05-19463. Defense Federal Acquisition Regulation Supplement; Prohibition of Foreign Taxation on U.S. Assistance Programs

AGENCY:

Department of Defense (DoD).

ACTION:

Interim rule with request for comments.

SUMMARY:

DoD has issued an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement a statutory prohibition on foreign taxation under contracts funded by U.S. assistance programs. The rule addresses the responsibilities of the contractor and the contracting officer regarding the prohibition.

DATES:

This interim rule is effective September 30, 2005. Comments on the interim rule should be submitted in writing to the address shown below on or before November 29, 2005, to be considered in the formation of the final rule.

ADDRESSES:

You may submit comments, identified by DFARS Case 2004-D012, using any of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
• Defense Acquisition Regulations Web site: http://emissary.acq.osd.mil/​dar/​dfars.nsf/​pubcomm. Follow the instructions for submitting comments.
• E-mail: [e-mail]. Include DFARS Case 2004-D012 in the subject line of the message.
• Fax: [phone].
• Mail: Defense Acquisition Regulations Council, Attn: Ms. Debra Overstreet, OUSD (AT&L) DPAP (DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062.
• Hand Delivery/Courier: Defense Acquisition Regulations Council, Crystal Square 4, Suite 200A, 241 18th Street, Arlington, VA 22202-3402.

All comments received will be posted to http://emissary.acq.osd.mil/​dar/​dfars.nsf.

FOR FURTHER INFORMATION CONTACT:

Ms. Debra Overstreet, [phone].

SUPPLEMENTARY INFORMATION:

A. Background

This interim rule adds policy and a contract clause to implement Section 579 of Division E of the Consolidated Appropriations Act, 2003 (Pub. L. 108-7), Section 506 of Division D of the Consolidated Appropriations Act, 2004 (Pub. L. 108-199), and Section 506 of Division D of the Consolidated Appropriations Act, 2005 (Pub. L. 108-447). These statutes require that a bilateral agreement providing for U.S. assistance to a foreign country must specify that the U.S. assistance shall be exempt from taxation by the foreign government. Therefore, the foreign government is prohibited from imposing taxes on commodities acquired under contracts funded by such U.S. assistance. The interim rule addresses the responsibilities of the contractor and the contracting officer regarding the prohibition.

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

This interim rule is not expected to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because the administrative notification requirements of the rule are expected to affect less than 10 contracts per year. Therefore, DoD has not performed an initial regulatory flexibility analysis. DoD invites comments from small businesses and other interested parties. DoD also will consider comments from small entities concerning the affected DFARS subparts in accordance with 5 U.S.C. 610. Such comments should be submitted separately and should cite DFARS Case 2004-D012.

C. Paperwork Reduction Act

The information collection requirements of the rule do not reach the threshold for requiring Office of Management and Budget approval under 44 U.S.C. 3501, et seq.

D. Determination to Issue an Interim Rule

A determination has been made under the authority of the Secretary of Defense that urgent and compelling reasons exist to publish an interim rule prior to affording the public an opportunity to comment. This interim rule implements Section 579 of Division E of the Consolidated Appropriations Act, 2003 (Pub. L. 108-7), Section 506 of Division D of the Consolidated Appropriations Act, 2004 (Pub. L. 108-199), and Section 506 of Division D of the Consolidated Appropriations Act, 2005 (Pub. L. 108-447). These statutes prohibit a government of a foreign country from imposing taxes on the United States under contracts funded by U.S. assistance provided to that country. The rule is needed for effective implementation of the statutory prohibition, as it addresses requirements for prompt notification to the appropriate parties if a foreign government imposes such taxes, so that corrective action can be taken. Comments received in response to this interim rule will be considered in the formation of the final rule.

List of Subjects in 48 CFR part 225, 229, and 252

• Government procurement

Michele P. Peterson,

Editor, Defense Acquisition Regulations System.

Therefore, 48 CFR parts 225, 229, and 252 are amended as follows:

PART 225—FOREIGN ACQUISITION

1. The authority citation for 48 CFR parts 225, 229, and 252 continues to read as follows:

Authority: 41 U.S.C. 421 and 48 CFR chapter 1.

2. Section 225.7301 is amended by adding paragraph (e) to read as follows:

225.7301

General.

* * * * *

(e) See 229.170 for policy on contracts financed under U.S. assistance programs that involve payment of foreign country value added taxes or customs duties.

PART 229—TAXES

3. Sections 229.170 through 229.170-4 are added to read as follows:

229.170

Reporting of foreign taxation on U.S. assistance programs.

229.170-1

Definition.

Commodities, as used in this section, means any materials, articles, supplies, goods, or equipment.

229.170-2

Policy.

(a) By law, bilateral agreements with foreign governments must include a provision that commodities acquired under contracts funded by U.S. assistance programs shall be exempt from taxation by the foreign government. If taxes or customs duties nevertheless are imposed, the foreign government must reimburse the amount of such taxes to the U.S. Government (Section 579 of Division E of the Consolidated Appropriations Act, 2003 (Pub. L. 108-7), as amended by Section 506 of Division D of the Consolidated Appropriations Act, 2004 (Pub. L. 108-199), and similar sections in subsequent acts).

(b) This foreign tax exemption—

(1) Applies to a contract or subcontract for commodities when—

(i) The funds are appropriated by the annual foreign operations appropriations act; and

(ii) The value of the contract or subcontract is $500 or more;

(2) Does not apply to the acquisition of services;

(3) Generally is implemented through letters of offer and acceptance, other country-to-country agreements, or Federal interagency agreements; and

(4) Requires reporting of noncompliance for effective implementation.

229.170-3

Reports.

The contracting officer shall submit a report to the designated Security Assistance Office when a foreign government or entity imposes tax or customs duties on commodities acquired under contracts or subcontracts meeting the criteria of 229.170-2(b)(1). Follow the procedures at PGI 229.170-3 for submission of reports.

229.170-4

Contract clause.

Use the clause at 252.229-7011, Reporting of Foreign Taxes—U.S. Assistance Programs, in solicitations and contracts funded with U.S. assistance appropriations provided in the annual foreign operations appropriations act.

PART 252—SOLICITATION PROVISIONS AND CONTRACT CLAUSES

4. Section 252.229-7011 is added to read as follows:

252.229-7011

Reporting of Foreign Taxes—U.S. Assistance Programs.

As prescribed in 229.170-4, use the following clause:

Reporting of Foreign Taxes—U.S. Assistance Programs (SEP 2005)

(a) Definition. Commodities, as used in this clause, means any materials, articles, supplies, goods, or equipment.

(b) Commodities acquired under this contract shall be exempt from all value added taxes and customs duties imposed by the recipient country. This exemption is in addition to any other tax exemption provided through separate agreements or other means.

(c) The Contractor shall inform the foreign government of the tax exemption, as documented in the Letter of Offer and Acceptance, country-to-country agreement, or interagency agreement.

(d) If the foreign government or entity nevertheless imposes taxes, the Contractor shall promptly notify the Contracting Officer and shall provide documentation showing that the foreign government was apprised of the tax exemption in accordance with paragraph (c) of this clause.

(e) The Contractor shall insert the substance of this clause, including this paragraph (e), in all subcontracts for commodities that exceed $500.

(End of clause)