Foreign Assistance:

USAID and the Department of State Are Beginning to Implement Prohibition on Taxation of Aid

GAO-04-314R: Published: Feb 20, 2004. Publicly Released: Feb 20, 2004.

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In 2002, Congress learned that the Palestinian Authority had collected $6.8 million in taxes on U.S. humanitarian assistance meant for the people of the West Bank and Gaza and subsequently learned that some other foreign governments were also taxing U.S. assistance. U.S. Agency for International Development (USAID) officials estimate that at least several million dollars in taxes are collected annually on U.S. assistance programs, although some of this amount is reimbursed by recipient governments. This situation raised concerns in Congress that U.S. assistance funds for programs to help developing country populations were instead being diverted to the treasuries of foreign governments. In response to these concerns, Congress included a prohibition against such taxation in its Consolidated Appropriations Resolution for fiscal year 2003, and provided for a 200 percent penalty for taxes levied but not reimbursed. This legislation defines "taxes" and "taxation" as value added taxes (VAT) and customs duties imposed on commodities financed with U.S. assistance for programs for which funds are appropriated by the act. This report responds to a requirement in that legislation that we report to the committees on appropriations concerning these provisions. In discussions with staff of the House Appropriations' Subcommittee on Foreign Operations, Export Financing and Related Programs, we agreed to determine (1) the extent to which USAID bilateral framework agreements or other arrangements include exemption from taxation and (2) the progress that the Department of State has made in developing and distributing guidance to implement the prohibition.

Of the 90 countries or entities to which USAID provided bilateral assistance in fiscal year 2003, 77 have bilateral framework agreements that include some type of prohibition on taxation, 6 have other agreements that include such prohibitions, and 7 do not have agreements that include such prohibitions. Of the 77 bilateral agreements that have some type of prohibition, 45 of them state that supplies, materials, equipment, or other property may be imported into or acquired within country free from any tariffs, customs duties, import taxes, and other taxes or similar charges. The other 32 agreements contain prohibitions against taxing commodities imported or introduced for use in assistance projects but do not address commodities purchased in-country. USAID has arrangements or agreements other than bilateral framework agreements with 6 countries and entities that include tax prohibitions. Of the 7 countries without agreements that include the prohibition, 2 have bilateral framework agreements with USAID, and 5 do not. USAID officials noted that, although bilateral framework agreements are an important tool for establishing the tax-exempt status of U.S. assistance, USAID has additional tools to obtain tax exemptions in actual practice, such as including tax prohibitions in individual grant agreements. However, USAID officials told us they could not provide comprehensive information on the use and effectiveness of such tools because they currently have no mechanism for collecting such information from individual missions. In response to the legislation's requirements, the State Department has developed guidance on implementing the prohibition on taxation of U.S. assistance and disseminated the guidance to all applicable offices and U.S. missions for implementation. For taxes charged in fiscal year 2003, State's guidance calls for the country to provide full reimbursement by January 31, 2004. If it does not, the government is to withhold 200 percent of the unreimbursed taxes assessed in fiscal year 2003 from that government's assistance allocation for fiscal year 2004. The guidance calls for State to collect in December 2003 preliminary estimates of taxes collected and reimbursed. As of mid-January 2004, State's Bureau of Resource Management had received only partial reports from the regional bureaus because some countries or programs had not yet provided the needed information. State officials noted that, of the reports received thus far, most countries or programs had reported that either no taxes had been charged or that relatively minor amounts (generally less than $100,000) had been charged. Of the few exceptions that were higher, none approached the $7 million that had been previously charged under the West Bank/Gaza program. State officials also noted that the interim reporting deadlines were meant to provide preliminary information on the magnitude of the problem and to ensure that fiscal year 2004 funds that may be subject to the 200 percent penalty are not obligated for release to the central government. Final reports will provide the basis for actually imposing the 200 percent penalty, if applicable, and are due to the Bureau of Resource Management by May 17, 2004. State's guidance also contains suggested language for implementing the prohibition, which is to be included in new agreements and amendments to agreements that do not contain the prohibition.

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