oversight

Opportunities To Economize on Purchases of Dairy and Bakery Products for U.S. Forces in Southeast Asia

Published by the Government Accountability Office on 1971-02-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Opportunities To Economize On
Purchases Of Dairy And Bakery
Products For U.S. Forces In
Southeast Asia B.171428 j
Department of Defense
Department of State




BY THE COMPTROLLER    GENERAL
OF THE UNITED  STATES         ..   *-
                         COPvlPTROLLER     GENERAL       OF   THE      UNITED     STATES
                                         WASHINGTON.      D.C.      20548




            B- 171428




            To the    President       of the Senate     and the
  ,/St’     Speaker     of the     House   of Representatives
.H
                      This report    presents           the results              of our review     on op-
            portunities      to economize            on purchases                of dairy  and   bakery
            products      for U.S. Forces            in Southeast               Asia.

                     The review    was made             as part of our continuing       exam-
             ination   of U.S. expenditures             in the Far East area,     pursuant
            to the Budget     and Accounting              Act, 1921 (31 U.S.C.    53), and
            the Accounting      and Auditing            Act of 1950 (31 U.S.C.     67).

                   Copies    of this report             are being    sent to the             Director,
     I
            Office   of Management        and          Budget;   the Secretary               of State;   and          ? 7,
                                                                                                                   _.N
     -y.*   the Secretary     of Defense.                                                                      L
J’




                                                        Comptroller                General
                                                        of the United              States
                           Contents
                                                               Page

DIGEST                                                           1

CHAPTER

        1   INTRODUCTION                                         3

        2   SOURCEOF INGREDIENTS USED IN DAIRY AND
            BAKERY PRODUCTS
                Thailand
                Agency comments
                Conclusion and recommendation

        3   TAXES PAID ON DAIRY AND BAKERY PRODUCTS              9
                Thailand                                        10
                      Tax agreements with Royal Thai Gov-
                        ernment                                10
                      Action taken to obtain tax-and
                        duty-free  entry of dairy products      11
                      Action taken to obtain tax-and
                        duty-free  entry of bakery products     13
                Taiwan                                          15
                Philippines                                     15
               Agency comments                                  15
                Conclusion and recommendation                   15
        4   SCOPE OF REVIEW                                     17
APPENDIX

        I   Letter   dated August 4, 1970, from Deputy
              Assistant    Secretary of Defense, to GAO         21
   II       Letter   dated October 21, 1970, from Deputy
              Assistant    Secretary for Budget and Finance,
               Department of State, to GAO                      24
 III        GAO estimate of    possible   increase in price
              of a 200ounce    loaf of bread procured for
              U.S. Forces in     Thailand if bread is made
              from American    flour                            26
.
    COMPTROLLERGENERAL'S                                                   OPPORTUNITIESTO ECONOMIZEON
    REPORTTO THE CONGRESS                                                  PURCHASESOF DAIRY AND BAKERY
                                                                           PRODUCTSFOR U.S. FORCES
                                                                           IN SOUTHEASTASIA
                                                                           Department of Defense
                                                                           Department of State B-14428


    DIGEST
    -_--_-

    WHYTHE REVIEW WASMADE

        The General Accounting Office (GAO) undertook this review (1) to.see
        if surplus. ,, ,l~\__
                        U.S.      agricultural
                           .,/~-..-"r.J,?,ss<.-,          commodities
                                             II "/.--.n. ..c,.--... _,       had been used in dairy anak-
        ery products manufactured,for..U,.S,                          Force%?'ri" the' Far-'East and (2) -be-*--
        cause    of indic~tions,$hat.~~port
           _.~..ww~~~~Jx?.xe--~
                           -                                     duties and taxes had"beenlevied                  on" ag-
        ricultural      products
                        ,-                used
                                  ,.L.",,^_.m--I  by   ~U.S.
                                                       a.+irx".l;Forces-
                                                               c-~*.,*%~$,‘ in't'helFar""EaSt.'
                                                                       e&GM.w.4                       %'.
                                                                              rEI~~:~,~"~~~,L~lr,.il,ix,r,'I*_* I_

        A prior GAO report questioned the payment of taxes by U.S. Forces world-
        wide.   (B-133267, Jan, 20, 1970.)

