Taxes–Foreign Contracts in Afghanistan

[Federal Register Volume 80, Number 250 (Wednesday, December 30, 2015)]
[Rules and Regulations]
[Pages 81467-81470]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32870]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 212, 229, and 252

[Docket DARS-2014-0046]
RIN 0750-AI26


Defense Federal Acquisition Regulation Supplement: Taxes--Foreign 
Contracts in Afghanistan (DFARS Case 2014-D003)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to notify contractors of 
requirements relating to Afghanistan taxes for contracts performed in 
Afghanistan.

DATES: Effective December 30, 2015.

FOR FURTHER INFORMATION CONTACT: Ms. Julie Hammond, telephone 571-372-
6174.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule in the Federal Register at 79 FR 
35715 on June 24, 2014, to revise the DFARS to add two new clauses that 
notify contractors of requirements relating to Afghanistan taxes when 
contracts are being performed in Afghanistan. Three respondents 
submitted public comments in response to the proposed rule.

II. Discussion and Analysis

    DoD reviewed the public comments in the development of the final 
rule. A discussion of the comments is provided below:

A. Summary of Significant Changes From the Proposed Rule

    The final rule amends DFARS clause 252.229-7014, Taxes--Foreign 
Contracts in Afghanistan, to reference the bilateral security agreement 
entitled ``The Security and Defense Cooperation Agreement between the 
Islamic Republic of Afghanistan and the United States of America'' 
signed on September 30, 2014. The reference to the bilateral security 
agreement replaces the reference to the prior Agreement entered into 
between the United States and Afghanistan on May 28, 2003, regarding 
the ``Status of United States Military and Civilian Personnel of the 
U.S. Department of Defense Present in

[[Page 81468]]

Afghanistan,'' which was concluded by an exchange of diplomatic notes 
(U.S. Embassy Kabul note No. 202, dated September 26, 2002; Afghanistan 
Ministry of Foreign Affairs notes 791 and 93, dated December 12, 2002, 
and May 28, 2003, respectively). The clause is also amended to change 
``Government of the United States of America'' to the ``Department of 
Defense'' to more accurately represent the new agreement.
    The final rule also amends DFARS clause 252.229-7015, Taxes--
Foreign Contracts in Afghanistan (North Atlantic Treaty Organization 
Status of Forces Agreement), to reference the North Atlantic Treaty 
Organization (NATO) Status of Forces Agreement (SOFA) signed on 
September 30, 2014, instead of the Military Technical Agreement (MTA) 
entered into between the NATO International Security Assistance Force 
(ISAF) and Interim Administration of Afghanistan in April 2002. As a 
result of the new SOFA, the reference to the 2011 NATO ISAF Letter of 
Interpretation that modified the MTA's tax exemption is also removed, 
including the language allowing contractors to include taxes on profits 
earned by local contractors in the contract price.
    The final rule also clarifies at DFARS 212.301 that the clauses 
apply to solicitations and contracts using FAR part 12 procedures for 
the acquisition of commercial items.

B. Analysis of Public Comments

1. Taxes in Afghanistan
    Comment: A respondent commented that the Afghan Ministry of Forces 
interprets Diplomatic Note (DN) 202 to apply only to prime contractors, 
while industry practice is to treat subcontractors in Afghanistan as 
subject to taxation. The respondent asked how DoD will enforce 
paragraph (b) of DFARS clause 252.225-7014, which exempts 
subcontractors from any taxes assessed in Afghanistan in accordance 
with DN 202.
    Response: The final rule has been updated to reference the new 
bilateral security agreement between the United States and Afghanistan 
signed on September 30, 2014. Article 17.3 of the new agreement states 
that United States subcontractors shall not be liable to pay any tax 
assessed by the government of Afghanistan within the territory of 
Afghanistan on their activities under a contract or subcontract with, 
or in support of, United States Forces.
    Comment: A respondent recommended Afghan contractors not be allowed 
to include Afghan tax on profits earned from NATO ISAF contracts in 
accordance with DFARS clause 252.225-7015(d). Another respondent asked 
about DoD's expectations regarding documentation of the price markup 
for Afghan income taxes as part of the contract price and whether 
United States Government contractors will be required to refund the 
United States Government if the Afghan contractors do not owe income 
taxes due to losses.
    Response: The language that allowed contractors to include Afghan 
taxes on profits earned by local contractors in the contract price is 
removed from the final rule.
2. Bilateral Security Agreement
    Comment: A respondent commented that clarifying language is needed 
in the pending bilateral security agreement between the United States 
and Afghanistan to affirm that all non-Afghan national employees 
working on DoD contracts are tax exempt and will not be treated as 
Afghan residents.
    Response: This comment concerns the content of the bilateral 
security agreement, which is outside the scope of this rule.
    Comment: Two respondents requested that implementation of the 
proposed rule be delayed until resolution is reached between the United 
States and the Afghanistan government in a bilateral security 
agreement. If implementation of the rule is not delayed, one respondent 
requested that the proposed rule be revised to allow contracting 
officers to relieve defense contractors and subcontractors of the risks 
and responsibilities when denied a tax exemption by the Afghan Ministry 
of Finance.
    Response: A resolution has been reached between the United States 
and the Afghanistan government in a bilateral security agreement. The 
final rule has been updated to reference the new bilateral security 
agreement.
3. General
    Comment: A respondent stated that the new tax law may limit the 
amount of contractors willing to work for the United States Government 
and may hurt future business relations between Afghanistan and the 
United States.
    Response: This comment concerns Afghanistan tax law and is outside 
the scope of this rule.
    Comment: A respondent recommended that the United States Government 
reduce costs by minimizing the use of military personnel and employing 
more Afghans.
    Response: The comment is outside the scope of this rule.
    Comment: One respondent suggested that clauses, similar to those 
included in the proposed rule, be added to specifically address and 
make the rule equally applicable to local Afghan contractors, vendors, 
and landlords.
    Response: The final rule has been updated to reference the new 
bilateral security agreement. Article 17.3 of the new agreement states 
that United States contractors that are Afghan entities shall not be 
exempt from corporate profits tax that may be assessed by the 
Afghanistan government within the territory of Afghanistan on income 
received due to their status as United States contractors.

