[Federal Register: July 1, 2009 (Volume 74, Number 125)]
[Rules and Regulations]
[Page 31561-31564]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jy09-15]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 4, 9, and 52
[FAC 2005-34; FAR Case 2008-009; Item II; Docket 2009-0020, Sequence 1]
RIN 9000-AL28
Federal Acquisition Regulation; FAR Case 2008-009, Prohibition on
Contracting with Inverted Domestic Corporations
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Interim rule with request for comments.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on an interim
rule amending the Federal Acquisition Regulation (FAR) to implement
Section 743 of Division D of the Omnibus Appropriations Act, 2009
(Public Law 111-8). Section 743 of Division D of this Act prohibits the
award of contracts using appropriated funds to any foreign incorporated
entity that is treated as an inverted domestic corporation or to any
subsidiary of one.
The Department of Homeland Security (DHS) has had its own rule
prohibiting contracting with inverted domestic corporations since
December 2003 (see 48 CFR Subpart 3009.1). The DHS rule implements
section 835 of the Homeland Security Act of 2002 (P.L. 107-296, 6
U.S.C. 395).
DATES: Effective Date: July 1, 2009.
Comment Date: Interested parties should submit written comments to
the Regulatory Secretariat on or before August 31, 2009 to be
considered in the formulation of a final rule.
ADDRESSES: Submit comments identified by FAR case 2008-009, by any of
the following methods:
Regulations.gov: http://www.regulations.gov.
Submit comments via the Federal eRulemaking portal by inputting
``FAR Case 2008-009'' under the heading ``Comment or Submission''.
Select the link ``Send a Comment or Submission'' that corresponds with
FAR Case 2008-009. Follow the instructions provided to complete the
``Public Comment and Submission Form''. Please include your name,
company name (if any), and ``FAR Case 2008-009'' on your attached
document.
Fax: 202-501-4067.
Mail: General Services Administration, Regulatory
Secretariat (VPR), 1800 F Street, NW, Room 4041, ATTN: Hada Flowers,
Washington, DC 20405.
Instructions: Please submit comments only and cite FAC 2005-34, FAR
case 2008-009, in all correspondence related to this case. All comments
received will be posted without change to http://www.regulations.gov,
including any personal and/or business confidential information
provided.
FOR FURTHER INFORMATION CONTACT: Ms. Meredith Murphy, Procurement
Analyst, at (202) 208-6925 for clarification of content. Please cite
FAC 2005-34, FAR case 2008-009. For information pertaining to status or
publication schedules, contact the Regulatory Secretariat at (202) 501-
4755.
SUPPLEMENTARY INFORMATION:
A. Background
This rule implements section 743 of Division D of the Omnibus
Appropriations Act, 2009 (Public Law 111-8). Although this is effective
for Fiscal Year 2009 funds, the Councils
[[Page 31562]]
have included the clause requirement when using Fiscal Year 2006, 2007,
and 2008 funds, when similar prohibitions were included in
appropriations acts.
Section 743 of Division D of this Act prohibits the use of Federal
appropriated funds for Fiscal Year 2009 to contract with any inverted
domestic corporation, as defined at section 835(b) of the Homeland
Security Act of 2002 (Pub. L. 107-296, 6 U.S.C. 395(b)) or any
subsidiary of such an entity.
What is an inverted domestic corporation. An inverted domestic
corporation is one that used to be incorporated in the United States,
or used to be a partnership in the United States, but now is
incorporated in a foreign country, or is a subsidiary whose parent
corporation is incorporated in a foreign country. The reason a
corporation would do this is to avoid United States taxes on business
income generated in foreign countries. Bermuda, Barbados, and the
Cayman Islands are well known tax havens; the statute is not restricted
to these countries however. A term in wide use for these corporations
is ``corporate expatriate''. Congress has enacted both contract
statutes and tax statutes to try to discourage corporations from
expatriating themselves.
Tax statute. Congress enacted 26 U.S.C. 7874 to remove the tax
benefits from the most egregious of these transactions, where at least
80 percent (80%) of the stock is now held by former shareholders or
partners and where the foreign entity plus companies connected to it by
50 percent (50%) or more ownership do not have substantial business
activities in the foreign country. The tax consequence is that the
parent foreign corporation must then file a United States income tax
return as a domestic corporation, not a foreign corporation.