    FINDINGS AND CONCLUSIONS

        The major ingredients   for dairy products --used by the United States in
        Vietnam, Thailand, the Philippines,    and Taiwan--were from U.S. sources.
        Except for Thailand,   this is true for bakery products also.    More than
        half the wheat used for bakery products by U.S. Forces in Thailand
        ($115,400 worth) came from Australia    because the contracts for bakery
        products did not require the use of U.S. wheat. This resulted in lost
        sales of U.S. wheat and an unfavorable effect on the U.S. balance of
        payments.   (See p. 5.)
        Contractors supplying dairy products to U.S. Forces in Vietnam were not
        required to pay Vietnamese import duties or taxes.          On bakery products
        in the same country, the contractors        avoided duties and taxes because
        the military     furnished the ingredients.      Relatively minor amounts of
        taxes were paid on dairy products in Taiwan and on bakery products in
        the Philippines.        In Thailand during fiscal year 1969, however, import
        duties and taxes amounting to $434,000 were paid on dairy and bakery
        products.     (See p. 9.)

        The United States and Thailand have agreements which exempt military    as-
        sistance and construction   programs from Thai import duties and taxes,
        but these agreements do not adequately cover the present tax structure
        in Thailand or the current U.S. military   situation.  Consequently, nego-
        tiations  on a case-by-case basis have been required to obtain exemptions.
        (See p. 11.1




                                                       1
     GAO found, the American Embassy did not consult with the Royal Thai Gov-
     ernment until 21 months after the Military   Assistance Commandinitially
     requested relief   from such duties and taxes on ingredients  imported for
     dairy products.    The Embassy's position was that the time was not right
     for presenting the question to the Thai Government. Also, U.S. offi-
     cials had not taken action to obtain tax relief    on bakery products
     bought in Thailand.    (See pp. 10 and 11.)

RECOMMENDATIONSOR SUGGESTIONS
 I
    The Department of Defense should include a requirement in its contracts
    for bakery products in Thailand that flour of U.S. origin be used. (See
    P. 8.)
..   The Department of State     should

       --direct   its officials     in Thailand to consult with Royal Thai Govern-
          ment officials     regarding the possibility  of obtaining relief from
          taxes on dairy and bakery products purchased for U.S. Forces and

       --seek an equitable     rebate for taxes and duties   levied   in the past,
          (See p. 16.)

AGENCYACTIONS AND UNRESOLVEDISSUES

     The Department of the Army said that the United States Army, Pacific,
     would be requested to examine into the economy of using U.S. wheat; and,
     if it is clearly demonstrated that there will be an advantage in the use
     of U.S. wheat, the Thailand procurement office will be requested to make
     this a requirement in its contracts.    The Army said also that an agree-
     ment had been reached with the Thai Customs Department for a l-year,
     duty-free entry of raw materials   for ml'lk products into Thailand effec-
     tive April 1, 1970. This should result in savings to the United States
     of $300,000 for the year.   Other taxes, however, will still    be imposed.

     The Department of State in its response stated that GAO's views and rec-
     ommendations had been referred to a joint State/Defense committee on
     foreign tax relief   and that the committee would give priority  attention
     to tax-relief  matters in Vietnam and Thailand.   GAO was also told that
     data would be developed to assist U.S. officials   consulting with the
     Royal Thai Government on tax relief  for wheat and bakery products.


MATTERS FOR CONSIDERATIONBY THE CONGRESS

     This report is being issued to the Congress because of the increasing
     concern by its members over economical use of U.S. fnnds.
‘




                                   CHAPTER 1

                               INTRODUCTION

          The General Accounting Office has made a review of ex-
    penditures  for dairy and bakery products purchased for the
    use of United States Forces in the Republic of Vietnam,
    Kingdom of Thailand,    the Republic of the Philippines,        and
    the Republic of China (Taiwan).      The   primary   objectives   of
    our review were (1) to determine whether the major ingredi-
    ents used in bakery and dairy products were obtained from
    U.S. sources and (2) to determine whether the United States
    was paying, either   directly  or indirectly,      any taxes or
    customs duties levied by the host countries         on the ingredi-
    ents imported or on the end products.         The scope of our re-
    view is shown on page 17.

           Dairy products for U.S. use in Vietnam, Thailand,       and
    Taiwan are purchased from private        dairy contractors.   Dairy
    products for U.S. use in the Philippines        are purchased from
    the U.S.-operated     regional   exchange with the exception   of
    some ice cream and novelty       items, which are procured from a
    private    Philippine   company.

            Some bakery products are purchased locally         from local
    bakeries in Vietnam, Thailand,        and the Philippines.      In ad-
    dition,    military   bakeries  in Vietnam and exchange bakeries
    in the Philippines      provide a portion    of the bakery product
    requirements.       In Taiwan, bakery products are purchased
    from the Navy exchange.

