[Federal Register Volume 78, Number 19 (Tuesday, January 29, 2013)]
[Rules and Regulations]
[Pages 6185-6187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01745]





48 CFR Parts 9 and 52

[FAC 2005-65; FAR Case 2012-013; Item I; Docket 2012-0013, Sequence 1]
RIN 9000-AM22

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 are adopting as final, without change, an 
interim rule amending the Federal Acquisition Regulation (FAR) to 
implement a section of the Consolidated Appropriations Act, 2012, that 
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 such entity.

DATES: Effective Date: January 29, 2013.

FOR FURTHER INFORMATION CONTACT: Mr. Michael O. Jackson, Procurement 
Analyst, at 202-208-4949, for clarification of content. For information 
pertaining to status or publication schedules, contact the Regulatory 
Secretariat at 202-501-4755. Please cite FAC 2005-65, FAR Case 2012-


I. Background

    DoD, GSA, and NASA published an interim rule in the Federal 
Register at 77 FR 27547 on May 10, 2012, to implement section 738 of 
Division C of the Consolidated Appropriations Act, 2012 (Pub. L. 112-
74), which was signed on December 23, 2011. The same Governmentwide 
restrictions are already incorporated in the FAR for funds appropriated 
in Fiscal Years 2008 through 2010, under FAR case 2008-009, published 
as an interim rule on July 1, 2009 (74 FR 31561), and as a final rule 
on May 31, 2011 (76 FR 31410).
    An inverted domestic corporation is one that used to be 
incorporated in the United States, or used to be a partnership in the 
United States, but now is incorporated in a foreign country, or is a 
subsidiary whose parent corporation is incorporated in a foreign 
country. See the definition of inverted domestic corporation at FAR 
    Six respondents submitted comments on the interim rule.

II. Discussion and Analysis

    The Civilian Agency Acquisition Council and the Defense Acquisition 
Regulations Council (the Councils) reviewed the comments in the 
development of the final rule. A discussion of the comments is provided 
as follows:

A. Summary of Significant Changes

    There are no changes to the interim rule as a result of the public 

B. Analysis of Public Comments

1. Support for the Prohibition
    Comment: Almost all respondents strongly supported the intent of 
the rule, to prohibit the Government from doing business with inverted 
domestic corporations. Some provided specific comments that the rule 
should be enforced and continued. Some of the specific reasons provided 
for support were as follows:
a. Impact on U.S. jobs.
    Comment: Several respondents stated that when millions of people in 
the United States are unemployed or under-employed, corporations that 
have ``turned their back'' on the United States and probably eliminated 
at least some of the jobs for American personnel should not receive 
Government contracts.
    Response: The Councils note that the views of these respondents are 
in accord with the intent of the law and this FAR rule.
b. Companies should not be rewarded for tax avoidance.
    Comment: Many respondents stated that companies should not be 
rewarded for tax avoidance, which enables them to compete unfairly with 
U.S. companies.
    Response: The Councils note that the views of these respondents are 
in accord with the intent of the law and this FAR rule.
c. One respondent discussed additional costly measures that are 
required when dealing with inverted domestic corporations: e.g., proxy 
agreements, authorization from national authorities, additional 
security measures.
    Response: The Councils note that the views of this respondent are 
in accord with the intent of the law and this FAR rule.
2. Rule Should Be Even More Stringent
    Comment: One respondent stated that the FAR rule on inverted 
domestic corporations is a good beginning, but does not go far enough 
to have any effect on the issue. The respondent requests that the 
Government should also stop distributors of the products of inverted 
domestic corporations from selling such products to the Government, 
because the manufacturers pay no income tax, and products they make off 
shore impede manufacturing growth of the United States economy and job 
    Response: Prior to this FAR case 2012-013, the FAR already 
implemented restrictions that were contained in the FY 2008 through FY 
2010 appropriations act restrictions: a provision at FAR 52.209-2, 
Prohibition on Contracting with Inverted Domestic Corporations--
Representation; and a clause at 52.209-10, Prohibition on Contracting 
with Inverted Domestic Corporations.
    Comparable to the prior appropriations act restrictions, Section 
738 of the Consolidated Appropriations Act, 2012 (Pub. L. 112-74), 
Division C, Title VII, prohibits the use of FY 2012 funds for contracts 
with any foreign entity which is treated as an inverted domestic 
corporation under section 835(b) of the Homeland Security Act of 2002. 
The statute only prohibits Government contracts directly awarded to an 
inverted domestic corporation. It does not cover contracts to 
distributors of the products of inverted domestic corporations.
    The purpose of the interim rule under this FAR Case 2012-013 was to 
extend the existing prohibition to solicitations and contracts using FY 
2012 funds. It did not propose any changes in interpretation or 
application of the statutory prohibition. Therefore, application to 
distributors of the products of inverted domestic corporations is 
outside the scope of this rule.
3. Relationship to Buy American Statute
    Comment: One respondent stated that the Buy American Act of 1933 
(now codified at 41 U.S.C. chapter 83) created

