Trade

In December 2011 the World Trade Organization reached an agreement in principle to implement “historic revisions” to the World Trade Organization Government Procurement Agreement (WTO GPA), a trade agreement covering the public procurement markets in more than 40 WTO member states (including the United States). On March 30, 2012, the WTO GPA formally adopted these revisions. While the updates have been formally agreed upon, it may take months until two-thirds of the signatory countries ratify the agreement and make the changes official. Nevertheless, the international community appears to be moving forward with plans to implement, pending ratification.

Separately, under the recently ratified the U.S./South Korea (“KORUS”) Free Trade Agreement (“FTA”), the U.S. Government has waived South Korea’s obligations to follow the WTO GPA, to which South Korea has been a signatory since January 1997. KORUS offers greater benefits to U.S. companies in the Korean procurement space compared to the WTO GPA, and where those benefits apply KORUS will, of course, take precedence over the WTO GPA. Toward this end, numerous interim rules have recently been issued to update the Federal Acquisition Regulation, recognizing the new KORUS FTA and reducing the applicable dollar thresholds for purchasing supplies and services from South Korean sources.

This blog posting provides a brief summary of some of these new changes to the WTO GPA and the KORUS FTA.

Updates to the WTO GPA

Generally, the updated WTO GPA changes the prior Agreement in two major ways – through expanded scope and improved flexibility.

Expanded Scope. The Government estimates that the expanded scope will improve access to approximately $80-$100 billion in U.S. and foreign procurement markets. In this regard, the new Agreement:

• Expands coverage to include approximately twelve U.S. executive agencies that were not previously covered by the Agreement (e.g., the Social Security Administration, the Advisory Council on Historic Preservation, the Court Service and Offender Supervision Agency for the District of Colombia, the Federal Energy Regulatory Commission, the Federal Labor Relations Authority, the Millennium Challenge Corporation, the National Assessment Governing Board, the National Endowment for the Arts, the National Endowment for the Humanities, the U.S. Marine Mammal Commission, and the United States Access Board);
• Allows access to additional central-government entities (estimated at 150-200) in a number of foreign countries such as European Union nations, Aruba, Hong Kong, Israel, Liechtenstein, South Korea, and Switzerland;
• Enhances coverage for sub-central entities (such as state, local, regional or provincial governments), particularly those located in Canada, which have historically been exempted from the GPA (this follows an agreement reached between the U.S. and Canada in February 2010 that liberalized access to sub-central entities that were not previously covered by the GPA);
• Offers full coverage for construction contracts;
• Expands the scope of specific categories of products that are covered by the GPA; and
• Gives flexibility for countries further to reduce the applicable dollar thresholds (currently set at $202,000 for purchases of supplies/services by the U.S. Government).

Improved Flexibility. The new Agreement also seeks to provide more flexible implementation processes and tools that can be more easily understood and that will facilitate better procurement practices across the globe. In this regard, the new Agreement:

• Updates the text of the Agreement, purportedly facilitating a “plain reading” of its terms;
• Provides procedures for increased transparency among the member countries to verify compliance with the terms of the GPA;
• Permits increased flexibility to use electronic tools in order to conduct public procurements more efficiently and also to monitor compliance with the GPA obligations;
• Allows countries greater flexibility in procuring commercial products;
• Authorizes additional compliance tools to support countries trying to move to a single, universal standard for conducting public procurements;
• Allows small countries/developing economies more flexibility in structuring their individual public procurement programs;
• Creates new, future “Work Programs” that the signatories hope to investigate to allow for improved administration of the GPA, including new ways to harmonize data and implement environmentally-friendly policies; and
• Encourages a framework that will be more welcoming for new signatories (including, for example, China).

Updates to the FAR to Implement the KORUS FTA

Beyond the updates to the WTO GPA, there have been additional updates to the regulations to implement the newly implemented U.S./South Korea FTA. This FTA was originally signed in June 2007, but it was not fully ratified by the Senate until October 2011. See Pub. L. No. 112-41. The FTA includes many different provisions, but (for purposes of this blog), there are at least two key points relating to public procurements.

