Federal Acquisition Regulation; Prohibition on Contracting With Inverted Domestic Corporations, 31410-31415 [2011-12853]
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and royalty reports, and is not delinquent in
submitting final vouchers on prior years’
settlements. The Contracting Officer may
release up to 90 percent of the fee withholds
under this contract based on the Contractor’s
past performance related to the submission
and settlement of final indirect cost rate
proposals.
DEPARTMENT OF DEFENSE
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48 CFR Parts 4, 9, and 52
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Federal Acquisition Regulation;
Prohibition on Contracting With
Inverted Domestic Corporations
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Incentive Fee (JUN 2011)
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[FR Doc. 2011–12852 Filed 5–27–11; 8:45 am]
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BILLING CODE 6820–EP–P
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Department of Defense (DoD),
General Services Administration (GSA),
and National Aeronautics and Space
Administration (NASA).
ACTION: Final rule.
AGENCY:
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(c) Withholding of payment. (1) Normally,
the Government shall pay the fee to the
Contractor as specified in the Schedule.
However, when the Contracting Officer
considers that performance or cost indicates
that the Contractor will not achieve target,
the Government shall pay on the basis of an
appropriate lesser fee. When the Contractor
demonstrates that performance or cost clearly
indicates that the Contractor will earn a fee
significantly above the target fee, the
Government may, at the sole discretion of the
Contracting Officer, pay on the basis of an
appropriate higher fee.
(2) Payment of the incentive fee shall be
made as specified in the Schedule; provided
that the Contracting Officer withholds a
reserve not to exceed 15 percent of the total
incentive fee or $100,000, whichever is less,
to protect the Government’s interest. The
Contracting Officer shall release 75 percent of
all fee withholds under this contract after
receipt of an adequate certified final indirect
cost rate proposal covering the year of
physical completion of this contract,
provided the Contractor has satisfied all
other contract terms and conditions,
including the submission of the final patent
and royalty reports, and is not delinquent in
submitting final vouchers on prior years’
settlements. The Contracting Officer may
release up to 90 percent of the fee withholds
under this contract based on the Contractor’s
past performance related to the submission
and settlement of final indirect cost rate
proposals.
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NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
RIN 9000–AL28
Incentive Fee.
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GENERAL SERVICES
ADMINISTRATION
[FAC 2005–52; FAR Case 2008–009; Item
III; Docket 2009–0020, Sequence 1]
9. Amend section 52.216–10 by
revising the date of the clause and
paragraph (c) to read as follows:
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52.216–10
appropriated funds for FY 2010. Eight
respondents submitted comments on the
interim rule.
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DoD, GSA, and NASA have
adopted as final, with changes, the
interim rule amending the Federal
Acquisition Regulation (FAR) to
implement section 743 of Division D of
the Omnibus Appropriations Act, 2009.
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. For Fiscal Year (FY)
2010, the same restrictions were
continued under section 740 of Division
C of the Consolidated Appropriations
Act, 2010.
DATES: Effective Date: May 31, 2011.
FOR FURTHER INFORMATION CONTACT: Ms.
Cecelia L. Davis, Procurement Analyst,
at (202) 219–0202, for clarification of
content. Please cite FAC 2005–52, FAR
Case 2008–009. For information
pertaining to status or publication
schedules, contact the FAR Secretariat
at (202) 501–4755.
SUPPLEMENTARY INFORMATION:
SUMMARY:
I. Background
DoD, GSA, and NASA published an
interim rule in the Federal Register at
74 FR 31561 on July 1, 2009, to
implement section 743 of the Division D
of the Omnibus Appropriations Act,
2009 (Pub. L. 111–8). Section 743 of
Division D of this Act prohibited the use
of Federal appropriated funds for FY
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. On December 16, 2009, section
740 of Division C of the Consolidated
Appropriations Act, 2010 (Pub. L. 111–
117), also prohibited the use of Federal
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II. Discussion and Analysis of the
Public Comments
The Civilian Agency Acquisition
Council and the Defense Acquisition
Regulations Council (the Councils)
reviewed the public comments in the
development of the final rule. A
discussion of the comments and the
changes made to the rule as a result of
those comments are provided as
follows:
A. Applicability to Fiscal Years (FY)
2006 and 2007 Funds
Comment: Three respondents
commented that the interim rule
inaccurately applies the ban on
contracting with inverted domestic
corporations to funds appropriated in
FY 2006 and FY 2007 on a
Governmentwide basis. Section 743 of
Division D of the Omnibus
Appropriations Act, 2009, and section
745 of the Consolidated Appropriations
Act, 2008, prohibit all Federal agencies
from using appropriated funds on
contracts with any foreign incorporated
entity that is treated as an inverted
domestic corporation or the subsidiary
of such a corporation. In FY 2006 and
FY 2007, the statutory prohibition was
limited to agencies funded under the
Treasury, Transportation and Housing
Appropriation (Pub. L. 109–115, Pub. L.
109–289, Pub. L. 109–369, Pub. L. 109–
383, and Pub. L. 110–5).
Response: The Councils agree with
the respondents that the prohibition in
the FY 2006 and FY 2007
appropriations bills only covers a
limited number of agencies, whereas the
FY 2008 and FY 2009 prohibition
applies Governmentwide. The Councils
therefore have revised FAR 9.108–3 to
apply the prohibition to the use of FY
2008 and FY 2009 appropriated funds.
The Councils recommend that each
covered agency continue with its
implementation of the FY 2006 and FY
2007 prohibitions because the required
implementation has probably already
occurred within the covered agencies.
B. Applicability to Task Orders
Comment: One respondent
commented that the interim rule fails to
reflect a statutory exception for funds
expended on task orders issued under
contracts entered into before December
26, 2007. Section 743(c) of Division D of
the Omnibus Appropriations Act, 2009,
and section 745(c) of Division D of
Public Law 110–161 (the Consolidated
Appropriations Act, 2008) each provide
that ‘‘This section shall not apply to any
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Federal Government contract entered
into before the date of the enactment of
this Act, or to any task order issued
pursuant to such contract.’’
Response: The Councils agree with
the respondent. The Councils have
revised FAR 9.108–2 to specify the
exclusion of contracts entered into
before December 26, 2007, (for FY 2008
funds); March 11, 2009, (for FY 2009
funds); and December 16, 2009, (for FY
2010 funds); and task orders issued
under such contracts.
C. Definitions
1. Inverted Domestic Corporation
Comment: Three respondents opined
that the incorporation of the Internal
Revenue Code (IRC) definition of
‘‘inverted domestic corporation’’
broadened the definition of the term
beyond the intent of Congress as the
definitions are not the same. They stated
rulemaking on inverted domestic
corporations should be based on the
definition in the Homeland Security Act
of 2002 rather than the IRC as Congress
did not incorporate the IRC definition
into any contracting ban.
Response: The Homeland Security
Act of 2002 and IRC definitions are not
identical. To simplify and avoid
complicating the application of the
inverted domestic corporation
prohibition, the Councils have—
• Deleted FAR 9.108–2, Relationship
with the Internal Revenue Code and
Treasury regulations;
• Added to the definition of ‘‘inverted
domestic corporation;’’
• Changed the content of FAR
52.209–2(b), Relation to Internal
Revenue Code; and
• Changed FAR 52.212–3(n)(1),
Relation to Internal Revenue Code.
Thus, the inverted domestic
corporation prohibition will be
implemented with the Homeland
Security Act of 2002 definition stating
explicitly that it is not the same as the
IRC definition.
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2. Subsidiary
Comment: One respondent stated that
failure to define the term ‘‘subsidiary’’
will result in inconsistent application of
the FAR rule. The respondent
contended that this will cause problems
for potential Government contractors as
well as contracting officers.