III. Applicability to Contracts at or Below the Simplified Acquisition 
Threshold (SAT) and for Commercial Items, Including Commercially 
Available Off-the-Shelf (COTS) Items

    This rule creates two new clauses: (1) DFARS 252.229-7014, Taxes--
Foreign Contracts in Afghanistan, and (2) DFARS 252.229-7015, Taxes--
Foreign Contracts in Afghanistan (North Atlantic Treaty Organization 
Status of Forces Agreement). The objective of the rule is to exempt DoD 
contracts performed in Afghanistan from payment liability for Afghan 
taxes pursuant to the bilateral security agreement entitled ``The 
Security and Defense Cooperation Agreement between the Islamic Republic 
of Afghanistan and the United States of America'' signed on September 
30, 2014, and the North Atlantic Treaty Organization (NATO) Status of 
Forces Agreement (SOFA) signed on September 30, 2014.
    DoD is applying these two clauses to solicitations and contracts 
below the SAT and to the acquisition of commercial items, including 
COTS items, as defined at FAR 2.101. This rule clarifies the 
application of requirements relating to treatment of taxes for 
contracts performed in Afghanistan. Not applying this guidance to 
contracts below the SAT and for the acquisition of commercial items, 
including COTS items, would exclude contracts intended to be covered by 
this rule and undermine the overarching purpose of the rule. 
Consequently, DoD is applying the rule to contracts below the SAT and 
for the acquisition of commercial items, including COTS items.

IV. 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,

[[Page 81469]]

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 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.

V. Regulatory Flexibility Act

    A final regulatory flexibility analysis has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
and is summarized as follows:
    DoD is amending the Defense Federal Acquisition Regulation 
Supplement (DFARS) to add two new clauses in order to notify DoD 
contractors of requirements relating to Afghanistan taxes when DoD 
contracts are being performed in Afghanistan. The clause at DFARS 
252.229-7014, Taxes-Foreign Contracts in Afghanistan, will be required 
to be included in solicitations and contracts, including solicitations 
and contracts using FAR part 12 procedures for the acquisition of 
commercial items, with performance in Afghanistan, unless the clause at 
252.229-7015 is used. The clause at DFARS 252.229-7015, Taxes-Foreign 
Contracts in Afghanistan (North Atlantic Treaty Organization Status of 
Forces Agreement), will be required to be included in all solicitations 
and contracts, including solicitations and contracts using FAR part 12 
procedures for the acquisition of commercial items, with performance in 
Afghanistan awarded on behalf of NATO, which are governed by the NATO 
Status of Forces Agreement, if approval from the Director, Defense 
Procurement and Acquisition Policy, Office of the Under Secretary of 
Defense for Acquisitions, Technology, and Logistics, is obtained prior 
to each use.
    No comments were received from the public relative to the initial 
regulatory flexibility analysis.
    DoD does not expect this proposed 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 this rule merely provides notice of the tax exemption for DoD 
contracts where performance is in Afghanistan. According to data in the 
Federal Procurement Data System, a total of thirty-five small business 
vendors received contract awards where performance was in Afghanistan 
during fiscal year 2015.
    There are no new projected reporting, recordkeeping, or other 
compliance requirements projected for this rule.
    There are no known significant alternatives to the rule. The impact 
of this rule on small business is not expected to be significant.

VI. 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 212, 229, and 252

    Government procurement.

Jennifer L. Hawes,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 212, 229, and 252 are amended as follows:

0
1. The authority citation for 48 CFR parts 212, 229, and 252 continue 
to read as follows:

    Authority: 41 U.S.C. 1303 and CFR chapter 1.

