Federal Acquisition Regulation; Prohibition on Contracting With Inverted Domestic Corporations, 31410-31415 [2011-12853]

Download as PDF 31410 Federal Register / Vol. 76, No. 104 / Tuesday, May 31, 2011 / Rules and Regulations 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 * 48 CFR Parts 4, 9, and 52 * * * * * * * Federal Acquisition Regulation; Prohibition on Contracting With Inverted Domestic Corporations * Incentive Fee (JUN 2011) * * * * * * * * [FR Doc. 2011–12852 Filed 5–27–11; 8:45 am] srobinson on DSK4SPTVN1PROD with RULES2 BILLING CODE 6820–EP–P VerDate Mar<15>2010 17:35 May 27, 2011 Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA). ACTION: Final rule. AGENCY: * (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. * NATIONAL AERONAUTICS AND SPACE ADMINISTRATION RIN 9000–AL28 Incentive Fee. * 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: ■ 52.216–10 appropriated funds for FY 2010. Eight respondents submitted comments on the interim rule. Jkt 223001 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 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 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 E:\FR\FM\31MYR2.SGM 31MYR2 Federal Register / Vol. 76, No. 104 / Tuesday, May 31, 2011 / Rules and Regulations 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. srobinson on DSK4SPTVN1PROD with RULES2 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 VerDate Mar<15>2010 17:35 May 27, 2011 Jkt 223001 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. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 31411 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 E:\FR\FM\31MYR2.SGM 31MYR2 31412 Federal Register / Vol. 76, No. 104 / Tuesday, May 31, 2011 / Rules and Regulations srobinson on DSK4SPTVN1PROD with RULES2 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 VerDate Mar<15>2010 17:35 May 27, 2011 Jkt 223001 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 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 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 & E:\FR\FM\31MYR2.SGM 31MYR2 srobinson on DSK4SPTVN1PROD with RULES2 Federal Register / Vol. 76, No. 104 / Tuesday, May 31, 2011 / Rules and Regulations 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 VerDate Mar<15>2010 17:35 May 27, 2011 Jkt 223001 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 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 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. * * * * * (e) 52.209–2, Prohibition on Contracting with Inverted Domestic Corporations—Representation. * * * * * 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 E:\FR\FM\31MYR2.SGM 31MYR2 31414 Federal Register / Vol. 76, No. 104 / Tuesday, May 31, 2011 / Rules and Regulations 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. VerDate Mar<15>2010 17:35 May 27, 2011 Jkt 223001 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). PO 00000 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] BILLING CODE 6820–EP–P VerDate Mar<15>2010 17:35 May 27, 2011 Jkt 223001 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 E:\FR\FM\31MYR2.SGM 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