The respondent first proposed that the
legislative history suggests that Congress
intended the prohibition to apply to
‘‘wholly-owned subsidiaries.’’ The
respondent stated that the impetus for
expanding the prohibition to cover
subsidiaries was to ‘‘plug a loophole’’
that became apparent when an award
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was made to a wholly-owned subsidiary
of a foreign entity.
Alternatively, as the less preferred
option, the respondent made a case for
defining subsidiary in accordance with
the tax code. The respondent cites both
6 U.S.C. 395 and 26 U.S.C. 7874,
because they both require 80 percent
ownership of stock in the foreign entity
by former shareholders of the domestic
corporation in order for the foreign
entity to be designated as an inverted
domestic corporation.
Response: The Councils concur that
the rule should provide a definition of
the term ‘‘subsidiary.’’ In general terms,
a subsidiary is an entity that is
controlled by a separate entity, called
the parent company. The most common
way (but not the only way) that control
of a subsidiary is achieved is through
ownership of shares (or other form of
ownership if not a corporation) in the
subsidiary by the parent. Subsidiaries
are separate distinct legal entities for the
purposes of taxation and regulation.
The Councils do not agree with the
respondent’s request to have
‘‘subsidiary’’ defined as ‘‘wholly-owned
subsidiary.’’ This position is not
supported in any of the research or
current IRC. The respondent provided
no citation to substantiate their request
of defining subsidiary to mean whollyowned subsidiary. Further, the words
‘‘wholly-owned,’’ which denote a
specific type of subsidiary, are not used
in either of the two cited statutes. The
fact that a particular instance involving
a wholly-owned subsidiary occurred,
does not mean that Congress intended to
limit application to wholly-owned
subsidiaries.
The Councils have defined
‘‘Subsidiary,’’ as used in this rule, to
mean an entity (or corporation) in
which more than 50 percent is owned—
(1) Directly by a parent company; or
(2) Through another subsidiary of a
parent company.
The definition revolves around the
idea of management control and the
financial interests of the parent
company. Any single entity that
controls greater than 50 percent of the
stock (or assets of a non-public
company) would essentially be able to
control and benefit from the operations
of the second entity. This option
interprets the legislation’s intent as
wanting to prevent inverted domestic
corporations from receiving the revenue
benefit from Federal contracts. With a
greater than 50 percent ownership
within a subsidiary, the inverted
domestic corporation would receive the
majority of the benefit. This
interpretation has grounding in the
current IRC. Section (c)(1) of 26 U.S.C.
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7874 states that expanded affiliated
groups (a corporation or chain of
corporations which are connected to a
parent corporation through stock
ownership) of foreign surrogates need
only own 50 percent of the stock of the
company instead of the normal 80
percent.
The mention of stock ownership as
the measuring criteria was replaced in
favor of a broader term of overall
ownership in order to cover private
companies.
In making the case for the 80 percent
ownership interpretation, the
respondent cited both 6 U.S.C. 395 and
26 U.S.C. 7874. Both sections of the
United States Code are meant to provide
the thresholds for determining whether
a corporation is an inverted domestic
corporation and not whether a
corporation is a subsidiary. The
Councils did not agree that it is correct
to use the threshold for determining an
inverted domestic corporation as the
threshold for determining a subsidiary
as they are two separate and different
determinations. The IRC (26 U.S.C.
1563) does describe parent-subsidiary
relationships using the 80 percent
threshold, but only for filing
consolidated returns.
D. Trade Agreements
Comment: One respondent argued
that the application of section 743 of
Division D to products, services, or
suppliers of a party to the World Trade
Organization Government Procurement
Agreement (WTO GPA) or a party to a
U.S. free trade agreement would be
inconsistent with the nondiscrimination obligations in those
agreements. This respondent proposed
that the final rule should be changed so
that it does not apply to inverted
domestic corporations or U.S.
subsidiaries of inverted domestic
corporations that have relocated from
the United States to countries that are
parties to the WTO GPA or U.S. free
trade agreements.
Response: The Councils have
considered the respondent’s arguments
regarding the compatibility of section
743 with U.S. trade agreement
obligations. The Councils do not
consider that the application of section
743 to products, services, or suppliers of
a party to the WTO GPA or a party to
a U.S. free trade agreement, or to the
U.S. subsidiaries of such suppliers,
would be inconsistent with the nondiscrimination obligations in those
agreements. Furthermore, section 743
does not provide for drawing
distinctions of the kind the respondent
has proposed. Therefore, the Councils
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do not believe it is appropriate to make
this revision.
E. Scope of the Representation
Comment: One respondent requested
that the FAR Councils clarify the
certification requirement set forth in
FAR 52.209–2. Specifically, the
comment requested that we clarify the
following points:
(1) Whether a business that was
previously an inverted domestic
corporation, but no longer one at the
time of initial offer, would be eligible
for contract award; and
(2) Whether an awardee can become
an inverted domestic corporation during
performance of the contract.
The respondent stated that the
Councils should not limit an awardees’
ability to become an inverted domestic
corporation during performance of the
contract because it would be an overly
broad interpretation and would unfairly
punish the shareholders.
Response: The Councils agree that the
representation (it is not a certification,
but a representation) requires additional
clarification. In addition, the Councils
agree that a former inverted domestic
corporation could be eligible for award
of a contract if it is no longer an
inverted domestic corporation at the
time of initial offer. However, the statute
prohibits the expenditure of funds to an
awardee that becomes an inverted
domestic corporation during contract
performance.
Specifically, the public laws at issue
in this rule state that ‘‘None of the funds
appropriated * * * may be used for any
Federal Government contract with
* * * an inverted domestic corporation
* * *’’ see Public Law 111–117, section
740. This would mean that a company
could not be an inverted domestic
corporation at the time of initial offer,
contract award, or any time after. If a
corporation receives a contract and
during contract performance becomes
an inverted domestic corporation, then
payment using restricted funds may
constitute a violation of the AntiDeficiency Act. Consequently, the
Councils have added a clause at FAR
52.209–10, Prohibition on Contracting
with Inverted Domestic Corporations, to
inform a contractor of the potential
consequences if the contractor becomes
an inverted domestic corporation or a
subsidiary thereof at any time during
the period of performance of the
contract.
F. Procedures for Determining Status as
an Inverted Domestic Corporation
Background: FAR 9.108–3(b) of the
interim rule stated that contracting
officers ‘‘should rigorously examine
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circumstances known to them that
would lead a reasonable business
person to question the contractor selfcertification, and after consultation with
legal counsel, take appropriate action
where questionable self-certification
cannot be verified.’’
Further, the Federal Register
preamble to the interim rule states that
‘‘the appropriation restriction applies to
accountable Government officers, and if
willfully and knowingly violated, may
result in criminal penalties.’’
Comments: Two respondents
commented on the procedures for the
contracting officer to determine the
validity of an offeror’s representation
regarding status as an inverted domestic
corporation. These respondents have
several concerns—that these procedures
place undue burdens on contracting
officers, that different contracting
officers will reach inconsistent
conclusions about a single offeror, and
that the Federal Register preamble cites
potential criminal penalties.
One respondent stated that the
procedure is inefficient because it
places the burden of determination on
many contracting officers. The
respondent stated that contracting
officers are not in the best position to
make the determination. Both
respondents were concerned that many
different contracting officers may reach
multiple conclusions regarding a single
contractor.
One respondent commented that it is
an ‘‘unusual step to identify potential
criminal penalties for contracting
officers to adequately review
contractor’s certifications.’’ The other
respondent stated that there is no basis
for the threat of criminal penalties in the
appropriations restrictions.
