Treasury rulings on
investment bonds

Recently

the

Department

of

Treasury

restricted

Guam

and

some of the other territories from issuing certain types of tax-

exempt investment bonds, or from establishing tax havens for
foreign investors and U.S. corporations.
These proposed revenue

enhancing

initiatives

and

the

federal

response

to

them

illus-

trate
the
problem
caused
when
the
goal
of
greater
selfsufficiency for the territories clashes with U.S. tax and fiscal
policy.
Some insular officials claim that these actions contribute to growing uncertainty of the overall objective of U.S.
policy to the territories.
The examples also raise questions

whether

the

territories should

ferent than states,

under U.S.

receive

special

treatment,

tax and fiscal policies.

dif-

Arbitrage bonds
In late 1983, Guam attempted to issue $850 million worth of
tax-exempt securities known as arbitrage bonds.
Guam hoped to
earn revenue from the interest earned when the tax exempt bonds
are reinvested at higher rates of interest.
Treasury blocked
the issuance of the bonds and announced that it was recommending
immediate leqislation to end these bonds' tax free status.
A
Treasury official said that since the states have been prohibited from marketing these bonds since 1969, the action was taken

to

prevent

the

territories

from

taking

further advantage of

tax loophole which the Congress was seeking to remove.

a

Guam officials argued that Treasury's action was contrary
to the U.S. objective to encourage economic self-reliance.
They
pointed out that just prior to the Treasury announcement, Puerto
Rico had marketed a $450 million bond issue.
According to the
Governor of Guam, Treasury's decision cost Guam $91 million in
potential equity capital.
The Governor and other Guamanian
officials cited Treasury's action as an example of a federal
policy contradicting a U.S. objective to allow the territories
to become more self-reliant.
Tax

havens

Another example cited by Guam was a December 1982 Treasury
decision to prevent Guam's proposal to become an international
finance center.
Guam wanted to establish itself as a finance
center by enhancing U.S. corporations' access to international
‘capital markets by offering tax free securities, such as Eurobonds,
to foreign investors.
At the time,
the Netherlands
Antilles,

bond

under

center

tax

for

treaty

mainland

with

the

United

companies

States,

seeking

to

served

tap

as

a

foreign

sources of capital.
Treasury opposed Guam's attempt to obtain a
Similar advantage, citing its general opposition to tax havens.

A Treasury official

said

that

such
28

5000238

arrangements

are

a

drain

on

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