[Federal Register Volume 78, Number 19 (Tuesday, January 29, 2013)]
[Rules and Regulations]
[Pages 6189-6191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01750]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 31 and 52

[FAC 2005-65; FAR Case 2011-011; Item IV; Docket 2011-0011, Sequence 1]
RIN 9000-AM13


Federal Acquisition Regulation; Unallowability of Costs 
Associated With Foreign Contractor Excise Tax

AGENCY: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

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SUMMARY: DoD, GSA, and NASA are issuing a final rule amending the 
Federal Acquisition Regulation (FAR) to implement certain requirements 
of section 301 of the James Zadroga 9/11 Health and Compensation Act of 
2010, which imposes a 2 percent excise tax on certain Federal 
procurement payments to foreign persons. The rule disallows the cost 
associated with the 2 percent excise tax on certain foreign 
procurements.

DATES: Effective Date: February 28, 2013.

FOR FURTHER INFORMATION CONTACT: Mr. Edward N. Chambers, Procurement 
Analyst, at 202-501-3221, 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 2011-
011.

SUPPLEMENTARY INFORMATION: 

I. Background

    The James Zadroga 9/11 Health and Compensation Act of 2010 (Pub. L. 
111-347) was signed into law and effective on January 2, 2011. Section 
301 of the Act amends the Internal Revenue Code of 1986 by adding a new 
section 5000C, Imposition of tax on certain foreign procurements (26 
U.S.C. 5000C). Section 5000C imposes a 2 percent excise tax on payments 
made to foreign persons pursuant to Government contracts for the 
provision of goods or services, if the goods are manufactured or 
produced in, or the services are performed in, a country that is not a 
party to an international procurement agreement with the United States. 
The statute applies to contracts entered into on or after January 2, 
2011. The statute does not apply, however, if the imposition of the tax 
would be inconsistent with any international agreement. The tax is to 
be collected in a manner similar to other U.S. taxes withheld on 
payments to foreign persons. Additionally, section 301 stipulates that 
no funds are to be disbursed to any foreign contractor in order to 
reimburse the tax imposed (26 U.S.C. 5000C Note).
    On February 22, 2012, DoD, GSA, and NASA published a proposed rule 
in the Federal Register at 77 FR 10461 implementing the prohibition 
against reimbursement of the 2 percent excise tax, by revising the FAR 
rules so that the cost of the tax cannot be included as part of a 
payment, or as part of a cost-based negotiated price.
    Regulations under section 5000C will be forthcoming from the 
Department of the Treasury that will provide specific guidance 
regarding the application of the tax and the procedures for withholding 
the tax. Once the Department of the Treasury implements procedures for 
withholding this 2 percent excise tax, the impact on

[[Page 6190]]

applicable FAR provisions will be handled in a separate FAR case.

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 and the 
changes made to the rule as a result of those comments are provided as 
follows:

A. Summary of Significant Changes

    To comply with the statute, FAR 31.205-41 is amended to inform the 
Government and contractors that the costs of the 2 percent excise tax 
are not allowable. FAR 52.229-3, 52.229-4, 52.229-6, and 52.229-7 are 
amended to provide that the costs for the 2 percent excise tax are not 
included in either foreign fixed-price contracts with a foreign concern 
or foreign fixed-price contracts with foreign governments.
    Based on a review of the public comments, discussed below, the 
Councils have concluded that no change to the proposed rule is 
necessary.

B. Analysis of Public Comments

    The Regulatory Secretariat received responses from two respondents 
to the proposed rule which are discussed below:
1. Intent of the rule.
    Comment: One respondent believes the intent of this rule is to 
encourage countries to sign the World Trade Organization (WTO) 
Government Procurement Agreement (GPA) and other Free Trade Agreements 
(FTAs) identified under FAR part 25.
    Response: The intent of the FAR rule is to implement requirements 
in the FAR to disallow the cost of the 2 percent excise tax mandated by 
the Public Law 111-347. The FAR is the primary document for uniform 
policies and procedures for acquisition by all executive agencies. FAR 
part 25 provides policies and procedures applicable to acquisitions 
that are covered by the trade agreements to which the United States is 
a party.
2. Implementation of the 2 percent excise tax and withholding 
procedures.
    Comment: Both respondents submitted comments regarding the 
implementation of the 2 percent excise tax and the Government's 
intended withholding procedures. These comments included:
    (a) Turkey is a member of the WTO, but is only an observer of the 
WTO's GPA. Will the 2 percent excise tax be applied to Turkish 
contractors?
    (b) The rule is considered to be a violation of the trade and 
investment agreements between Turkey and the U.S.
    (c) The rule will impose a tax that will cause certain foreign 
contractors to withdraw from contracting with the U.S. Government.
    (d) The rule should apply to future contracts, not be retroactively 
applied to already signed contracts.
    (e) The rule degrades the U.S. Government's ability to procure 
qualified contractors to perform in areas of the world, such as 
Afghanistan.
    (f) The rule creates unfair treatment to non-signatories of the WTO 
GPA and favors WTO GPA signatories and U.S. contractors.
    (g) The rule fails to define ``international procurement 
agreement'' and the respondent believes that it refers only to the WTO 
GPA and other Free Trade Agreements, as identified in FAR part 25.
    (h) The respondent believes that contractors from WTO GPA signatory 
countries will still be subject to the rule in the event that goods are 
produced or services rendered in a non-signatory country.
    (i) Will the 2 percent excise tax be withheld from payments to 
subcontractors?
    Response: The intent of the rule is to implement the requirements 
of Public Law 111-347 in the FAR regarding the disallowance of the cost 
of the 2 percent excise tax. This rule does not determine the extent to 
which contract payments will be subject to the tax. Regulations under 
section 5000C will be forthcoming from the Department of the Treasury, 
which will provide guidance regarding the application of the tax and 
the procedures for withholding the tax. This rule simply disallows the 
tax as part of a payment, or as part of a cost-based negotiated price.