First, the U.S. Government has recognized that the new FTA is generally more advantageous for U.S. businesses than the WTO GPA (to which South Korea has been a signatory since January 1997). On March 2, 2012, the U.S. Government waived South Korea’s obligations under the WTO GPA because (according to the U.S. Trade Representative) the new FTA generally provides greater and more comprehensive procurement benefits for U.S. companies than the corresponding obligations under the GPA. See 77 Fed. Reg. 12904.

Second, on March 7, 2012 the FAR Council issued an interim rule updating FAR Part 25 and implementing the new agreement. See 77 Fed. Reg. 13952. Perhaps most importantly for companies selling to the U.S. Government, the interim rule lowered the applicable dollar thresholds for purchases of supplies and services, but left unchanged the dollar threshold for construction contracts. The new thresholds are as follows:

On January 2, 2011, the President signed the James Zadroga 9/11 Health and Compensation Act of 2010, Pub. L. No. 111-347, which set up a relief fund for victims, first responders, and construction workers who were injured in the September 11 terrorist attacks in New York City. To pay the estimated $4.3 billion price tag for the Act, Section 301 of the Act imposed on any foreign person a tax equal to 2% of federal procurement payment received by that foreign person. See 26 U.S.C. § 5000C. In addition, any person who makes or otherwise is a withholding agent with respect to such a payment is required to withhold the 2% tax from the federal procurement payment and remit the tax withheld to the Internal Revenue Service (“IRS”) under tax laws and regulations applicable to withholding of United States taxes from payments made to foreign persons. Although the tax has been in place for more than 14 months and the IRS has issued a revised Form 1042 with revised instructions to implement withholding and reporting obligations, the Government is only now turning to the details of how this tax will be accounted for in connection with the procurement process. And – as is often the case – there is quite a lot of devil in those details.

A proposed Federal Acquisition Regulation was issued on February 22, 2012 stating that the 2% tax cannot be recovered by foreign offerors on any new flexibly-priced or fixed-price contracts. See 77 Fed. Reg. 10461. Exactly how this will play out in the world of government contracting remains to be seen, but foreign companies should be aware of how this new tax may impact their bottom line, and U.S. companies should be aware of the IRS withholding and reporting requirements imposed by the Act with respect to the 2% tax. Companies should pay particular attention to the following points:

• Be aware that “foreign person” does not necessarily mean the same thing under the tax code as it does under the procurement or export laws. As such, companies could be subject to this tax even if they are organized under U.S. law.
• This tax poses significant risks for withholding agents, who are required under tax laws to withhold certain taxes owed by foreign persons. If the foreign person fails to pay the tax, the withholding agent could be on the hook for the tax liability.
• Determining what payments this tax applies to will be a nightmare because it could apply to a host of different persons and products in a host of different circumstances, none of which are clearly spelled out in the statute, the IRS guidance, or the proposed acquisition rules. Consider that the statute imposes the tax on certain specified Federal procurement payments, which are made to certain foreign persons, for the purchase of certain foreign-made products or foreign-performed services, with the tax being applied consistent with certain international agreements (including, presumably, free trade agreements and international tax treaties). It will be difficult for a company to craft a “one size fits all” solution to identify taxable transactions and to ensure that the tax is withheld and paid appropriately.

Good advice here would be “Consult your tax counsel,” particularly for those government contractors who are most likely to be dealing with taxable “specified Federal procurement payments” in the regular course of business.

Last year in January 2011, the President signed the 2011 National Defense Authorization Act (Pub. L. No. 111-383, Section 846), which included a “Buy American” requirement for photovoltaic devices being purchased by the U.S. Department of Defense (“DoD”). We previously discussed this new requirement in our blog. Twelve months later, the DoD has issued an interim rule to implement this new requirement. See 76 Fed. Reg. 18858 (Dec. 20, 2011). The interim rule appears to be straightforward, implementing exceptions and manufacturing requirements with which most companies are already familiar under the Buy American Act or the Trade Agreements Act, but there is some fine print of which all companies selling photovoltaic devices to the DoD should be aware.

Key Definitions

The interim rule includes a new subsection at Defense Federal Acquisition Regulation Supplement (“DFARS”) 225.7017, as well as a new contract clause at DFARS 252.225-7017, Photovoltaic Devices, and a corresponding certification requirement at DFARS 252.225-7018. Defining its key concepts, the interim rule largely restates the statutory language from Section 846 by defining “covered contracts” and “photovoltaic device.”