Response: The Councils concur with
the comments on the first issue. The
Councils have revised FAR 9.108–3(b)
as follows:
‘‘The contracting officer may rely on an
offeror’s representation that it is not an
inverted domestic corporation unless the
contracting officer has reason to question the
representation.’’
This is a lesser standard than
‘‘rigorously examine,’’ but the
contracting officer should not ignore
information that provides a valid reason
to question (including the challenge of
an interested party). The provisions of
the Anti-Deficiency Act would not
allow contracting officers to rely solely
on a representation in the face of
contradictory evidence. The
representation is to prevent violating
restrictions on expenditure of funds
which would trigger the Anti-Deficiency
Act. This approach is similar to the
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direction to contracting officers with
regard to the representation offerors
make regarding small business status.
The Councils note that the basis for
mention of criminal penalties in the
Federal Register preamble was because
knowing and willful violation of the
Anti-Deficiency Act (31 U.S.C. 1341) is
a criminal offense (31 U.S.C. 1350)
subject to criminal penalties. The
Federal Register did not state that there
would be criminal penalties for failure
to ‘‘adequately review’’ the offeror’s
representation but only cited potential
criminal penalties if the appropriations
act restriction is ‘‘knowingly and
willfully violated.’’
G. Flowdown
Comments: Two respondents
commented on the question of whether
the prohibition against contracting with
an inverted domestic corporation
should be flowed down to
subcontractors. The interim rule did not
require flowdown and requested
comments on the issue. One respondent
commented that silence puts a prime
contractor at risk of cost disallowances
if a subcontractor is subsequently found
to be an inverted domestic corporation,
i.e., the Government might disallow
subcontractors’ expenditures of
restricted fiscal years’ monies.
On the other hand, a second
respondent made a strong case that
Congress would have specifically asked
for flowdown in the statute if it wanted
the requirement to apply to
subcontractors. The absence of any
mention of subcontractors in the statute,
according to the respondent, means that
Congress did not want the prohibition to
apply to subcontractors.
Response: Given the plain wording of
the statute and the comments received
on this subject, the Councils have
determined that it is not appropriate to
include a flow down requirement in this
rule.
H. Interim v. Proposed Rule
Comments: Four respondents
commented on the decision to issue an
interim rule, which is effective
immediately, instead of a proposed rule,
which does not have an immediate
impact. The respondents generally posit
that the mere fact that there is currently
a prohibition in statute prohibiting
contracting with inverted domestic
corporations does not justify a claim of
‘‘urgent and compelling circumstances.’’
A respondent stated that the fact that
the prohibitions had existed in
appropriations laws for several years
before the interim rule was issued did
not justify the claimed urgency. This
respondent cited Atchison, Topeka &
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Santa Fe Ry. Co. v. Wichita Bd. Of
Trade, 412 U.S. 800, 808 (1973), in
which the Supreme Court stated that
any grounds for departure from prior
norms ‘‘must be clearly set forth so that
the reviewing court may understand the
basis of the agency’s action and so may
judge the consistency of that action with
the agency’s mandate.’’ This respondent
claimed that the Councils did not make
a reasonable explanation for why they
did not initiate a rulemaking for
identical or substantially similar
statutory restrictions dating back several
years.
The respondent quotes from the
Office of Federal Procurement Policy
Act section 418b(a) that ‘‘no
procurement policy, regulation,
procedure, or form * * * may take
effect until 60 days after (it) is published
for comment in the Federal Register’’
and then states that the 60-day notice
may only be waived ‘‘if urgent and
compelling circumstances make
compliance with such requirements
impracticable.’’
Another respondent suggested that an
interim rule was improper because it
risked harming shareholders who had
no role in deciding to shift a company
offshore and also risked contracting
officers reaching disparate conclusions.
For these reasons, and the reasons
discussed above, the respondents
requested suspension of the interim
rule.
Response: The restrictions against
contracting with inverted domestic
corporations in Fiscal Years 2006 and
2007 were not applicable to all
Government agencies. The FAR
coverage was not required for the nonGovernmentwide prohibition in those
fiscal years. However, the inverted
domestic corporation language in the
Fiscal Years 2008, 2009, and 2010
appropriations law is applicable
Governmentwide, thus making it an
appropriate subject for FAR coverage.
The Councils do not agree that the FAR
Council lacked authority to issue the
coverage as an interim rule; the rule
implemented an existing restriction on
appropriations about which contracting
officers and ordering activities may have
been unaware. The Councils cannot
suspend the interim rule because it may
harm shareholders. The Councils are
obligated to implement the statutory
restriction on contracting with inverted
domestic corporations.
I. Permanent Response to Temporary
Legislation
Comments: Two respondents claimed
that a restriction included in an
appropriations bill does not equate to a
permanent restriction, whereas the
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Councils have responded with
regulations that are permanent. The
respondents believed that this
‘‘permanent’’ FAR language is not a
proper reaction to statutes restricting
use of appropriations in a given fiscal
year, particularly because inevitable
variations in future years’
appropriations limitations on
contracting with inverted domestic
corporations are likely to make
regulatory changes still more
complicated.
Response: The Councils do not agree
that this is in fact permanent coverage,
because the prohibition is tied to the
expenditure of specific year funds and
is self-deleting over time. There is no
other readily accessible means for this
information to get to the contracting
officers who must implement the
contracting restriction.
J. Editorial Comments
Two respondents made several
editorial comments, which have been
incorporated as appropriate in the final
rule.
III. Executive Orders 12866 and 13563
Executive Orders (E.O.s) 12866 and
13563 direct agencies to assess all costs
and benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). E.O. 13563 emphasizes the
importance of quantifying both costs
and benefits, of reducing costs, of
harmonizing rules, and of promoting
flexibility. This is a significant
regulatory action and, therefore, was
subject to review under section 6(b) of
E.O. 12866, Regulatory Planning and
Review dated September 30, 1993. This
rule is not a major rule under 5 U.S.C.
804.
IV. Regulatory Flexibility Act
The Department of Defense, the
General Services Administration, and
the National Aeronautics and Space
Administration certify that this final
rule will not 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. The number of entities
impacted by this rule will be minimal
because small business concerns are
unlikely to have been incorporated in
the United States and then
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31413
reincorporated in a foreign country; the
major players in these transactions are
reportedly the very large multinational
corporations. No comments were
received relating to impact on small
business concerns.
V. Paperwork Reduction Act
The final rule does not contain any
information collection requirements that
require the approval of the Office of
Management and Budget under the
Paperwork Reduction Act (44 U.S.C.
chapter 35).
List of Subjects in 48 CFR Parts 4, 9,
and 52
Government procurement.
Dated: May 18, 2011.
Millisa Gary,
Acting Director, Office of Governmentwide
Acquisition Policy.
Accordingly, the interim rule
amending 48 CFR parts 4, 9, and 52,
which was published in the Federal
Register at 74 FR 31561 on July 1, 2009,
is adopted as final with the following
changes:
■ 1. The authority citation for 48 CFR
parts 4, 42, and 52 continues to read as
follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C.
chapter 137; and 42 U.S.C. 2473(c).
PART 4—ADMINISTRATIVE MATTERS
2. Amend section 4.1202 by removing
paragraph (f); redesignating paragraph
(e) as paragraph (f), and adding a new
paragraph (e) to read as follows:
■
4.1202 Solicitation provision and contract
clause.
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*
*
*
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(e) 52.209–2, Prohibition on
Contracting with Inverted Domestic
Corporations—Representation.