           The dollar    values of expenditures       during fiscal year
    1969 for dairy      and bakery products for       U.S. use were as
    follows:
                               Dairy   products       Bakery Products

          Vietnam                 $22,302,900               S1,120,700a
          Thailand                  1,939,500                  417,900
          Philippines               1,050,300                   343,400
          Taiwan                       725,800                   63,100
                Total             $26;018,500               $1,945,100

    aExcludes    cost of bakery     products     produced     in Army field
     bakeries    in Vietnam.
                                         3
Estimated import duties     and taxes        paid   during     fiscal     year
1969 were as follows:

                          Dairy    products         Bakery     products

     Vietnam                  $                         $      -
     Thailand                     3141200                   119,900
     Philippines                                              1,200
     Taiwan                         6,r300

          Total               $320,500                  $121,100


                                             $441,600
                                CHAPTER 2

                    SOURCEOF INGREDIENTS USED

                  IN DAIRY AND BAKERY PRODUCTS

       Our review showed that the major ingredients      for dairy
products used by the United States in Vietnam, Thailand,         the
Philippines,    and Taiwan were from U.S. sources.     We also
found that the major ingredients      for bakery products used by
the United States in Vietnam, the Philippines,       and Taiwan
were from U.S. sources.      However, more than 50 percent of the
wheat used for U.S. bakery product requirements       in Thailand
was obtained from Australia.

      Our findings concerning use of major ingredients                     from
other than U.S. sources are discussed in more detail                      below.

THAILAND

      The U.S. Army Procurement Office,  an element of the U.S.
Army Support Command, Thailand,  purchases bakery products for
U.S. Forces in Thailand from Thai bakeries.    During fiscal
year 1969, purchases of bakery products for U.S. Forces in
Thailand amounted to $417,900.

      We were advised by an official    of the U.S. Army Pro-
curement Office that flour used in bakery products purchased
in Thailand was of U.S. origin.      We were furnished   a copy of
a memorandum, dated August 1, 1969, to the Ambassador, con-
cerning the Army's investigation     of an allegation  that U.S.
wheat and flour were not being utilized.       The memorandum
states that:

     "An intensive     investigation      concerning     the sub-
     ject matter has been completed.             The allegation
     that the United States was not requiring               local
     bakers to use flour       from U.S. wheat when baking
     for U.S. military      installations      is unfounded.
     All bakery products for military            consumption in
     Thailand are baked under Federal Specifications
     EE-B-671~ and is so stated in existing              contracts.
     All contracts     containing      the specification       state
     that flour    from U.S. wheat must be utilized.              ***'I

                                      5
                                                                     1




       Our review of the bakery product contracts     has shown
that, although Federal Specifications      EE-B-671~ are cited
in the contracts,   neither the specifications     nor the con-
tracts   state that flour used must be from U.S. wheat.

       We visited   bakeries which were furnishing     bakery pro-
ducts under U.S. military       contracts and found that the bags
containing     the two brands of flour used by these bakeries
had been stamped "From American Wheates9 All flour used by
these bakeries was milled by the same flour mill.          We vis-
ited the flour mill to observe whether the wheat milled in-
to flour was, in fact,      U.S. wheat.   We have found that the
flour mill was importing      mostly Australian   wheat (about 70
percent).      We have found that one brand of flour was a 50-
50 mixture of Australian      hard wheat and U.S. wheat whereas
the other brand was milled entirely       from Australian    soft
wheat.

      We estimate    that about 1,400 metric tons of Australian
wheat, valued at $115,40O,was utilized      to produce the flour
used in the bakery products purchased for U.S. Forces in
Thailand during fiscal     years 1968 and 1969.    This represents
a corresponding    loss in utilization  of U.S. wheat and un-
favorable   balance of payments.
AGENCYCOMMENTS

       In response to our interim  memor ndum on the use of non-
                                        j
U.S. wheat, the Commander, U.S. Military    Assistance Command,
Thailand,    advised us, in December 1969, that:

     "***When the question of the use of U.S. Flour
     arose, an inspection    was made by the Veterinarian
     Detachment.   Because the bags containing      flour
     used in baking bread products for the Government
     bore the legend, Made from American Wheat, it
     could only be assumed that the flour was milled
     from U.S. wheat.     There is no contractual     re-
     quirement in the above specification      [Federal
     Specification  EE-B-671~1 that the wheat be of
     U.S. origin."

      By letter of August 4, 1970, the Deputy Assistant  Sec-
retary of Defense (Installations  and Logistics)  sent us the

                                 6
1


    Department of the Army comments on a draft of this report,
    which contained our proposal that action be taken to ensure
    that flour milled from U.S. wheat be used for bakery pro-
    ducts procured in Thailand for U.S. Forces.

           The Department of Army stated that the Army Support
    Command had estimated    that use of U.S. flour would increase
    the average contract    price for a 20-ounce loaf of bread from
    417cents to 20 or 21 cents.      On the basis of data developed
    during our review, however,    we  estimate  that any price in-
    crease resulting    from the use of U.S. wheat would amount to
    about l/2 to 1 cent a loaf rather than the 3 to 4 cents es-
    timated by the Army Support Command. The basis for our es-
    timate is set forth more fully     in appendix III.