• “Covered contracts” means “an energy savings performance contract, a utility service contract, or a private housing contract awarded by DoD, if such contract results in DoD ownership of photovoltaic devices, by means other than DoD purchase as end products. DoD is deemed to own a photovoltaic device if the device is – (1) Installed on DoD property or in a facility owned by DoD; and (2) Reserved for the exclusive use of DoD for the full economic life of the device.” Note that a “covered contract” will not include government contracts valued at less than $150,000 (the simplified acquisition threshold).

• “Photovoltaic device” means “a device that converts light directly into electricity through a solid-state, semiconductor process.” Under this definition, a solar panel containing many individual solar cells would constitute a “photovoltaic device.” If such a panel were manufactured or assembled in the United States in a manner that constituted a substantial transformation (thus qualifying as a “domestic product”), the photovoltaic device would appear to qualify under this regulation, just as it would have under prior rules.

Applicable Dollar Thresholds and Products from U.S. Allies

The interim rule also breaks out the applicable dollar thresholds/categories at which the various free trade agreements apply.

There are at least four issues worth noting about the applicable dollar thresholds and lists of approved countries:

1. Dollar Thresholds Apply to the Value of Photovoltaic Devices. The dollar thresholds apply to the value of the photovoltaic devices being purchased as part of the overall contract. As such, if you have a $3 million contract with the DoD but estimate only $100,000 in photovoltaic devices as a part of that overall contract, then it is the $100,000 figure that would determine whether specific trade agreement exceptions apply for the photovoltaic devices.
2. Updated Dollar Thresholds. These dollar thresholds have been updated effective January 1, 2012, which unfortunately means that the new interim rule is already out of date. While these thresholds will no doubt be reconciled when a final rule is eventually issued, the different thresholds will be confusing in the interim.
3. Qualifying Countries. The DoD has entered into Memoranda of Understanding with twenty-one U.S. allies whose ministries of defense have agreed that neither the U.S. nor the ally will discriminate against the other in defense procurements. Accordingly, the interim rule acknowledges that purchases at any dollar threshold will satisfy the “Buy American” requirement where the photovoltaic devices are from a “qualifying country,” which includes Australia, Austria, Belgium, Canada, Denmark, Egypt, Finland, France, Germany, Greece, Israel, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. Note that even though the U.S. and South Korea have entered into a newly expanded free trade agreement that should be fully implemented in 2012, the free trade agreement does not include a MOU between the DoD and the South Korean Ministry of National Defense such that South Korea would be included on this list as a “qualifying country.” However, South Korea remains a signatory to the WTO GPA, and photovoltaic devices from South Korea would satisfy the interim rule when purchases are at or above the $203,000 threshold.
4. U.S.-Oman Free Trade Agreement. The rule does not include the U.S.-Oman free trade agreement entered into in 2009, which does not cover the DoD. Oman, therefore, is not listed as an “approved” country under the new DoD photovoltaic rules, even though a product form Oman would otherwise qualify under the Trade Agreements Act when purchased by most civilian agencies.

Other Key Features of the Interim Rule

• Components. The interim rule reinforces the fact that it is concerned only with the country of origin for the manufactured end-product – not the components. Where the Buy American Act commonly requires that an end-product be both: (1) manufactured in the U.S.; and (2) consist of more than 50% in domestic component parts, the new photovoltaic “Buy American” requirement requires only that the manufactured photovoltaic device end-product be manufactured in the U.S. or a qualifying country (or a free trade agreement partner, if applicable). This means that a domestically manufactured photovoltaic device could consist of entirely foreign content, so long as the final end-product was manufactured or substantially transformed in an approved country.

• Commercial Products. The interim rule expressly states that this rule applies to commercial purchases.

• Unreasonable Cost Exception Remain Available. An existing exception under the Buy American Act permits DoD to purchase products from non-approved countries when the cost of a product from an approved country is 50% more than the product from a non-approved country. In this respect, the interim rule does not absolutely require the purchase of domestic photovoltaic devices, but merely establishes a sizeable preference for the purchase of domestic products or other qualifying goods.