Contracting and appropriations statutes. The contracting statutes
are similar to the tax statute, but not identical. Congress, in 6
U.S.C. 395, restricted the Department of Homeland Security (DHS) from
awarding contracts to inverted domestic corporations, either parent or
subsidiary. Congress further restricted all executive branch agencies
in Public Law 111-8, from using Fiscal Year 2009 monies ``for any
Federal Government contract with any...inverted domestic
corporation...''. This statute borrowed the definition of inverted
domestic corporation from the DHS statute, which in turn is related to
the tax statute. The FAR is implementing Public Law 111-8 by further
reliance on the tax statute and Internal Revenue Service regulations,
as the Councils do not believe that Congress intended to set up two
different statutory schemes for handling inverted domestic
corporations. A foreign corporation that has to file a tax return as a
domestic corporation is automatically going to be an inverted domestic
corporation for contracting purposes as well. The Councils note that
there is an important difference between the tax statute and the other
statutory definitions: the tax statute only applies to incorporations
completed after March 4, 2003. An incorporation that took place on or
before March 4, 2003, will not escape the contracting and fiscal ban.
Statutory definition of inverted domestic corporation. Section
835(b) defines an inverted domestic corporation to mean a foreign
incorporated entity that, pursuant to a plan (or a series of related
transactions) (1) directly or indirectly acquires substantially all of
the properties held directly or indirectly by a domestic corporation or
substantially all of the properties constituting a trade or business of
a domestic partnership; (2) acquires at least eighty percent (80%) of
the stock (by vote or value) of the entity held (a) in the case of an
acquisition with respect to a domestic corporation, by former
shareholders of the domestic corporation by reason of holding stock in
the domestic corporation; or (b) in the case of an acquisition with
respect to a domestic partnership, by former partners of the domestic
partnership by reason of holding a capital or profits interest in the
domestic partnership; and (3) after the acquisition, the expanded
affiliated group that includes the entity does not have substantial
business activities in the foreign country in which or under the law of
which the entity is created or organized when compared to the total
business activities of such expanded affiliated group.
Which contractors are inverted domestic corporations. The Councils
do not have this information. The Councils and Government contracting
officers by law do not have access to tax return information. We cannot
determine whether a contractor's status and history mean it falls under
the statutory requirements. Each contractor will have to analyze its
own history and current status. This should be very easy to determine
for sole proprietorships, partnerships, and domestic corporations
without a foreign parent, as none of these could be inverted domestic
corporations. It will also be easy for a foreign corporation which
filed last year's income tax return as a domestic corporation and its
subsidiaries, which automatically fall under the contracting ban. The
harder case will be for foreign corporations that were domestic
corporations or partnerships before 2004, and their subsidiaries. A
list of high profile inversions occurring before February 2002 can be
found in an article (Mihir A. Desai and James R. Hines, Jr.,
``Expectations and Expatriations: Tracing the Causes and Consequences
of Corporate Inversions,'' 55 National Tax Journal 409, 418-20 (2002)):
Triton Energy, Tyco, Fruit of the Loom, Transocean, Everest
Reinsurance, Foster Wheeler, Cooper Industries, Global Marine,
Ingersoll Rand, Nabors Industries, and Noble Drilling. The Councils do
not know whether these corporations would fall under the contracting
ban (because of the 80 percent (80%) rule and the substantial-business
test).
Funds covered. Section 743 of Public Law 111-8 contains the words
``None of the funds appropriated or otherwise made available by this or
any other Act may be used for any Federal Government contract...''. The
Government Accountability Office (GAO) has stated that ``The words `or
any other Act' in a provision addressing funds appropriated in or made
available by `this or any other act' are not words of futurity. They
merely refer to any other appropriations act for the same fiscal
year.'' Volume One of the GAO Red Book at page 2-36. This means Section
743 does not apply to future fiscal years, unless Congress extends it
in future legislation. However, it does apply to all Fiscal Year 2009
monies, whether the agency appropriations are directly covered by
Public Law 111-8 or by a different 2009 appropriations act.