           Whereas the use of U.S. wheat might be slightly      more
    costly   to the Department of Defense, the small premium in-
    volved (using either      the CA0 or the Army estimate)  is well
    within   the Department's    93uy American" guidelines  which per-
    mit payment of an extra 50 percent to favor the consumption
    of U.S. products    abroad.    Even this small increase in cost
    might be avoided, however, if the Department of Defense were
    able to arrange with the Department of Agriculture       for the
    use of surplus U.S, wheat,       In this regard, we were informed
    that the Thailand regional      exchange was able to purchase
    such surplus wheat at about $0 percent of the cost paid by
    the Army.
          In addition, we believe that, if U.S. wheat were uti-
    lized for the bakery products for U.S. troop requirements,
    a stronger  case could be made for obtaining  exemption from
    import duties imposed by the Thai Government.

    CONCLUSION AND IKKZMMENDATION

            The use of U.S.-grown  agricultural       products    to manufac-
    ture dairy and bakery products overseas obviously               has sev-
    eral advantages.      Overseas dollar..expenditures        are reduced;
    and exports of U-S. agricultural        products,     some of which are
    traditionally     in a surplus position,     are increased.

          Procurement    officials     in the countries  rev%ewed have
    recognized   these   advantages and have generally      required the
    use of U.S.-grown     agricultural      commodities by requiring the
use of U.S.-grown  commodities for    production   of dairy and '   .
bakery products through contractual      arrangement,   Such was
not the case in Thailand.

      Consequently,  we feel that the Department      of Defense
should include a requirement    in their  contracts    for bakery
products  in Thailand that flour   of U.S. origin     be used.




                                8
                                CHAPTER3

            TAXES PAID ON DAIRY AND BAKERY PRODUCTS
       In January 1970, we reported      to the CongressL on the
subject of foreign     taxation   of U.S. military      expenditures
abroad.    In the report,     we conclude that substantial        amounts
of avoidable    expenditures    have been made because of direct
and indirect    taxes paid on overseas military         procurements.
We have pointed out that the wide variety          of problems asso-
ciated with the administration        of tax matters affecting        de-
fense expenditures     in other countries     indicated     the need for
a thorough management review and analysis          of the matter.
       Both the Department of State and the Department of De-
fense generally       agreed with the report.      Both Departments
have pointed out that effective          economical administration    of
the tax-relief      provisions   of the current    agreements in cer-
tain countries      is a continuing    task.    The Departments have
recognized     that some unresolved      issues remained but have
pointed out that the United States has obtained and will con..
tinue to obtain substantial         tax relief   in the various coun-
tries.
      This chapter supplements the prior  report and is based
on more current   data concerning taxes paid on dairy and
bakery products.
      During our current review, we have found that contrac-
tors supplying      dairy products     to U.S. Forces in Vietnam were
not required    to pay Vietnam import duties or taxes.               We have
also found that Vietnam import duties and taxes on bakery
products were avoided because the military             furnished     the in-
gredients    to the bakeries.      Due to administrative         delays,
however, and the Embassy's position           that the time was not
right   for presenting      the question to the Thai Goverllment,
import duties and taxes on dairy and bakery products                 amount-
ing to about $434,000 were paid during fiscal              year 1969 in
Thailand.     Additionally,     we have found that, during fiscal
year 1969, taxes on dairy products           in Taiwan amounted to
about $6,300 and taxes on bakery products            in the Philippines
amounted to about $1,200.


L‘ques t ionable
          -       Payment of Taxes to Other Governments on U.S.
 Defense Activities    Overseas," B==133267, dated Jan. 20, 1970.
                                      9
     Details    concerning taxes       paid in Thailand,      Taiwan,   and
the Philippines    are discussed       below.

THAILAND

     We estimate that,  during fiscal year 1969, import duties
and taxes were paid on dairy and bakery products purchased
by U.S. military forces in Thailand as follows:

Dairy     products:
        Customs                                  $207,500
        Sales taxes                               106,700

                                                                 $314,200

Bakery products:
    Import duty (wheat)                          $ 82,700
    Municipal    and business taxes:
         wheat             ,:,                        3,200
         flour                                       10,900
    Business tax (bakery items)                      23,000

                                                                  119,800

                Total

       We found that no action had been taken to obtain tax
relief   on bakery products procured in Thailand.        We also
found that the Military    Assistance   Command, Thailand,     had
made repeated requests to the American Embassy to approach
the Royal Thai Government for tax relief       on ingredients    im-
ported by a dairy contractor,      which produced dairy products
for U.S. Forces in Thailand.       The American Embassy, however,
did not approach the Thai Government until       21 months after
the Military   Assistance  Command's original    request.