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*
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PART 9—CONTRACTOR
QUALIFICATIONS
9.104–1
[Amended]
3. Amend section 9.104–1 by
removing the word ‘‘FAR’’ from
paragraph (g).
■ 4. Revise sections 9.108–1 through
9.108–5 to read as follows:
■
9.108–1
Definitions.
As used in this section—
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
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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). An
inverted domestic corporation as herein
defined does not meet the definition of
an inverted domestic corporation as
defined by the Internal Revenue Code at
26 U.S.C. 7874.
Subsidiary means an entity in which
more than 50 percent of the entity is
owned—
(1) Directly by a parent corporation; or
(2) Through another subsidiary of a
parent corporation.
9.108–2
Prohibition.
(a) Section 740 of Division C of the
Consolidated Appropriations Act, 2010
(Pub. L. 111–117) prohibits the use of
2010 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
Governmentwide restriction was also
contained in the Fiscal Year 2008 and
2009 appropriations acts. Agencyspecific restrictions on contracting with
inverted domestic corporations also
existed in FY 2006 and FY 2007
appropriations for United States
Departments of Transportation and
Treasury, Housing and Urban
Development, the Judiciary and
Independent Agencies (including Public
Laws 109–115 and 109–289).
(b) This prohibition does not apply as
follows:
(1) When using Fiscal Year 2008
funds for any contract entered into
before December 26, 2007, or for any
order issued pursuant to such contract.
(2) When using Fiscal Year 2009
funds for any contract entered into
before March 11, 2009, or for any order
issued pursuant to such contract.
(3) When using Fiscal Year 2010
funds for any contract entered into
before December 16, 2009, or for any
order issued pursuant to such contract.
srobinson on DSK4SPTVN1PROD with RULES2
9.108–3
Representation by the offeror.
(a) In order to be eligible for contract
award when using Fiscal Year 2008
through Fiscal Year 2010 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) The contracting officer may rely on
an offeror’s representation that it is not
an inverted domestic corporation unless
the contracting officer has reason to
question the representation.
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9.108–4
Waiver.
Any agency head may waive the
prohibition in subsection 9.108–2 and
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 and
Contract Clause.
When using funds appropriated in
Fiscal Year 2008 through Fiscal Year
2010, unless waived in accordance with
FAR 9.108–4, the contracting officer
shall—
(a) Include the provision at 52.209–2,
Prohibition on Contracting with
Inverted Domestic Corporations—
Representation, in each solicitation for
the acquisition of products or services
(including construction); and
(b) Include the clause at 52.209–10,
Prohibition on Contracting with
Inverted Domestic Corporations, in each
solicitation and contract for the
acquisition of products or services
(including construction).
PART 52—SOLICITATION PROVISIONS
AND CONTRACT CLAUSES
5. Amend section 52.204–8 by—
a. Revising the date of the provision;
and
■ b. Redesignating paragraphs (c)(1)(v)
through (xx) as paragraphs (c)(1)(vi)
through (xxi), respectively; and adding
a new paragraph (c)(1)(v) to read as
follows:
■
■
52.204–8 Annual Representations and
Certifications.
*
*
*
*
*
Annual Representations and Certifications
(May 2011)
(c)(1) * * *
(v) 52.209–2, Prohibition on Contracting
with Inverted Domestic Corporations—
Representation. This provision applies to
solicitations using funds appropriated in
fiscal years 2008, 2009, or 2010.
*
*
*
*
*
6. Revise 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(a), insert the
following provision:
Prohibition on Contracting With Inverted
Domestic Corporations—Representation
(May 2011)
(a) Definitions. Inverted domestic
corporation and subsidiary have the meaning
given in the clause of this contract entitled
Prohibition on Contracting with Inverted
Domestic Corporations (52.209–10).
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Frm 00022
Fmt 4701
Sfmt 4700
(b) Relation to Internal Revenue Code. An
inverted domestic corporation as herein
defined does not meet the definition of an
inverted domestic corporation as defined by
the Internal Revenue Code at 26 U.S.C. 7874.
(c) Representation. By submission of its
offer, the offeror represents that—
(1) It is not an inverted domestic
corporation; and
(2) It is not a subsidiary of an inverted
domestic corporation.
(End of provision)
7. Add section 52.209–10 to read as
follows:
■
52.209–10 Prohibition on Contracting With
Inverted Domestic Corporations.
As prescribed in 9.108–5(b), insert the
following clause:
Prohibition on Contracting With Inverted
Domestic Corporations (May 2011)
(a) Definitions. As used in this clause—
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). An inverted
domestic corporation as herein defined does
not meet the definition of an inverted
domestic corporation as defined by the
Internal Revenue Code at 26 U.S.C. 7874.
Subsidiary means an entity in which more
than 50 percent of the entity is owned—
(1) Directly by a parent corporation; or
(2) Through another subsidiary of a parent
corporation.
(b) If the contractor reorganizes as an
inverted domestic corporation or becomes a
subsidiary of an inverted domestic
corporation at any time during the period of
performance of this contract, the Government
may be prohibited from paying for Contractor
activities performed after the date when it
becomes an inverted domestic corporation or
subsidiary. The Government may seek any
available remedies in the event the
Contractor fails to perform in accordance
with the terms and conditions of the contract
as a result of Government action under this
clause.
(End of clause)
8. Amend section 52.212–3 by—
a. Revising the date of the provision;
■ b. In paragraph (a) revising the
definition ‘‘Inverted domestic
corporation’’; and adding, in
alphabetical order, the definition
‘‘Subsidiary’’; and
■ c. Revising paragraph (n) to read as
follows:
■
■
52.212–3 Offeror Representations and
Certifications—Commercial Items.
*
E:\FR\FM\31MYR2.SGM
*
*
31MYR2
*
*
Federal Register / Vol. 76, No. 104 / Tuesday, May 31, 2011 / Rules and Regulations
Offeror Representations and Certifications—
Commercial Items (May 2011)
DEPARTMENT OF DEFENSE
*
GENERAL SERVICES
ADMINISTRATION
*
*
*
*
*
*
*
(a) * * *
*
*
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 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). An inverted
domestic corporation as herein defined does
not meet the definition of an inverted
domestic corporation as defined by the
Internal Revenue Code at 26 U.S.C. 7874.
*
*
*
*
*
Subsidiary means an entity in which more
than 50 percent of the entity is owned—
(1) Directly by a parent corporation; or
(2) Through another subsidiary of a parent
corporation.
*
*
*
*
*
(n) Prohibition on Contracting with
Inverted Domestic Corporations—(1) Relation
to Internal Revenue Code. An inverted
domestic corporation as herein defined does
not meet the definition of an inverted
domestic corporation as defined by the
Internal Revenue Code 25 U.S.C. 7874.
(2) Representation. By submission of its
offer, the offeror represents that—
(i) It is not an inverted domestic
corporation; and
(ii) It is not a subsidiary of an inverted
domestic corporation.
*
*
*
*
*
9. Amend section 52.212–5 by
revising the date of the clause;
redesignating paragraphs (b)(7) through
(48) as (b)(8) through (49), respectively;
and adding a new paragraph (b)(7) to
read as follows:
■
52.212–5 Contract Terms and Conditions
Required To Implement Statutes or
Executive Orders—Commercial Items.