[[Page 6186]]

a precedent to prefer American-made products relative to non-
domestically produced ones. Therefore, it is proper for this act to 
favor domestic firms over foreign firms.
    Response: The Councils note that the prohibition in this rule is 
not against all foreign firms, but only those foreign firms that are 
inverted domestic corporations.
    Comment: One respondent stated that all corporations based outside 
the United States should be forbidden to receive business from any 
branch of the U.S. Government.
    Response: The Buy American statute promotes purchase of domestic 
products, but provides certain exceptions that provide necessary 
balance (such as unreasonable cost or nonavailability of domestic 
products). In addition, the United States is party to the World Trade 
Organization Government Procurement Agreement and numerous free trade 
agreements, which provide the mutual benefit allowing the United States 
to export more goods and services, in exchange for opening our markets 
to the goods and services of countries that do not discriminate against 
the United States in their trade practices.
    Comment: One respondent stated a belief that inverted domestic 
corporations are ``representing themselves as American companies'' and 
that the U.S. military does not even know that they are receiving 
``tools made off shore in the guises of Buy American Act.''
    Response: The Government considers inverted domestic corporations 
to be foreign companies, because they are incorporated outside the 
United States and do not pay U.S. corporate income taxes. Furthermore, 
for purposes of the Buy American statute, the key factor is not whether 
the corporate entity is foreign or domestic, but whether the offered 
product is a domestic end product: i.e., the product is manufactured in 
the United States and the majority of the components are also of 
domestic origin. If the Buy American statute applies to an acquisition, 
the offeror must certify whether the offered product is a domestic end 
product. In any solicitation that is predominantly for the acquisition 
of manufactured end products, the offeror must also indicate whether 
the place of manufacture of the offered products is in the United 
States or outside the United States (FAR 52.225-18, Place of 
4. Possible Lack of Other Sources
    Comment: One respondent, although generally supporting the rule, 
was concerned about negative impact on DoD and NASA due to lack of 
possible leeway if there is no domestic firm producing a particular 
part that can only be obtained from an inverted domestic corporation.
    Response: FAR 9.108-4 allows for a waiver of the prohibition, if an 
agency head determines in writing that the waiver is required in the 
interest of national security, documents the determination, and reports 
it to Congress.
5. Impact on Small Business
    Comment: Several respondents considered that the rule could have an 
impact on small business, to the extent that a small business might now 
receive an award that formerly would have been made to an inverted 
domestic corporation, which would create a positive impact. One 
respondent expressed the certainty that a myriad of products and 
services can be re-directed to U.S.-based small businesses.
    Another respondent did not disagree with the statement in the 
interim rule that small businesses would not be impacted by the rule.
    Response: With regard to re-direction of awards to small U.S. 
businesses, the Federal Government already has an active program to set 
aside awards for small businesses (see FAR subpart 19.5). Generally, 
acquisitions with a value less than the simplified acquisition 
threshold are set aside for small businesses, and contracting officers 
are also required to set aside for small businesses acquisitions that 
exceed the simplified acquisition threshold, when there is a reasonable 
expectation that offers will be obtained from at least two responsible 
small business concerns offering the products of different small 
business concerns, and award will be made at fair market prices.
    This final rule does not directly impact small business, because 
the rule only extends the existing prohibition on contracting with 
inverted domestic corporations to acquisitions using FY 2012 funds, and 
the prohibition relates to foreign entities that are also generally 
large multinational corporations. The fact that these particular 
entities are now prohibited from contracting with the Government will 
not have a significant impact on a substantial number of small 
entities, because it only removes an insignificant number of 
competitors and Government awards may still go to either large or small 
businesses, either domestic or foreign, depending on other applicable 
statutes and regulations. In some instances, depending on the product 
to be provided and the extent of competition in that market, there may 
be a minimal positive impact for some small businesses.
6. Prescription for Use of FAR 52.209-2
    Comment: One respondent stated that the interim rule leaves 
unchanged the text of FAR 9.108-5(a), which states the prescription for 
use of the provision at FAR 52.209-2. According to the respondent, the 
prescription conflicts with FAR 4.1202(e), which says not to separately 
include FAR 52.209-2 in any solicitation that includes the clause at 
FAR 52.204-7, Central Contractor Registration (CCR).
    Response: This comment is outside the scope of this case, which did 
not address FAR 9.108-5(a). The issue raised is a global issue that 
affects the prescriptions for all provisions listed at FAR 4.1202(a) 
through (bb). If the solicitation includes FAR 52.204-7, or the offeror 
is registered in CCR and has completed the Online Representations and 
Certifications Application (ORCA) electronically and chooses to rely on 
the electronic representations and certifications, then paragraph (d) 
of FAR 52.204-8, Annual Representations and Certifications, applies. 
FAR 52.204-8, paragraph (d) allows reliance on representation in ORCA, 
rather than separate inclusion of the representation in the 
    The current convention has been to independently prescribe the 
clauses in the applicable FAR parts and then override the prescription 
at FAR 4.1202, if the acquisition contains the clause at FAR 52.204-7 
or the offeror meets the other conditions and chooses to make paragraph 
(d) applicable. If the Councils decide to change this convention, then 
it should be addressed in a proposed rule that provides a uniform 
prescription format for all affected provisions, not be done piecemeal 
for just one provision.