Tax agreements        with   Royal Thai Government

       The "Agreement Respecting Military Assistance   Between
the Government of the United States of America and the Gov-
ernment of Thailand,~~ dated October 17, 1950, and the ?&no-
randum of Agreement as to the Implementation     of Construction
Projects   under United States of America Direct Forces Sup-
port Program, st dated April 6, 1956, are the two governing

                                       10
documents relating      to tax matters in Thailand.   These agree-
ments provide for exemption from import duties and taxes
for products,    materials,    and equipment imported for military
assistance    and related    construction programs.

       These agreements are general in nature and do not ade-
quately cover the present tax structure             of Thailand or the
current U.S. military        situation    in Thailand.    The lack of
formalized     tax-exemption     procedures has resulted       in case-
by-case negotiations       to obtain tax exemption in specific
circumstances.

Action taken    to obtain tax-
and duty-free     entry of dairy   products

       On January 9, 1967, the Military       Assistance      Command re-
quested the assistance       of the American Embassy in determining
the position    of the Thai Government toward permitting          duty-
free entry of milk ingredients       required   for in-country     pro-
duction of dairy products for U.S. military           activities.
The Military    Assistance    Command pointed out that the prices
of dairy products      included a 30-percent    import duty and a
lo-percent   tax.

        At the request of the American Embassy, on March 27,
1967, a more definitized     memorandum was submitted by the
Military    Assistance Command to replace the previous one.
This memorandum sets forth the monthly and yearly require-
ments of dairy products for fiscal     year 1968.

        A memorandum dated May 7, 1968, indicated  that the
Military    Assistance Command had made numerous follow-ups   on
this matter but, as a rule had been advised by an official
of the American Embassy that the time was not right      for pre-
sentation    to the Thai Government.

        On June 8, 1968, during our prior review of tax-exemp-
tion agreements in Thailand,      the Military    Assistance    Command
again requested the assistance       of the American Embassy in
obtaining    duty-free  admission of raw materials       for milk pro-
ducts and to obtain a waiver of local business taxes.             The
Military    Assistance  Command estimated     that the cost of duties
and taxes was approximately      $323,000 a year.


                                    11
       On September 4, 1968, the Military       Assistance     Command
again requested       assistance  from the American Embassy in ob-
taining    duty-free    admission of raw materials     for milk prod-
ucts and waiver of local business taxes.           The Military
Assistance     Command pointed out that,    since its first      request
for assistance       on January 9, 1967, the U.S. Government had
paid more than $360,000 for import duty and taxes on milk
products,     all of which was gold flow.

      Finally    on September 27, 1968, the American Embassy
presented     the matter to the Thai Director   General Customs
who advised that there was no problem in bringing        in U.S.
supplies    for the troops duty free but that there was a prob-
lem in keeping products      separate from materials   to be used
commercially.

     The Thai Government agreed July 1, 1969, to a procedure
for duty-free importation  of U.S. milk powder, vegetable  fat,
and chocolate or cocoa for reconstituting  into milk products
for U.S. use.

      The Embassy confirmed   the agreement on September 8,
1969.   However, the agreement does not provide   for exemption
from the Thai Government sales tax which amounted to about
$106,700 during fiscal   year 1969.

       Although the agreement permitting       the free importation
of ingredients     for milk products     was confirmed by the Amer-
ican Embassy on September 8, 1969, the procedures         for the
duty-free    importationwerenot      implemented until  April 1, 1970.
Import duties estimated        at $128,000 have been paid on the in-
gredients    imported during the interim.

        An official   of the Army Procurement Office          informed us
that,    at the time the tax agreement was concluded in Septem-
ber 1969, the Office       of the Directorate        of Procurement,
Japan, was evaluating       proposals     received     for a new milk con-
tract    in Thailand.     The officials      stated that the dairy con-
tractor    was not willing     to implement the control        procedures
required    for duty-free     importation     unless they were assured
of a new contract      as their    existing     contract   had been ex-
tended only to March 31, 1970.
        On November 26, 1969, the Office of the Directorate        of
Procurement,    Japan, awarded a new contract    effective
April 1, 1970, to the dairy contractor.       This contract      pro-
vides for the control     procedures required  for duty-free      im-
portation    of dairy products.

Action taken    to obtain tax-
and duty-free     entry of bakery   products

      Notwithstanding    the lack of a formal tax agreement, it
is obvious that officials      of the Thai Government are willing
to grant tax relief    to military   procurement  if they can be
assured that the exempted products will not enter the Thai
commercial economy.