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 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, and that this rule is not a major 
rule under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD, GSA, and NASA have prepared a Final Regulatory Flexibility 
Analysis (FRFA) consistent with the Regulatory Flexibility Act, 5 
U.S.C. 601, et seq. The FRFA is summarized as follows:

    DoD, GSA, and NASA do not expect this rule to have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. 
because the 2 percent excise tax is applied only to foreign persons 
that receive payments made pursuant to a contract with the 
Government of the United States for the provision of goods, if such 
goods are manufactured or produced in any country which is not a 
party to an international procurement agreement with the United 
States, or the provision of services, if such services are provided 
in any country which is not a party to an international procurement 
agreement with the United States. ``Foreign person'' means any 
person (including any individual, partnership, corporation, or other 
form of association) other than a United States person. Therefore, 
this rule is expected to have no impact on domestic small business 
concerns. There are no reporting, recordkeeping, or other compliance 
requirements for this rule. The approach described in this rule is 
the most practical and beneficial for both Government and industry.

    Interested parties may obtain a copy of the FRFA from the 
Regulatory Secretariat. The Regulatory Secretariat has submitted a copy 
of the FRFA to the Chief Counsel for Advocacy of the Small Business 
Administration.

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 31 and 52

    Government procurement.

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

    Therefore, DoD, GSA, and NASA amend 48 CFR parts 31 and 52 as set 
forth below:

0
1. The authority citation for 48 CFR parts 31 and 52 continues to read 
as follows:


[[Page 6191]]


    Authority:  40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 51 
U.S.C. 20113.

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

0
2. Amend section 31.205-41 by adding paragraph (b)(8) to read as 
follows:


31.205-41  Taxes.

* * * * *
    (b) * * *
    (8) Any tax imposed under 26 U.S.C. 5000C.
* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
3. Amend section 52.229-3 by revising the date of the clause and 
paragraph (b) to read as follows:


52.229-3  Federal, State, and Local Taxes.

* * * * *

Federal, State, and Local Taxes (FEB 2013)

* * * * *
    (b)(1) The contract price includes all applicable Federal, State, 
and local taxes and duties, except as provided in subparagraph 
(b)(2)(i) of this clause.
    (2) Taxes imposed under 26 U.S.C. 5000C may not be--
    (i) Included in the contract price; nor
    (ii) Reimbursed.
* * * * *

0
4. Amend section 52.229-4 by revising the date of the clause and 
paragraph (b) to read as follows:


52.229-4  Federal, State, and Local Taxes (State and Local 
Adjustments).

* * * * *

Federal, State, and Local Taxes (State and Local Adjustments) (FEB 
2013)

* * * * *
    (b)(1) Unless otherwise provided in this contract, the contract 
price includes all applicable Federal, State, and local taxes and 
duties, except as provided in subparagraph (b)(2)(i) of this clause.
    (2) Taxes imposed under 26 U.S.C. 5000C may not be--
    (i) Included in the contract price; nor
    (ii) Reimbursed.
* * * * *

0
5. Amend section 52.229-6 by--
0
a. Revising the date of the clause;
0
b. Redesignating paragraph (c) as (c)(1); removing from the newly 
designated paragraph (c)(1) ``States.'' and adding ``States, except as 
provided in subparagraph (c)(2) of this clause.'' in its place;
0
c. Adding paragraph (c)(2);
0
d. Redesignating paragraph (d) as (d)(1); removing from the newly 
designated paragraph (d)(1) ``The contract price shall'' and adding 
``Except as provided in subparagraph (d)(2) of this clause, the 
contract price shall'' in its place; and
0
e. Adding paragraph (d)(2).
    The revisions and additions read as follows:


52.229-6  Taxes--Foreign Fixed-Price Contracts.

* * * * *

Taxes--Foreign Fixed-Price Contracts (FEB 2013)

* * * * *
    (c)(1) * * *
    (2) Taxes imposed under 26 U.S.C. 5000C may not be--
    (i) Included in the contract price; nor
    (ii) Reimbursed.
    (d)(1) * * *
    (2) The contract price may not be increased to offset taxes imposed 
under 26 U.S.C. 5000C.
* * * * *

0
6. Amend section 52.229-7 by--
0
a. Revising the date of the clause;
0
b. Redesignating paragraph (b) as paragraph (b)(1); and
0
c. Adding paragraph (b)(2).
    The revision and addition read as follows:


52.229-7  Taxes--Foreign Fixed-Price Contracts with Foreign 
Governments.

* * * * *

Taxes--Foreign Fixed-Price Contracts With Foreign Governments (FEB 
2013)

* * * * *
    (b) * * *
    (2) Taxes imposed under 26 U.S.C. 5000C may not be included in the 
contract price.
* * * * *
[FR Doc. 2013-01750 Filed 1-28-13; 8:45 am]
BILLING CODE 6820-EP-P