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. 
The Office of Information and Regulatory Affairs (OIRA) has deemed that 
this is not a significant regulatory action and, therefore, was not 
subject to review under section 6(b) of

[[Page 6187]]

E.O. 12866, Regulatory Planning and Review, dated September 30, 1993, 
and that 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. It is expected that the number of 
entities impacted by this rule will be minimal. Small business concerns 
are unlikely to have been incorporated in the United States and then 
reincorporated in a tax haven; the major players in these transactions 
are reportedly the very large multinational corporations. No domestic 
entities will be directly impacted by this rule. For the definition of 
``small business,'' the Regulatory Flexibility Act refers to the Small 
Business Act, which in turn allows the U.S. Small Business 
Administration (SBA) Administrator to specify detailed definitions or 
standards (5 U.S.C. 601(3) and 15 U.S.C. 632(a)). The SBA regulations 
at 13 CFR 121.105 discuss who is a small business: ``(a)(1) Except for 
small agricultural cooperatives, a business concern eligible for 
assistance from SBA as a small business is a business entity organized 
for profit, with a place of business located in the United States, and 
which operates primarily within the United States or which makes a 
significant contribution to the U.S. economy through payment of taxes 
or use of American products, materials or labor.'' Also see the 
response to the comment at II.B.5. of this preamble. Therefore, a Final 
Regulatory Flexibility Analysis has not been performed.

V. Paperwork Reduction Act

    The 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 9 and 52

    Government Procurement.

    Dated: January 23, 2013.
Laura Auletta,
Director, Office of Governmentwide Acquisition Policy, Office of 
Acquisition Policy, Office of Governmentwide Policy.

Interim Rule Adopted as Final Without Change

Accordingly, the interim rule amending 48 CFR parts 9 and 52, which was 
published in the Federal Register at 77 FR 27547 on May 10, 2012, is 
adopted as final without change.

[FR Doc. 2013-01745 Filed 1-28-13; 8:45 am]