*
*
*
*
*
Contract Terms and Conditions Required To
Implement Statutes or Executive Orders—
Commercial Items (May 2011)
srobinson on DSK4SPTVN1PROD with RULES2
*
*
*
*
*
(b) * * *
l(7) 52.209–10, Prohibition on
Contracting with Inverted Domestic
Corporations (section 740 of Division C of
Public Law 111–117, section 743 of Division
D of Public Law 111–8, and section 745 of
Division D of Public Law 110–161)
*
*
*
*
*
[FR Doc. 2011–12853 Filed 5–27–11; 8:45 am]
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31415
48 CFR Parts 25 and 52
and benefits, of reducing costs, of
harmonizing rules, and of promoting
flexibility. This is not a significant
regulatory action and, therefore, was not
subject to review under section 6(b) of
E.O. 12866, Regulatory Planning and
Review, dated September 30, 1993. This
rule is not a major rule under 5 U.S.C.
804.
[FAC 2005–52; FAR Case 2009–039; Item
IV; Docket 2010–0104, Sequence 1]
III. Regulatory Flexibility Act
RIN 9000–AL62
The Department of Defense, the
General Services Administration, and
the National Aeronautics and Space
Administration certify that this final
rule will not 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 the
rule simplifies the treatment of
construction material that is also a
commercial information technology
item, which constitutes a small
percentage of the overall construction
material in a project. This final rule
does not affect small business set-asides
to the prime contractor or the small
business subcontracting goals.
Construction contracts that exceed
$7,804,000 and are subject to trade
agreements already exempt designated
country construction material from the
Buy American Act.
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
Federal Acquisition Regulation; Buy
American Exemption for Commercial
Information Technology—Construction
Material
Department of Defense (DoD),
General Services Administration (GSA),
and National Aeronautics and Space
Administration (NASA).
ACTION: Final rule.
AGENCY:
DoD, GSA, and NASA have
adopted as final, without change, an
interim rule amending the Federal
Acquisition Regulation (FAR) to
implement section 615 of Division C,
Title VI, of the Consolidated
Appropriations Act, 2010, to authorize
exemption from the Buy American Act
for acquisition of information
technology that is a commercial item.
DATES: Effective Date: May 31, 2011.
FOR FURTHER INFORMATION CONTACT: Ms.
Cecelia L. Davis, Procurement Analyst,
at (202) 219–0202 for clarification of
content. For information pertaining to
status or publication schedules, contact
the Regulatory Secretariat at (202) 501–
4755. Please cite FAC 2005–52, FAR
Case 2009–039.
SUPPLEMENTARY INFORMATION:
SUMMARY:
I. Background
DoD, GSA, and NASA published an
interim rule in the Federal Register at
75 FR 60266 on September 29, 2010, to
implement section 615 of the Division
C, Title VI, of the Consolidated
Appropriations Act, 2010 (Pub. L. 111–
117). No comments were received by the
close of the public comment period on
November 29, 2010.
II. Executive Orders 12866 and 13563
Executive Orders (E.O.s) 12866 and
13563 direct agencies to assess all costs
and benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). E.O. 13563 emphasizes the
importance of quantifying both costs
PO 00000
Frm 00023
Fmt 4701
Sfmt 9990
IV. Paperwork Reduction Act
The Paperwork Reduction Act (44
U.S.C. chapter 35) does apply; however,
these changes to the FAR do not impose
additional information collection
requirements to the paperwork burden
previously approved under OMB
Control Number 9000–0141, titled: Buy
America Act—Construction—FAR
Sections Affected: Subpart 25.2; 52.225–
9; and 52.225–11.
List of Subjects in 48 CFR Parts 25 and
52
Government procurement.
Dated: May 18, 2011.
Millisa Gary,
Acting Director, Office of Governmentwide
Acquisition Policy.
Interim Rule Adopted as Final Without
Change
Accordingly, the interim rule
amending 48 CFR parts 25 and 52,
which was published in the Federal
Register at 75 FR 60266 on September
29, 2010, is adopted as final without
change.
[FR Doc. 2011–12854 Filed 5–27–11; 8:45 am]
BILLING CODE 6820–EP–P
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31MYR2
]]>Agencies
[Federal Register Volume 76, Number 104 (Tuesday, May 31, 2011)]
[Rules and Regulations]
[Pages 31410-31415]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12853]
-----------------------------------------------------------------------
DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 4, 9, and 52
[FAC 2005-52; FAR Case 2008-009; Item III; Docket 2009-0020, Sequence
1]
RIN 9000-AL28
Federal Acquisition Regulation; Prohibition on Contracting With
Inverted Domestic Corporations
AGENCY: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: DoD, GSA, and NASA have adopted as final, with changes, the
interim rule amending the Federal Acquisition Regulation (FAR) to
implement section 743 of Division D of the Omnibus Appropriations Act,
2009. 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. For Fiscal Year (FY) 2010, the same restrictions
were continued under section 740 of Division C of the Consolidated
Appropriations Act, 2010.
DATES: Effective Date: May 31, 2011.
FOR FURTHER INFORMATION CONTACT: Ms. Cecelia L. Davis, Procurement
Analyst, at (202) 219-0202, for clarification of content. Please cite
FAC 2005-52, FAR Case 2008-009. For information pertaining to status or
publication schedules, contact the FAR Secretariat at (202) 501-4755.
SUPPLEMENTARY INFORMATION:
I. Background
DoD, GSA, and NASA published an interim rule in the Federal
Register at 74 FR 31561 on July 1, 2009, to implement section 743 of
the Division D of the Omnibus Appropriations Act, 2009 (Pub. L. 111-8).
Section 743 of Division D of this Act prohibited the use of Federal
appropriated funds for FY 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. On December 16, 2009, section 740 of Division C of the
Consolidated Appropriations Act, 2010 (Pub. L. 111-117), also
prohibited the use of Federal appropriated funds for FY 2010. Eight
respondents submitted comments on the interim rule.
II. Discussion and Analysis of the Public Comments
The Civilian Agency Acquisition Council and the Defense Acquisition
Regulations Council (the Councils) reviewed the public comments in the
development of the final rule. A discussion of the comments and the
changes made to the rule as a result of those comments are provided as
follows:
A. Applicability to Fiscal Years (FY) 2006 and 2007 Funds
Comment: Three respondents commented that the interim rule
inaccurately applies the ban on contracting with inverted domestic
corporations to funds appropriated in FY 2006 and FY 2007 on a
Governmentwide basis. Section 743 of Division D of the Omnibus
Appropriations Act, 2009, and section 745 of the Consolidated
Appropriations Act, 2008, prohibit all Federal agencies from using
appropriated funds on contracts with any foreign incorporated entity
that is treated as an inverted domestic corporation or the subsidiary
of such a corporation. In FY 2006 and FY 2007, the statutory
prohibition was limited to agencies funded under the Treasury,
Transportation and Housing Appropriation (Pub. L. 109-115, Pub. L. 109-
289, Pub. L. 109-369, Pub. L. 109-383, and Pub. L. 110-5).
Response: The Councils agree with the respondents that the
prohibition in the FY 2006 and FY 2007 appropriations bills only covers
a limited number of agencies, whereas the FY 2008 and FY 2009
prohibition applies Governmentwide. The Councils therefore have revised
FAR 9.108-3 to apply the prohibition to the use of FY 2008 and FY 2009
appropriated funds. The Councils recommend that each covered agency
continue with its implementation of the FY 2006 and FY 2007
prohibitions because the required implementation has probably already
occurred within the covered agencies.
B. Applicability to Task Orders
Comment: One respondent commented that the interim rule fails to
reflect a statutory exception for funds expended on task orders issued
under contracts entered into before December 26, 2007. Section 743(c)
of Division D of the Omnibus Appropriations Act, 2009, and section
745(c) of Division D of Public Law 110-161 (the Consolidated
Appropriations Act, 2008) each provide that ``This section shall not
apply to any
[[Page 31411]]
Federal Government contract entered into before the date of the
enactment of this Act, or to any task order issued pursuant to such
contract.''