FAR coverage. The Councils are considering the prohibition as a
prohibited business practice and have chosen to place coverage in the
FAR Subpart entitled Responsible Prospective Contractors, 9.1. In
addition to the definition of inverted domestic corporation and the
prohibition on contracting with one, newly added FAR section 9.108
includes the limited Secretarial waiver authority granted by the
statute and a representation requirement to be included in
solicitations for goods and services.
The new solicitation provision at 52.209-2, Prohibition on
Contracting with Inverted Domestic Corporations--Representation,
provides the relevant definition and the condition that, by submission
of its offer, the offeror represents that it is not an inverted
domestic corporation or a subsidiary of an inverted domestic
corporation. If the offeror cannot affirmatively make the
representation, then it is not allowed to submit an offer absent a
Secretarial waiver that contracting with the
[[Page 31563]]
inverted domestic corporation or its subsidiary is in the interest of
national security.
Contracting officers should rigorously examine circumstances known
to them that would lead a reasonable business person to question the
contractor self-certification, as the appropriation restriction applies
to accountable Government officers, and if willfully and knowingly
violated, may result in criminal penalties.
The Act does not require flow down of the representation provision.
Section 743 addresses only contracts entered into by Executive
agencies. However, the Councils are taking public comments on this
issue.
Applicability to commercial item contracts. Section 8003 of Public
Law 103-355 (41 U.S.C. 430) is intended to limit the applicability of
procurement laws to commercial items. Section 430 only permits
exemption from a covered law, which is ``any provision of law
that...sets forth policies, procedures, requirements, or restrictions
for the procurement of property or services by the Federal
Government.'' Also, exemption under section 430 is not permitted if the
provision of law contains criminal or civil penalties. In any event,
the law may be applied if the Federal Acquisition Regulatory Council
makes a written determination that it is not in the best interest of
the Federal Government to exempt commercial item contracts from the
covered law.
Therefore, given that Section 743 of Division D of the Omnibus
Appropriations Act, 2009 (Public Law 111-8) prohibits the use of funds
for any Federal Government contract with an inverted domestic
corporation or to any subsidiary of one, the FAR Council has determined
that the rule applies to contracts for commercial items.
Applicability to Commercially Available Off-The-Shelf (COTS) item
contracts. Section 4203 of Public Law 104-106, the Clinger-Cohen Act of
1996 (41 U.S.C. 431), governs the applicability of laws to the
procurement of commercially available off-the-shelf (COTS) items, and
is intended to limit the applicability of laws to them. Clinger-Cohen
provides that if a provision of law contains criminal or civil
penalties, or if the Administrator for Federal Procurement Policy makes
a written determination that it is not in the best interest of the
Federal Government to exempt COTS item contracts, the provision of law
will apply. The same applies for subcontracts for COTS items.
Therefore, given the requirements of Section 743 of Division D of
the Omnibus Appropriations Act of 2009 (Public Law 111-8) which
prohibits the use of funds for any Federal Government contract with an
inverted domestic corporation or to any subsidiary of one, and the
intent of the law, the Administrator of the Office of the Federal
Procurement Policy, has determined that it is in the best interest of
the Federal Government to apply this law to Commercially Available Off-
The-Shelf (COTS) item contracts and subcontracts, as defined at FAR
2.101.
This is a significant regulatory action and, therefore, was subject
to review under Section 6(b) of Executive Order 12866, Regulatory
Planning and Review, dated September 30, 1993. This rule is not a major
rule under 5 U.S.C. 804.
B. Regulatory Flexibility Act
The interim rule is not expected to have a significant economic
impact on a substantial number of small entities within the meaning of
the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because this
rule will only impact an offeror that is an inverted domestic
corporation and wants to do business with the Government. It is
expected that the number of entities impacted by this rule will be
minimal. Small business concerns are unlikely to have been incorporated
in the U.S. and then reincorporated in a tax haven; the major players
in these transactions are reportedly the very large multinational
corporations.
Therefore, an Initial Regulatory Flexibility Analysis has not been
performed. The Councils will consider comments from small entities
concerning the affected FAR Parts 4, 9, and 52 in accordance with 5
U.S.C. 610. Interested parties must submit such comments separately and
should cite 5 U.S.C 601, et seq. (FAC 2005-34, FAR case 2008-009), in
all correspondence.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the changes to
the FAR do not impose information collection requirements that require
the approval of the Office of Management and Budget under 44 U.S.C.