PART 212--ACQUISITION OF COMMERCIAL ITEMS

0
2. Amend section 212.301 by--
0
a. Redesignating paragraphs (f)(xiii) through (xix) as (f)(xiv) through 
(xx); and
0
b. Adding a new paragraph (f)(xiii).
    The addition reads as follows:


212.301  Solicitation provisions and contract clauses for acquisition 
of commercial items.

* * * * *
    (f) * * *
    (xiii) Part 229--Taxes.
    (A) Use the clause at 252.229-7014, Taxes--Foreign Contracts in 
Afghanistan, as prescribed at 229.402-70(k).
    (B) Use the clause at 252.229-7015, Taxes--Foreign Contracts in 
Afghanistan (North Atlantic Treaty Organization Status of Forces 
Agreement), as prescribed at 229.402-70(l).
* * * * *

PART 229--TAXES

0
3. In section 229.402-70, revise the section heading and add new 
paragraphs (k) and (l) to read as follows:


229.402-70  Additional provisions and clauses.

* * * * *
    (k) Use the clause at 252.229-7014, Taxes--Foreign Contracts in 
Afghanistan, in solicitations and contracts, including solicitations 
and contracts using FAR part 12 procedures for the acquisition of 
commercial items, with performance in Afghanistan, unless the clause at 
252.229-7015 is used.
    (l) Use the clause at 252.229-7015, Taxes--Foreign Contracts in 
Afghanistan (North Atlantic Treaty Organization Status of Forces 
Agreement), instead of the clause at 252.229-7014, Taxes--Foreign 
Contracts in Afghanistan, in solicitations and contracts, including 
solicitations and contracts using FAR part 12 procedures for the 
acquisition of commercial items, with performance in Afghanistan 
awarded on behalf of the North Atlantic Treaty Organization (NATO), 
which are governed by the NATO Status of Forces Agreement (SOFA), if 
approval from the Director, Defense Procurement and Acquisition Policy, 
Office of the Under Secretary of Defense for Acquisition, Technology, 
and Logistics, has been obtained prior to each use.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
4. Add sections 252.229-7014 and 252.229-7015 to read as follows:


252.229-7014  Taxes--Foreign Contracts in Afghanistan.

    As prescribed in 229.402-70(k), use the following clause:

Taxes--Foreign Contracts in Afghanistan (DEC 2015)

    (a) This acquisition is covered by the Security and Defense 
Cooperation Agreement (the Agreement) between the Islamic Republic 
of Afghanistan and the United States of America signed on September 
30, 2014, and entered into force on January 1, 2015.
    (b) The Agreement exempts the Department of Defense (DoD), and 
its contractors and subcontractors (other than those that are Afghan 
legal entities or residents), from paying any tax or similar charge 
assessed on activities associated with this contract within 
Afghanistan. The Agreement also exempts the acquisition, 
importation, exportation, reexportation, transportation, and use of 
supplies and services in Afghanistan, by or on behalf of DoD, from 
any taxes, customs, duties, fees, or similar charges in Afghanistan.
    (c) The Contractor shall exclude any Afghan taxes, customs, 
duties, fees, or similar charges from the contract price, other than 
those charged to Afghan legal entities or residents.
    (d) The Agreement does not exempt Afghan employees of DoD 
contractors and subcontractors from Afghan tax laws. To the extent 
required by Afghan law, the Contractor shall withhold tax from the 
wages

[[Page 81470]]

of these employees and remit those payments to the appropriate 
Afghanistan taxing authority. These withholdings are an individual's 
liability, not a tax against the Contractor.
    (e) The Contractor shall include the substance of this clause, 
including this paragraph (e), in all subcontracts, including 
subcontracts for commercial items.

(End of clause)


252.229-7015  Taxes--Foreign Contracts in Afghanistan (North Atlantic 
Treaty Organization Status of Forces Agreement).

    As prescribed in 229.402-70(l), use the following clause:

Taxes--Foreign Contracts in Afghanistan (North Atlantic Treaty 
Organization Status of Forces Agreement) (DEC 2015)

    (a) This acquisition is covered by the Status of Forces 
Agreement (SOFA) entered into between the North Atlantic Treaty 
Organization (NATO) and the Islamic Republic of Afghanistan issued 
on September 30, 2014, and entered into force on January 1, 2015.
    (b) The SOFA exempts NATO Forces and its contractors and 
subcontractors (other than those that are Afghan legal entities or 
residents) from paying any tax or similar charge assessed within 
Afghanistan. The SOFA also exempts the acquisition, importation, 
exportation, reexportation, transportation and use of supplies and 
services in Afghanistan from all Afghan taxes, customs, duties, 
fees, or similar charges.
    (c) The Contractor shall exclude any Afghan taxes, customs, 
duties, fees or similar charges from the contract price, other than 
those that are Afghan legal entities or residents.
    (d) Afghan citizens employed by NATO contractors and 
subcontractors are subject to Afghan tax laws. To the extent 
required by Afghan law, the Contractor shall withhold tax from the 
wages of these employees and remit those withholdings to the 
Afghanistan Revenue Department. These withholdings are an 
individual's liability, not a tax against the Contractor.
    (e) The Contractor shall include the substance of this clause, 
including this paragraph (e), in all subcontracts including 
subcontracts for commercial items.

(End of clause)

[FR Doc. 2015-32870 Filed 12-29-15; 8:45 am]
BILLING CODE 5001-06-P


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