Response: The Councils agree with the respondent. The Councils have
revised FAR 9.108-2 to specify the exclusion of contracts entered into
before December 26, 2007, (for FY 2008 funds); March 11, 2009, (for FY
2009 funds); and December 16, 2009, (for FY 2010 funds); and task
orders issued under such contracts.
C. Definitions
1. Inverted Domestic Corporation
Comment: Three respondents opined that the incorporation of the
Internal Revenue Code (IRC) definition of ``inverted domestic
corporation'' broadened the definition of the term beyond the intent of
Congress as the definitions are not the same. They stated rulemaking on
inverted domestic corporations should be based on the definition in the
Homeland Security Act of 2002 rather than the IRC as Congress did not
incorporate the IRC definition into any contracting ban.
Response: The Homeland Security Act of 2002 and IRC definitions are
not identical. To simplify and avoid complicating the application of
the inverted domestic corporation prohibition, the Councils have--
Deleted FAR 9.108-2, Relationship with the Internal
Revenue Code and Treasury regulations;
Added to the definition of ``inverted domestic
corporation;''
Changed the content of FAR 52.209-2(b), Relation to
Internal Revenue Code; and
Changed FAR 52.212-3(n)(1), Relation to Internal Revenue
Code.
Thus, the inverted domestic corporation prohibition will be
implemented with the Homeland Security Act of 2002 definition stating
explicitly that it is not the same as the IRC definition.
2. Subsidiary
Comment: One respondent stated that failure to define the term
``subsidiary'' will result in inconsistent application of the FAR rule.
The respondent contended that this will cause problems for potential
Government contractors as well as contracting officers.
The respondent first proposed that the legislative history suggests
that Congress intended the prohibition to apply to ``wholly-owned
subsidiaries.'' The respondent stated that the impetus for expanding
the prohibition to cover subsidiaries was to ``plug a loophole'' that
became apparent when an award was made to a wholly-owned subsidiary of
a foreign entity.
Alternatively, as the less preferred option, the respondent made a
case for defining subsidiary in accordance with the tax code. The
respondent cites both 6 U.S.C. 395 and 26 U.S.C. 7874, because they
both require 80 percent ownership of stock in the foreign entity by
former shareholders of the domestic corporation in order for the
foreign entity to be designated as an inverted domestic corporation.
Response: The Councils concur that the rule should provide a
definition of the term ``subsidiary.'' In general terms, a subsidiary
is an entity that is controlled by a separate entity, called the parent
company. The most common way (but not the only way) that control of a
subsidiary is achieved is through ownership of shares (or other form of
ownership if not a corporation) in the subsidiary by the parent.
Subsidiaries are separate distinct legal entities for the purposes of
taxation and regulation.
The Councils do not agree with the respondent's request to have
``subsidiary'' defined as ``wholly-owned subsidiary.'' This position is
not supported in any of the research or current IRC. The respondent
provided no citation to substantiate their request of defining
subsidiary to mean wholly-owned subsidiary. Further, the words
``wholly-owned,'' which denote a specific type of subsidiary, are not
used in either of the two cited statutes. The fact that a particular
instance involving a wholly-owned subsidiary occurred, does not mean
that Congress intended to limit application to wholly-owned
subsidiaries.
The Councils have defined ``Subsidiary,'' as used in this rule, to
mean an entity (or corporation) in which more than 50 percent is
owned--
(1) Directly by a parent company; or
(2) Through another subsidiary of a parent company.
The definition revolves around the idea of management control and
the financial interests of the parent company. Any single entity that
controls greater than 50 percent of the stock (or assets of a non-
public company) would essentially be able to control and benefit from
the operations of the second entity. This option interprets the
legislation's intent as wanting to prevent inverted domestic
corporations from receiving the revenue benefit from Federal contracts.
With a greater than 50 percent ownership within a subsidiary, the
inverted domestic corporation would receive the majority of the
benefit. This interpretation has grounding in the current IRC. Section
(c)(1) of 26 U.S.C. 7874 states that expanded affiliated groups (a
corporation or chain of corporations which are connected to a parent
corporation through stock ownership) of foreign surrogates need only
own 50 percent of the stock of the company instead of the normal 80
percent.
The mention of stock ownership as the measuring criteria was
replaced in favor of a broader term of overall ownership in order to
cover private companies.
In making the case for the 80 percent ownership interpretation, the
respondent cited both 6 U.S.C. 395 and 26 U.S.C. 7874. Both sections of
the United States Code are meant to provide the thresholds for
determining whether a corporation is an inverted domestic corporation
and not whether a corporation is a subsidiary. The Councils did not
agree that it is correct to use the threshold for determining an
inverted domestic corporation as the threshold for determining a
subsidiary as they are two separate and different determinations. The
IRC (26 U.S.C. 1563) does describe parent-subsidiary relationships
using the 80 percent threshold, but only for filing consolidated
returns.
D. Trade Agreements
Comment: One respondent argued that the application of section 743
of Division D to products, services, or suppliers of a party to the
World Trade Organization Government Procurement Agreement (WTO GPA) or
a party to a U.S. free trade agreement would be inconsistent with the
non-discrimination obligations in those agreements. This respondent
proposed that the final rule should be changed so that it does not
apply to inverted domestic corporations or U.S. subsidiaries of
inverted domestic corporations that have relocated from the United
States to countries that are parties to the WTO GPA or U.S. free trade
agreements.
Response: The Councils have considered the respondent's arguments
regarding the compatibility of section 743 with U.S. trade agreement
obligations. The Councils do not consider that the application of
section 743 to products, services, or suppliers of a party to the WTO
GPA or a party to a U.S. free trade agreement, or to the U.S.
subsidiaries of such suppliers, would be inconsistent with the non-
discrimination obligations in those agreements. Furthermore, section
743 does not provide for drawing distinctions of the kind the
respondent has proposed. Therefore, the Councils
[[Page 31412]]
do not believe it is appropriate to make this revision.
E. Scope of the Representation
Comment: One respondent requested that the FAR Councils clarify the
certification requirement set forth in FAR 52.209-2. Specifically, the
comment requested that we clarify the following points:
(1) Whether a business that was previously an inverted domestic
corporation, but no longer one at the time of initial offer, would be
eligible for contract award; and
(2) Whether an awardee can become an inverted domestic corporation
during performance of the contract.
The respondent stated that the Councils should not limit an
awardees' ability to become an inverted domestic corporation during
performance of the contract because it would be an overly broad
interpretation and would unfairly punish the shareholders.
Response: The Councils agree that the representation (it is not a
certification, but a representation) requires additional clarification.
In addition, the Councils agree that a former inverted domestic
corporation could be eligible for award of a contract if it is no
longer an inverted domestic corporation at the time of initial offer.
However, the statute prohibits the expenditure of funds to an awardee
that becomes an inverted domestic corporation during contract
performance.
Specifically, the public laws at issue in this rule state that
``None of the funds appropriated * * * may be used for any Federal
Government contract with * * * an inverted domestic corporation * * *''
see Public Law 111-117, section 740. This would mean that a company
could not be an inverted domestic corporation at the time of initial
offer, contract award, or any time after. If a corporation receives a
contract and during contract performance becomes an inverted domestic
corporation, then payment using restricted funds may constitute a
violation of the Anti-Deficiency Act. Consequently, the Councils have
added a clause at FAR 52.209-10, Prohibition on Contracting with
Inverted Domestic Corporations, to inform a contractor of the potential
consequences if the contractor becomes an inverted domestic corporation
or a subsidiary thereof at any time during the period of performance of
the contract.