      All the advantages of obtaining      relief  from internal
Thai taxes and duties accrue to the United States.           Under
these conditions,   the burden of initiating      and devising   a
control   mechanism satisfactory to the Thai Government rests
with United States Government personnel.

         We found, however, that neither    the    American Embassy
nor the Military       Assistance  Command had    taken action to ob-
tain tax relief       on bakery products.   An    American Embassy
official      advised us that the matter had      not been brought to
the Embassy's attention.

      An official of the Military   Assistance  Command stated
that the Command did not request the Embassy to attempt to
obtain tax relief  on the ingredients    used in bakery products
because it did not wish to disrupt    the negotiations    with the
Thai Government for the tax-exempt privilege      for milk ingre-
dients imported by the dairy contractor.

        Unlike the use of dairy products,        where only one con-
tractor     is involved,  the problems associated      with bakery
products are more difficult         to resolve because five prime
contractors      and a subcontractor     are involved.

     At the conclusion     of our review, we were informed by
Embassy officials     that the necessary data would be developed
for subsequent discussions     with Thai officials  on the matter.
of tax relief     for wheat and bakery products.



                                    13
      The Department of the Army did not comment on our find-
ing that no action had been taken to obtain tax relief  on
bakery products procured in Thailand.




                              14
.

    TAIWAN

         We found that the United States had received exemptla~~a
    on import duties and related  taxes on ingredients imported
    for use in dairy products produced for U.S. Forces in Taiwan.

           A business tax of .75 percent of sales and a stamp tax
    of .4 percent on sales were still     in effect  at the time Of
    our fieldwork,    but a tax agreement, dated October 15, 1969,
    between the United States and the Republic of China is being
    implemented to obtain relief     from the business tax and a
    preferred    (one tenth of 1 percent)   stamp tax rate.   In fiscal
    year 1969, the business tax and stamp tax paid by the United
    States on dairy products amounted to about $6,300.
          Our review showed that no duty-or     taxes had been in-
    curred on bakery products procured for      U.S. Forces in Taiwan.

    PHILIPPINES

          Bakery and dairy products purchased from the U.S.-
    operated Philippines    regional   exchange are free of duties
    and taxes.    Import duties and taxes are included in bakery
    products purchased locally,      but these taxes have been nomi-
    nal due to limited   local procurements.     We estimate that the
    duties and taxes included in bakery products procured locally
    in fiscal   year 1969 were about $1,200.

    AGENCYCOMMENTS

           By letter   dated October 21, 1970, the Deputy Assistant
    Secretary     of State for Budget and Finance commented on a
    draft of this report.      He stated that the views and recommen-
    dations in our draft report had been noted and that the re-
    port had been referred     to the Joint State/Defense   Interde-
    partmental     Committee on Foreign Tax Relief,   which was estab-
    lished on June 25, 1970. He further       stated that this com-
    mittee would give priority      attention to tax-relief  matters
    in Vietnam and Thailand.

    CONCLUSION AND RECOMMENDATION

         We believe that payment of import duties and taxes        on
    dairy and bakery products has largely  been avoided in
Vietnam, Taiwan, and the Philippines      but that this matter
continues  to be a problem in Thailand.        Although import
duties on raw materials     imported for milk products are no
longer paid to Thailand since April 1, 1970, significant
sales taxes are still    imposed.    We believe that efforts
should be continued   to obtain relief    from sales taxes on
bakery and dairy products      and relief   from import duties on
bakery products   in Thailand.

      One of the recommendations        made in our prior   report
was that:

      The Secretary    of State, in coordination    with the Secre-
      tary of Defense, take appropriate       steps to negotiate  a
      clearly   defined   and adequately worded tax agreement
      with the Government of the Kingdom of Thailand.

       In their   response to the prior report,    the Department
of State and Defense has stated that they were prepared to
undertake necessary preparatory       studies of the Thai tax
structure    as it presently  affects    U.S. common defense expen-
ditures.

      On the basis of the results      of these studies,  the two
Departments will consider   initiating     negotiations  with the
Thai Government if these results       show such a need.

      While this    data is being developed and until      an overall
tax agreement is     negotiated,   we believe that efforts    should
be continued   on   a case-by-case   basis to obtain relief    from
duties and taxes     which have already been identified,      such
as those in this     report.

       Consequently,      we believe that the Department of State
should direct      its officials    in Thailand to consult with
Royal Thai Government officials         regarding the possibility of
obtaining   relief     from sales tax on dairy and bakery products
and duty-free      entry of the major products used in bakery
products purchased for the use of U.S. Forces in Thailand,
The State Department should seek an equitable         rebate for
taxes and duties levied in the past.