Conclusion

It is doubtful whether Section 846 was even necessary in the first place – after all, the statute merely directed DoD to ensure that the purchases of photovoltaic devices comply with the Buy American Act and the Trade Agreements Act, two statutes that would have applied to DoD purchases even if Section 846 were never passed. Nevertheless, now that the DFARS has been amended with this interim rule, there should be greater clarity for contractors regarding the types of products that will satisfy the new requirement, as well as the specific procedures on how this new “Buy American” requirement will be implemented (particularly with regard to the valuation of photovoltaic devices being procured as part of a larger government contract). DoD is accepting comments on the interim rule through February 21, 2012.

2012 will see changes regarding U.S. free trade agreements relating to, first, the dollar thresholds at which the various agreements apply to federal purchases and, second, the likely expansion of the scope of the World Trade Organization Government Procurement Agreement (“WTO GPA”). The updated dollar thresholds are important for government contractors because the thresholds determine when a contract is subject to the Buy American Act (“BAA”) or the Trade Agreements Act (“TAA”). As to the WTO GPA, its expansion should provide significant increased access to the U.S and many of its trading partners in international procurements, although the hoped for accession of China to the WTO GPA remains stalled

Updated Dollar Thresholds

On December 8, 2011, the U.S. Trade Representative (“USTR”), Ronald Kirk, announced the dollar thresholds at which free trade agreements (“FTAs”) will apply to U.S. procurements beginning in 2012. See 76 Fed. Reg. 76808. The USTR has raised some thresholds, maintained others, and even lowered some:
 

As we discussed previously in this blog when the thresholds were last adjusted in 2010, it is unclear whether the FAR will need to be amended to incorporate the new thresholds or whether the new thresholds automatically become “effective January 1, 2012″ as directed by the USTR. However, on January 30, 2012, the DFARS was amended to incorporate the new dollar thresholds. See 77 Fed. Reg. 4630. While the FAR Councils are no doubt also working on updating the relevant FAR clauses at FAR Subpart 25.4, any new rules will probably not be issued until February or March 2012. Contractors should be aware that Contracting Officers may take even longer to update individual contracts, or, for that matter, to agree that modifications to existing contracts are appropriate in the first place.

Pending Updates to the WTO GPA

In December 2011, the members of the WTO met in Geneva to revise the WTO GPA. Ever since Canada and the U.S. negotiated amendments to the U.S.-Canada FTA allowing Canada greater access to procurements by state and local governments (one of the primary outlets for stimulus funds through 2009 and 2010), members of the WTO have clamored for expanded access under the GPA. FTAs typically apply only to governmental agencies that are specifically listed in the free trade agreement; the new December 2011 agreement allows expanded access by foreign companies to U.S. procurements by listing twelve previously uncovered federal agencies (including the Social Security Administration and the Transportation Security Administration) as now covered by the WTO GPA. In exchange, U.S. companies will gain access to hundreds of foreign “central and sub-central” government procurements in countries such as Japan, South Korea, Israel, and many other E.U. countries. The new WTO agreement is expected to open significant international procurement markets, and the USTR hailed the new agreement as a major breakthrough for free trade. The changes to the WTO GPA are expected to be formalized by March 2012.

Meanwhile, in November 2011, China updated its submission to accede to the WTO GPA. But the submission fell short of U.S. and E.U. expectations, setting extremely high dollar thresholds and exempting a large number of Chinese sub-central agencies and state-run enterprises. China joined the WTO in 2001 and China has reiterated that it intends to accede to the WTO GPA. However, given the above high dollar thresholds and exemptions, China has thus far been unable to make the kind of aggressive offers demanded by the international community to complete its accession. Therefore, at least for the time being, products made in China will continue to be noncompliant under the Trade Agreements Act.

Current signatories to the WTO GPA include more than 40 countries: the U.S., the 27 member states of the European Union, Canada, Armenia, Aruba, Hong Kong, Iceland, Israel, Japan, Liechtenstein, Norway, Singapore, South Korea, Switzerland, and Taiwan. Armenia is the most recent addition to the WTO GPA, having just recently acceded to the WTO GPA on September 15, 2011. See 76 Fed. Reg. 58856; 77 Fed. Reg. 4631.