Federal Acquisition Regulation; FAR Case 2008-009, Prohibition on Contracting with Inverted Domestic Corporations, 31561-31564 [E9-15434]

Agencies

• General Services Administration
• National Aeronautics and Space Administration
• DEPARTMENT OF DEFENSE

[Federal Register Volume 74, Number 125 (Wednesday, July 1, 2009)]
[Rules and Regulations]
[Pages 31561-31564]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-15434]


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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: https://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 https://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]
BILLING CODE 6820-EP-S