The James Zadroga 9/11 Health and Compensation Act of 2010, Public Law No. 111-347 (Jan. 2, 2011) [pdf] establishes a program to provide health evaluations and medical treatment to emergency responders and other individuals directly impacted by the September 11, 2001 terrorist attacks on the World Trade Center. Funds for the program are to be generated by a two percent excise tax on any “specified Federal procurement payment” received by a “foreign person.” 26 U.S.C. § 5000C

In addition to imposing the tax, the Act requires federal agencies to make sure that taxes paid under this law are not “reimbursed.”

The FAR Councils published a proposed rule implementing this requirement on February 22, 2011. See 77 Fed. Reg. 10461 (Feb. 22, 2011). The proposed rule changes amend FAR 31.205-41 “to inform the Government and contractors that costs of the 2 percent tax are not allowable.” It also proposes changes to four FAR contract clauses “to provide that the costs for the 2 percent tax are not included in foreign fixed-price contracts . . . .”

We expect foreign companies doing business with the federal government to object to the proposed rule and to identify the significant legal, policy, and practical issues it presents.  Some examples:

  • The statute and the proposed rule conflict with written policies of the United States such as the “Afghan First” policy, which is intended to assist foreign contractors in Afghanistan develop the capability to build infrastructure in that nation. It also calls into question whether the United States is abiding by the rules and policies of the World Trade Organization.
  • It will be difficult for federal agencies to audit fixed-price contracts to determine whether the two percent has been included in the fixed-price bid. 
  • A special foreign-contractor tax creates a significant disincentive to contracting with the United States. Many foreign contractors will decide not to participate, creating an anti-competitive effect and increasing the cost of necessary goods and services. 

Comments on the proposed rule can be submitted by mail or through The keyword is “FAR Case 2011-011.”