F. Procedures for Determining Status as an Inverted Domestic
Corporation
Background: FAR 9.108-3(b) of the interim rule stated that
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 questionable self-certification
cannot be verified.''
Further, the Federal Register preamble to the interim rule states
that ``the appropriation restriction applies to accountable Government
officers, and if willfully and knowingly violated, may result in
criminal penalties.''
Comments: Two respondents commented on the procedures for the
contracting officer to determine the validity of an offeror's
representation regarding status as an inverted domestic corporation.
These respondents have several concerns--that these procedures place
undue burdens on contracting officers, that different contracting
officers will reach inconsistent conclusions about a single offeror,
and that the Federal Register preamble cites potential criminal
penalties.
One respondent stated that the procedure is inefficient because it
places the burden of determination on many contracting officers. The
respondent stated that contracting officers are not in the best
position to make the determination. Both respondents were concerned
that many different contracting officers may reach multiple conclusions
regarding a single contractor.
One respondent commented that it is an ``unusual step to identify
potential criminal penalties for contracting officers to adequately
review contractor's certifications.'' The other respondent stated that
there is no basis for the threat of criminal penalties in the
appropriations restrictions.
Response: The Councils concur with the comments on the first issue.
The Councils have revised FAR 9.108-3(b) as follows:
``The contracting officer may rely on an offeror's
representation that it is not an inverted domestic corporation
unless the contracting officer has reason to question the
representation.''
This is a lesser standard than ``rigorously examine,'' but the
contracting officer should not ignore information that provides a valid
reason to question (including the challenge of an interested party).
The provisions of the Anti-Deficiency Act would not allow contracting
officers to rely solely on a representation in the face of
contradictory evidence. The representation is to prevent violating
restrictions on expenditure of funds which would trigger the Anti-
Deficiency Act. This approach is similar to the direction to
contracting officers with regard to the representation offerors make
regarding small business status.
The Councils note that the basis for mention of criminal penalties
in the Federal Register preamble was because knowing and willful
violation of the Anti-Deficiency Act (31 U.S.C. 1341) is a criminal
offense (31 U.S.C. 1350) subject to criminal penalties. The Federal
Register did not state that there would be criminal penalties for
failure to ``adequately review'' the offeror's representation but only
cited potential criminal penalties if the appropriations act
restriction is ``knowingly and willfully violated.''
G. Flowdown
Comments: Two respondents commented on the question of whether the
prohibition against contracting with an inverted domestic corporation
should be flowed down to subcontractors. The interim rule did not
require flowdown and requested comments on the issue. One respondent
commented that silence puts a prime contractor at risk of cost
disallowances if a subcontractor is subsequently found to be an
inverted domestic corporation, i.e., the Government might disallow
subcontractors' expenditures of restricted fiscal years' monies.
On the other hand, a second respondent made a strong case that
Congress would have specifically asked for flowdown in the statute if
it wanted the requirement to apply to subcontractors. The absence of
any mention of subcontractors in the statute, according to the
respondent, means that Congress did not want the prohibition to apply
to subcontractors.
Response: Given the plain wording of the statute and the comments
received on this subject, the Councils have determined that it is not
appropriate to include a flow down requirement in this rule.
H. Interim v. Proposed Rule
Comments: Four respondents commented on the decision to issue an
interim rule, which is effective immediately, instead of a proposed
rule, which does not have an immediate impact. The respondents
generally posit that the mere fact that there is currently a
prohibition in statute prohibiting contracting with inverted domestic
corporations does not justify a claim of ``urgent and compelling
circumstances.'' A respondent stated that the fact that the
prohibitions had existed in appropriations laws for several years
before the interim rule was issued did not justify the claimed urgency.
This respondent cited Atchison, Topeka &
[[Page 31413]]
Santa Fe Ry. Co. v. Wichita Bd. Of Trade, 412 U.S. 800, 808 (1973), in
which the Supreme Court stated that any grounds for departure from
prior norms ``must be clearly set forth so that the reviewing court may
understand the basis of the agency's action and so may judge the
consistency of that action with the agency's mandate.'' This respondent
claimed that the Councils did not make a reasonable explanation for why
they did not initiate a rulemaking for identical or substantially
similar statutory restrictions dating back several years.
The respondent quotes from the Office of Federal Procurement Policy
Act section 418b(a) that ``no procurement policy, regulation,
procedure, or form * * * may take effect until 60 days after (it) is
published for comment in the Federal Register'' and then states that
the 60-day notice may only be waived ``if urgent and compelling
circumstances make compliance with such requirements impracticable.''
Another respondent suggested that an interim rule was improper
because it risked harming shareholders who had no role in deciding to
shift a company offshore and also risked contracting officers reaching
disparate conclusions. For these reasons, and the reasons discussed
above, the respondents requested suspension of the interim rule.
Response: The restrictions against contracting with inverted
domestic corporations in Fiscal Years 2006 and 2007 were not applicable
to all Government agencies. The FAR coverage was not required for the
non-Governmentwide prohibition in those fiscal years. However, the
inverted domestic corporation language in the Fiscal Years 2008, 2009,
and 2010 appropriations law is applicable Governmentwide, thus making
it an appropriate subject for FAR coverage. The Councils do not agree
that the FAR Council lacked authority to issue the coverage as an
interim rule; the rule implemented an existing restriction on
appropriations about which contracting officers and ordering activities
may have been unaware. The Councils cannot suspend the interim rule
because it may harm shareholders. The Councils are obligated to
implement the statutory restriction on contracting with inverted
domestic corporations.
I. Permanent Response to Temporary Legislation
Comments: Two respondents claimed that a restriction included in an
appropriations bill does not equate to a permanent restriction, whereas
the Councils have responded with regulations that are permanent. The
respondents believed that this ``permanent'' FAR language is not a
proper reaction to statutes restricting use of appropriations in a
given fiscal year, particularly because inevitable variations in future
years' appropriations limitations on contracting with inverted domestic
corporations are likely to make regulatory changes still more
complicated.
Response: The Councils do not agree that this is in fact permanent
coverage, because the prohibition is tied to the expenditure of
specific year funds and is self-deleting over time. There is no other
readily accessible means for this information to get to the contracting
officers who must implement the contracting restriction.
J. Editorial Comments
Two respondents made several editorial comments, which have been
incorporated as appropriate in the final rule.
III. Executive Orders 12866 and 13563
Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess
all costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). E.O.
13563 emphasizes the importance of quantifying both costs and benefits,
of reducing costs, of harmonizing rules, and of promoting flexibility.
This is a significant regulatory action and, therefore, was subject to
review under section 6(b) of E.O. 12866, Regulatory Planning and Review
dated September 30, 1993. This rule is not a major rule under 5 U.S.C.
804.
IV. Regulatory Flexibility Act
The Department of Defense, the General Services Administration, and
the National Aeronautics and Space Administration certify that this
final rule will not 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. The number of entities impacted by
this rule will be minimal because small business concerns are unlikely
to have been incorporated in the United States and then reincorporated
in a foreign country; the major players in these transactions are
reportedly the very large multinational corporations. No comments were
received relating to impact on small business concerns.
V. Paperwork Reduction Act
The final rule does not contain any information collection
requirements that require the approval of the Office of Management and
Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35).
List of Subjects in 48 CFR Parts 4, 9, and 52
Government procurement.
Dated: May 18, 2011.
Millisa Gary,
Acting Director, Office of Governmentwide Acquisition Policy.