Chapter 35, et seq.
D. Determination to Issue an Interim Rule
A determination has been made under the authority of the Secretary
of Defense (DoD), the Administrator of General Services (GSA), and the
Administrator of the National Aeronautics and Space Administration
(NASA) that urgent and compelling reasons exist to promulgate this
interim rule without prior opportunity for public comment. This action
is necessary because it implements section 743 of Division D of Public
Law 111-8, which is currently in effect. However, pursuant to Public
Law 98-577 and FAR 1.501, the Councils will consider public comments
received in response to this interim rule in the formation of the final
rule.
List of Subjects in 48 CFR Parts 4, 9, and 52
Government procurement.
Dated: June 25, 2009.
Al Matera,
Director, Office of Acquisition Policy.
0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 4, 9, and 52 as set
forth below:
0
1. The authority citation for 48 CFR parts 4, 9, and 52 continues to
read as follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and42 U.S.C.
2473(c).
PART 4--ADMINISTRATIVE MATTERS
0
2. Amend section 4.1202 by redesignating paragraphs (f) through (cc) as
(g) through (dd) respectively, and adding a new paragraph (f) to read
as follows:
4.1202 Solicitation provision and contract clause.
* * * * *
(f) 52.209-2, Prohibition on Contracting with Inverted Domestic
Corporations--Representation.
* * * * *
PART 9--CONTRACTOR QUALIFICATIONS
0
3. Amend section 9.104-1 by revising paragraph (g) to read as follows:
9.104-1 General standards.
* * * * *
(g) Be otherwise qualified and eligible to receive an award under
applicable laws and regulations (see also inverted domestic corporation
prohibition at FAR 9.108).
0
4. Add sections 9.108 through 9.108-5 to read as follows:
9.108 Prohibition on contracting with inverted domestic corporations.
9.108-1 Definition.
Inverted domestic corporation, as used in this section, means a
foreign incorporated entity which is treated as an inverted domestic
corporation under 6 U.S.C. 395(b), i.e., a corporation that used to be
incorporated in the United States, or used to be a partnership in the
United States, but now is incorporated in a foreign country, or is a
subsidiary whose parent corporation is incorporated in a foreign
country, that
[[Page 31564]]
meets the criteria specified in 6 U.S.C. 395(b), applied in accordance
with the rules and definitions of 6 U.S.C. 395(c).
9.108-2 Relationship with the Internal Revenue Code and Treasury
regulations.
(a) Inverted domestic corporations are covered not only in the
Department of Homeland Security statute at 6 U.S.C. 395, but also are
similarly covered in the Internal Revenue Code at 26 U.S.C. 7874. A
foreign corporation is treated as an inverted domestic corporation for
U.S. Federal income tax purposes, rather than as a foreign corporation,
if--
(1) At least 80 percent (80%) of the stock is now held by former
shareholders of the domestic corporation or partners of the domestic
partnership; and
(2) The foreign entity plus companies connected to it by 50 percent
(50%) or more ownership do not have substantial business activities in
the foreign country.
(b) A foreign corporation that is treated as an inverted domestic
corporation for U.S. Federal income tax purposes, is also treated as
one for purposes of this section.
(c) A foreign entity that escapes the tax consequence of 26 U.S.C.
7874 only because the inversion transactions were completed on or
before the March 4, 2003, date in section 7874, is nevertheless treated
as an inverted domestic corporation for purposes of 6 U.S.C. 395 (which
does not have a limiting date) and therefore also for purposes of this
section.
9.108-3 Prohibition.
(a) Section 743 of Division D of the FY 2009 Omnibus Appropriations
Act (Public Law 111-8) prohibits the use of 2009 appropriated funds for
contracting with any foreign incorporated entity that is treated as an
inverted domestic corporation, or with a subsidiary of such a
corporation. The same restriction was also contained in the Fiscal Year
2006 through 2008 appropriations acts. In order to be eligible for
contract award when using Fiscal Year 2006 through Fiscal Year 2009
funds, an offeror must represent that it is not an inverted domestic
corporation or subsidiary. Any offeror that cannot so represent is
ineligible for award of a contract using such appropriated funds.