                                   16
                               CHAPTER 4

                           SCOPE OF REVIEW

      Our review of the procurement of dairy and bakery
products for U.S. use in the Republic of Vietnam, the King-
dom of Thailand,   the Republic of the Philippines,     and the
Republic of China included an examination     into (1) procure-
ment actions for dairy and bakery products,      and (2)
country-to-country    tax agreements and other understandings.

       During the course of our fieldwork,             which was performed
during the period October 1969 through January 1970, we met
with representatives       of the various military           commands who
were administering      the procurement of bakery and dairy
products    and with responsible       officials      of the American
Embassy, Bangkok.      We    also met   with     representatives    of the
contractors    supplying these commodities,            reviewed the con-
tracts   or purchase agreements under which the commodities
were being procured,       and visited      various facilities      in
which the products were being produced.




                                    17
APPENDIXES




 19
                                                                                                     APPENDIXI
                                                                                                        Page 1

                                             ASSISTANT SECRETAR?’OF DEFENSE
                                                  WASHINGTON,        B.C.    20301




                                                                                                      4 AUG1970
INSTALLATIONS      AND LOGISTICS




            Mr.     C. M. Bailey
            Director
            Defense     Division
            U. S. General        Accounting       Office
            Washington,        D. C.        20548

            Dear        Mr.        Bailey:

            This is in response    to your letter        dated    May 13, 1970 transmitting
            copies   of your draft  report    entitled,      “Review    of Dairy  and Bakery
            Products    Used by U.S.     Forces       in Southeast    Asia”   (OSD Case #3118).

            Attached  are comments               of the    Department                of the   Army   on this   case
            with which this office            concurs.

                                                                            Since    rely,




                Enclosure
                   4s




                                                                21
APPENDIX I                       COPY
    Page 2
                      DEPARTMENTOF THE ARMY
                 OFFICE OF THE ASSISTANT SECRETARY
                       Washington, D,C. 20310



Comments of the Department of the Army on GAO Draft Report
dated 13 May 1970, "Review of Dairy and Bakery Products Used
by U.S. Forces in Southeast Asia'" (OSD Case #3118)



Reference is made to GAO Draft Report, dated 13 May 1970,
"Review of Dairy and Bakery Products Used by U.S. Forces in
Southeast Asia" (OSD Case #3118).

GAO found that in Thailand more than half of the wheat used to
fill    the needs for bakery products by U.S. Forces ($115,400
worth) was obtained from Australia          because the contract    did
not require      the use of American wheat.       This results   in a loss
of utilization       of an American surplus commodity (wheat) and an
unfavorable      balance of payments effect.       GAO found that no ac-
tion had been taken to obtain tax relief           on bakery products
procured in Thailand,,        GAO also found that for ingredients
imported for dairy products,         the American Embassy did not
approach the Royal Thai Government until           21 months after the
U.S. Military      Assistance   Command, Thailand's    (USMACTHAI) ini-
tial    request for possible relief      from duties and taxes.      As a
result,     the United States had paid import duties and taxes
estimated      at $119,900 for bakery products and $314,200 for
dairy products procured in Thailand in Fiscal Year 1969,

The problem of furnishing     bakery products to U.S. Forces was
under consideration     at the time of the GAO review and a pro-
posal to construct    two bakeries had been submitted by Command-
ing General, U.S. Army Support Command, Thailand (USARSUPTHAI)
in January 1969, Due to current circumstances       in Thailand, the
plan to construct   the bakeries was cancelled    in April 1970,
At present,  Bakery Products are purchased from five (5) ba-
keries,  two (2) of which are located outside of Bangkok.


                           [See GAO note,    Pa 231



                                     22
                                                                  APPENDIX I
                                                                      Page 3
  ,

                              [See GAO note.]

Army Procurement Office,        USARSUPTHAI advises that if the con-
tractors     were required   to use U.S. flour,        it is estimated  that
the current     average contract       price of S.17 for a 20 oz. loaf
would increase to $.20 - $.21 per loaf.              Both prices include
all taxes.      Bread Products and Pastry are authorized           for pro-
curement from foreign       sources by the Commander in Chief, U.S.
Army, Pacific , pursuant to the authority            contained   in ASPR
6-805.2(a)(iv)      and 6-805.2(a)(v).         However, since neither   the
GAO report nor the information            received from USARPAC contains
any cost analysis      of the economy involved         in using U.S. wheat,
other than the tax consideration,             USARPACwill be requested
to examine that area.        If it is clearly       demonstrated   that there
will be an advantage in the use of American wheat the Thailand
Procurement Office will be requested to make this a requirement
in their contracts.




                            [See GAO note.]




GAO note:    Deleted comments relate  to matter in the draft            re-
             port but omitted from the final   report.