Accordingly, the interim rule amending 48 CFR parts 4, 9, and 52,
which was published in the Federal Register at 74 FR 31561 on July 1,
2009, is adopted as final with the following changes:
0
1. The authority citation for 48 CFR parts 4, 42, and 52 continues to
read as follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
PART 4--ADMINISTRATIVE MATTERS
0
2. Amend section 4.1202 by removing paragraph (f); redesignating
paragraph (e) as paragraph (f), and adding a new paragraph (e) to read
as follows:
4.1202 Solicitation provision and contract clause.
* * * * *
(e) 52.209-2, Prohibition on Contracting with Inverted Domestic
Corporations--Representation.
* * * * *
PART 9--CONTRACTOR QUALIFICATIONS
9.104-1 [Amended]
0
3. Amend section 9.104-1 by removing the word ``FAR'' from paragraph
(g).
0
4. Revise sections 9.108-1 through 9.108-5 to read as follows:
9.108-1 Definitions.
As used in this section--
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
[[Page 31414]]
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). An
inverted domestic corporation as herein defined does not meet the
definition of an inverted domestic corporation as defined by the
Internal Revenue Code at 26 U.S.C. 7874.
Subsidiary means an entity in which more than 50 percent of the
entity is owned--
(1) Directly by a parent corporation; or
(2) Through another subsidiary of a parent corporation.
9.108-2 Prohibition.
(a) Section 740 of Division C of the Consolidated Appropriations
Act, 2010 (Pub. L. 111-117) prohibits the use of 2010 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 Governmentwide restriction was also
contained in the Fiscal Year 2008 and 2009 appropriations acts. Agency-
specific restrictions on contracting with inverted domestic
corporations also existed in FY 2006 and FY 2007 appropriations for
United States Departments of Transportation and Treasury, Housing and
Urban Development, the Judiciary and Independent Agencies (including
Public Laws 109-115 and 109-289).
(b) This prohibition does not apply as follows:
(1) When using Fiscal Year 2008 funds for any contract entered into
before December 26, 2007, or for any order issued pursuant to such
contract.
(2) When using Fiscal Year 2009 funds for any contract entered into
before March 11, 2009, or for any order issued pursuant to such
contract.
(3) When using Fiscal Year 2010 funds for any contract entered into
before December 16, 2009, or for any order issued pursuant to such
contract.
9.108-3 Representation by the offeror.
(a) In order to be eligible for contract award when using Fiscal
Year 2008 through Fiscal Year 2010 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) The contracting officer may rely on an offeror's representation
that it is not an inverted domestic corporation unless the contracting
officer has reason to question the representation.
9.108-4 Waiver.
Any agency head may waive the prohibition in subsection 9.108-2 and
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 and Contract Clause.
When using funds appropriated in Fiscal Year 2008 through Fiscal
Year 2010, unless waived in accordance with FAR 9.108-4, the
contracting officer shall--
(a) Include the provision at 52.209-2, Prohibition on Contracting
with Inverted Domestic Corporations--Representation, in each
solicitation for the acquisition of products or services (including
construction); and
(b) Include the clause at 52.209-10, Prohibition on Contracting
with Inverted Domestic Corporations, in each solicitation and contract
for the acquisition of products or services (including construction).
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
0
5. Amend section 52.204-8 by--
0
a. Revising the date of the provision; and
0
b. Redesignating paragraphs (c)(1)(v) through (xx) as paragraphs
(c)(1)(vi) through (xxi), respectively; and adding a new paragraph
(c)(1)(v) to read as follows:
52.204-8 Annual Representations and Certifications.
* * * * *
Annual Representations and Certifications (May 2011)
(c)(1) * * *
(v) 52.209-2, Prohibition on Contracting with Inverted Domestic
Corporations--Representation. This provision applies to
solicitations using funds appropriated in fiscal years 2008, 2009,
or 2010.
* * * * *
0
6. Revise 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(a), insert the following provision:
Prohibition on Contracting With Inverted Domestic Corporations--
Representation (May 2011)
(a) Definitions. Inverted domestic corporation and subsidiary
have the meaning given in the clause of this contract entitled
Prohibition on Contracting with Inverted Domestic Corporations
(52.209-10).
(b) Relation to Internal Revenue Code. An inverted domestic
corporation as herein defined does not meet the definition of an
inverted domestic corporation as defined by the Internal Revenue
Code at 26 U.S.C. 7874.
(c) Representation. By submission of its offer, the offeror
represents that--
(1) It is not an inverted domestic corporation; and
(2) It is not a subsidiary of an inverted domestic corporation.
(End of provision)
0
7. Add section 52.209-10 to read as follows:
52.209-10 Prohibition on Contracting With Inverted Domestic
Corporations.
As prescribed in 9.108-5(b), insert the following clause:
Prohibition on Contracting With Inverted Domestic Corporations (May
2011)
(a) Definitions. As used in this clause--
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). An
inverted domestic corporation as herein defined does not meet the
definition of an inverted domestic corporation as defined by the
Internal Revenue Code at 26 U.S.C. 7874.
Subsidiary means an entity in which more than 50 percent of the
entity is owned--
(1) Directly by a parent corporation; or
(2) Through another subsidiary of a parent corporation.
(b) If the contractor reorganizes as an inverted domestic
corporation or becomes a subsidiary of an inverted domestic
corporation at any time during the period of performance of this
contract, the Government may be prohibited from paying for
Contractor activities performed after the date when it becomes an
inverted domestic corporation or subsidiary. The Government may seek
any available remedies in the event the Contractor fails to perform
in accordance with the terms and conditions of the contract as a
result of Government action under this clause.
(End of clause)
0
8. Amend section 52.212-3 by--
0
a. Revising the date of the provision;
0
b. In paragraph (a) revising the definition ``Inverted domestic
corporation''; and adding, in alphabetical order, the definition
``Subsidiary''; and
0
c. Revising paragraph (n) to read as follows:
52.212-3 Offeror Representations and Certifications--Commercial Items.
* * * * *
[[Page 31415]]
Offeror Representations and Certifications--Commercial Items (May 2011)
* * * * *
(a) * * *
* * * * *
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 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). An inverted domestic corporation as herein defined
does not meet the definition of an inverted domestic corporation as
defined by the Internal Revenue Code at 26 U.S.C. 7874.
* * * * *
Subsidiary means an entity in which more than 50 percent of the
entity is owned--
(1) Directly by a parent corporation; or
(2) Through another subsidiary of a parent corporation.
* * * * *
(n) Prohibition on Contracting with Inverted Domestic
Corporations--(1) Relation to Internal Revenue Code. An inverted
domestic corporation as herein defined does not meet the definition
of an inverted domestic corporation as defined by the Internal
Revenue Code 25 U.S.C. 7874.
(2) Representation. By submission of its offer, the offeror
represents that--
(i) It is not an inverted domestic corporation; and
(ii) It is not a subsidiary of an inverted domestic corporation.
* * * * *
0
9. Amend section 52.212-5 by revising the date of the clause;
redesignating paragraphs (b)(7) through (48) as (b)(8) through (49),
respectively; and adding a new paragraph (b)(7) to read as follows:
52.212-5 Contract Terms and Conditions Required To Implement Statutes
or Executive Orders--Commercial Items.
* * * * *
Contract Terms and Conditions Required To Implement Statutes or
Executive Orders--Commercial Items (May 2011)
* * * * *
(b) * * *
--(7) 52.209-10, Prohibition on Contracting with Inverted
Domestic Corporations (section 740 of Division C of Public Law 111-
117, section 743 of Division D of Public Law 111-8, and section 745
of Division D of Public Law 110-161)
* * * * *
[FR Doc. 2011-12853 Filed 5-27-11; 8:45 am]
BILLING CODE 6820-EP-P