(b) Contracting officers should rigorously examine circumstances
known to them that would lead a reasonable business person to question
the contractor self--certification and, after consultation with legal
counsel, take appropriate action where that questionable self-
certification cannot be verified.
9.108-4 Waiver.
Any agency head may waive the requirement of subsection 9.108-3 for
a specific contract if the agency head determines in writing that the
waiver is required in the interest of national security, documents the
determination, and reports it to the Congress.
9.108-5 Solicitation provision.
When using funds appropriated in Fiscal Year 2006 through Fiscal
Year 2009, the contracting officer shall include the provision at
52.209-2, Prohibition on Contracting with Inverted Domestic
Corporations--Representation, in each solicitation issued after July 1,
2009 for the acquisition of products or services (see FAR 52.212-3 for
solicitations issued under Part 12), unless waived in accordance with
FAR 9.108-4.
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
0
5. Add section 52.209-2 to read as follows:
52.209-2 Prohibition on Contracting with Inverted Domestic
Corporations--Representation.
As prescribed in 9.108-5, insert the following provision:
PROHIBITION ON CONTRACTING WITH INVERTED DOMESTIC CORPORATIONS--
REPRESENTATION (JUL 2009)
(a) Definition. Inverted domestic corporation means a foreign
incorporated entity which is treated as an inverted domestic
corporation under 6 U.S.C. 395(b), i.e., a corporation that used to
be incorporated in the United States, or used to be a partnership in
the United States, but now is incorporated in a foreign country, or
is a subsidiary whose parent corporation is incorporated in a
foreign country, that meets the criteria specified in 6 U.S.C.
395(b), applied in accordance with the rules and definitions of 6
U.S.C. 395(c).
(b) Relation to Internal Revenue Code. A foreign entity that is
treated as an inverted domestic corporation for purposes of the
Internal Revenue Code at 26 U.S.C. 7874 (or would be except that the
inversion transactions were completed on or before March 4, 2003),
is also an inverted domestic corporation for purposes of 6 U.S.C.
395 and for this solicitation provision (see FAR 9.108).
(c) Representation. By submission of its offer, the offeror
represents that it is not an inverted domestic corporation and is
not a subsidiary of one.
(End of provision)
0
6. Amend section 52.212-3 by--
0
a. Revising the date of the provision;
0
b. In paragraph (a), adding, in alphabetical order, the definition
``Inverted domestic corporation'';
0
c. Removing from paragraph (b)(2) ``(c) through (m)'' and adding ``(c)
through (n)'' in its place;
0
d. Adding paragraph (n).
The revised and added text reads as follows:
52.212-3 Offeror Representations and Certifications--Commercial Items.
* * * * *
OFFEROR REPRESENTATIONS AND CERTIFICATIONS--COMMERCIAL ITEMS (JUL 2009)
* * * * *
(a) * * *
* * * * *
Inverted domestic corporation means a foreign incorporated
entity which is treated as an inverted domestic corporation under 6
U.S.C. 395(b), i.e., a corporation that used to be incorporated in
the United States, or used to be a partnership in the United States,
but now is incorporated in a foreign country, or is a subsidiary
whose parent corporation is incorporated in a foreign country, that
meets the criteria specified in 6 U.S.C. 395(b), applied in
accordance with the rules and definitions of 6 U.S.C. 395(c).
* * * * *
(n) Prohibition on Contracting with Inverted Domestic
Corporations. (1) Relation to Internal Revenue Code. A foreign
entity that is treated as an inverted domestic corporation for
purposes of the Internal Revenue Code at 26 U.S.C. 7874 (or would be
except that the inversion transactions were completed on or before
March 4, 2003), is also an inverted domestic corporation for
purposes of 6 U.S.C. 395 and for this solicitation provision (see
FAR 9.108).
(2) Representation. By submission of its offer, the offeror
represents that it is not an inverted domestic corporation and is
not a subsidiary of one.
* * * * *
[FR Doc. E9-15434 Filed 6-30-09; 8:45 am]
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