” said Brock.

In yesterday’s SCC meeting held at Hyatt Regency, former CDA board chair Sixto Igisomar agreed there are problems to discuss regarding the program.

He said, though, that CDA has had no enough time to pursue its own research about it.

“We had some discussions with the chamber on this issue. We agreed to making changes but CDA was busy…we had to focus on our financial [survival], loans, and there’s QC on the side. We never had a full chance to review it,” said Igisomar.

The chairman left the agency in summer this year.

CDA acting executive officer Oscar Camacho said he recognized that no one except the clients would know the problems they encountered with the program.

He said there should be transparency to ensure that everything is clear to all parties.

The QC program, first enacted in December 2000, was set up to provide various tax incentives for investors to build, expand, and operate commercial projects in the CNMI.

Enacted during the 12th Legislature, the law has undergone two amendments “to address the needs of existing business in the CNMI.”

The original law sought to entice new investments, but it was amended to help existing businesses keep up with new competitors.

It was later amended to offer tax break incentive for businesses that have weathered the economic crisis since 1999.

The amendments also lowered the minimum investment amount for hotel or condominium expansion, removed the discretionary authority for the governor to establish terms and conditions in approving a QC, and allowed rebates of taxes of up to 100 percent for 25 years rather than three years.

The first company to qualify for the program was Sand Castle-Saipan in 2002.

The QC program aims to strengthen the existing industries and other target industries: restaurants, water parks, cultural centers, aquariums, theme parks, convention centers, dinner theater, special events, golf courses, resort hotels and condominiums, manufacturers or processors of high technology products, Internet-related businesses engaged in Internet commerce, and Commonwealth-based airlines and other aviation-related activities.