                                      23
APPENDIX II
    Page 1


                         DEPARTMENT                OF      STATE

                               Washiq!on,   D.C.        20520




                                                                   OCT 21 1970
     Mr. 0. V. Stovall,Director
     International  Division
     U.S. General Accounting Office
     Washington, D. C. 20548
     Dear Mr. Stovall:
           I refer to your letter  dated May 13, 1970,
     transmitting   copies of the draft report entitled
     "Review of Dairy and Bakery Products Used by U-S.,
     Forces in Southeast Asia" for review and comment on
     matters which fall within the purview of the Depart-
     ment of State.    I regret the delay in replying to
     your letter.
           The draft report refers in part to the efforts
     of the American Embassy, Bangkok in trying to obtain
     customs and tax relief  on dairy and bakery products
     purchased for the use of U.S. forces in Thailand.
           With regard to the payment of duties and taxes
     on milk products,     as far back as 1966 or 1967, Foremost
     Dairy, an American firm which had the contract           to supply
     milk to the U.S. military,       had made efforts    to obtain
     exemption from the duties on raw ingredients.            However,
     because of the situation      faced by the Embassy during the
     early days of the military      build up, priorities      were such
     that the Embassy did not consider it opportune to pursue
     the matter.   Later, the U.S. military       authorities    decided
     to build their own milk plant.        After disapproval     of
     the funds for the building of the proposed plant, efforts
     were undertaken to obtain duty free import of the raw
     ingredients,  and they are now exempted from Thai duties.
     Since the exemption was only granted in 1970 for one
     year, further   efforts   will be required in the future in
     order to continue this exemption.
          As noted in the draft report,   the question of tax
     exemptions on bakery products was complicated by the
     lack of effective  control over several different   bakeries
     engaged in the importation  of ingredients   for processing
     into bakery products.

                                            24
                                                   APPENDIX II
                                                       Page 2



      The views and recommendations of the GAO
expressed in the draft report have been noted.
The draft report has been referred        to the Joint
State/Defense   Interdepartmental     Committee on
Foreign Tax Relief,     which was formally established
on June 25, 1970, for attention       along with the pre-
vious GAO report on "Questionable Payment of Taxes
to Other Governments on U.S. Defense Activities
Overseas", B-133267 dated January 20, 1970. The
Joint State/Defense     Interdepartmental    Committee
will give priority     attention   to tax relief  matters
in Viet-Nam and Thailand.
                          Sincerely   yours,




                    Deputy Assistant Secretary     for
                         Budget and Finance




                              25
APPENDIX III


                                                GAOESTIMATEOF POSSIBLE
                                           INCREASEIN PRICE OF A PO-OUNCELOAF
                                           OF BREADPROCURED
                                                          FOR U.S. FORCES

                                                INTHAILANDIFBREABIS
                                                MADEFROMAHERICANFLOUR



  Facts:
       Flour used to make bread equals about 75 percent                     of the weight      of the baked bread.
       Flour obtained         by milling     wheat equals about 80 percent            of the weight of the whole
       wheat,
       Cost of American and Australian             wheat (per metric         ton>:

                       SPe of                                                     Trans-                 Total
                        wheat                     cost          Insurance        portation                cost

                  American                       $80.00          $4.00               $14.00          $98.00
                  Australian,     hard            71.50           3.575               10.00           85.075
                  Australian,     soft            65.00           3.25                10.00           78.25

   Computation     of price     increase     using American wheat:
       Cost of wheat per ounce:
           1 metric ton = 2,204.6             lbs. = 35,273.6 OZ.
           American wheat:   $98.00             per metric ton         ? 35,273.6             oz. = $0.00278 per oz.
           Australian hard wheat:               $85.075 per metric ton f 35,273.6             oz. = $0.00241 per OZ.
           Australian  soft wheat:              $78.25 per metric ton '5 35,273.6             oz. = $0.00222 per oz.
       Quantity     of wheat in 20-ounce loaf            of bread:
            20 oz* of bread x .75 = 15 oz. of flour
            15 oz. of flour + .80 = 18.7 02~ of wheat
       Cost of wheat in 20-ounce loaf             of bread:
           American wheat:                     $0.00278 per oz. x 18.7 OZ. = $0.0520 per loaf
           Australian hard wheat:              $0.00241 per oz. x 18.7 oz. = $0.0451 per loaf
           Australian soft wheat:              $0.00222 per oz. x 18.7 ozD = $0.0415 per loaf
  Conclusion:
      Use of American wheat would be $0.007 and $O.~OlOSmore costly                           than Australian
  hard and soft wheat, respectively, per 20-ounce loaf of bread,




                                                                                                  U.S.   GAO Wash.,   D.C.

                                                          26