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News/Resources: Blog

Brown Rudnick BLOGS

Welcome to Brown Rudnick’s blog page.  Below you will find our Emerging Technologies and Government Contracts blogs.  To read our Real Estate blog, Get Real! Keeping Real Estate Professionals Ahead, please visit www.getrealestatelawblog.com.

The views expressed herein are solely the views of the author(s) and do not represent the views of parties represented by the blogger(s) or the views of Brown Rudnick LLP or parties it represents.

Mobile App Privacy: Five Things Businesses Can Do To Stay Out Of Trouble

Posted on Friday, Dec 21, 2012

BY Edward J. Naughton and Ryan S. Moore

The business case for offering a mobile app can be compelling: an app can give a business a constant presence on its customers’ mobile desktop, building brand awareness and allowing easy and direct interaction.  But businesses that roll out apps need to pay attention to privacy rules, too, as the recent enforcement action by California’s Attorney General reminds us.

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A New Wave Of GPL Enforcement? Samba and Linux kernel copyrightholders join the fight

Posted on Friday, Jun 29, 2012

BY Edward J. Naughton

Talk about unintended consequences: Rob Landley, a lead developer of BusyBox, announced that he was rewriting that program solely to disarm GPL enforcers. In response, several other copyright holders came forward to hand the enforcers some bigger and more effective weapons.

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New procurement for $80 billion long-range bomber has Northrop competing against team of Boeing, Lockheed and California?

Posted on Wednesday, Jul 16, 2014

BY Kenneth B. Weckstein and Shlomo D. Katz

California is not in the business of competing for multi-billion contracts from the Department of Defense. But it is in the business of helping its citizens and taxpayers. So what happens when the Pentagon announces a program for what may be the largest contract in history? The competition attracts Northrop Grumman and a second team led by Boeing and Lockheed Martin. And although proposals have not been submitted and an award of the Pentagon’s contract for up to 100 new long-range bombers–with a price tag of up to $550 million each–is not expected until the spring of 2015, Lockheed already has recruited the State of California to its team.

Lockheed Martin apparently has successfully lobbied for a $420 million tax credit from California if its team wins the contract to produce a new aircraft for the U.S. Air Force. Competitors call that unfair. We call it smart.

The law doesn’t mention Lockheed by name.  Instead, the bill that California’s governor recently signed says:

For each taxable year beginning on or after January 1, 2015, and before January 1, 2030, a qualified taxpayer shall be allowed a credit against the “tax,” as defined in Section 23036, in an amount equal to 17-1/2 percent of qualified wages paid or incurred by the qualified taxpayer during the taxable year to qualified full-time employees multiplied by the annual full-time equivalent ratio.

Lots of contractors and employers pay taxes; aren’t they “qualified taxpayers”?  Well, no.  The law defines “qualified taxpayer” as:

any taxpayer that is a major first-tier subcontractor awarded a subcontract to manufacture property for ultimate use in or as a component of a new advanced strategic aircraft for the United States Air Force. For purposes of this paragraph, the term “major first-tier subcontractor” means a subcontractor that was awarded a subcontract in an amount of at least 35 percent of the amount of the initial prime contract awarded for the manufacturing of a new advanced strategic aircraft for the United States Air Force.

Any contractor that happens to be a major first-tier subcontractor performing at least 35% of a prime contract to manufacture a new advanced strategic aircraft for the U.S. Air Force can take advantage of this tax credit, but for now, only Lockheed qualifies.

So what is next? There have been reports that Northrop is trying to get a similar deal from California. Of course that would neutralize the tax break dangled in front of Lockheed. But there is nothing to prevent all of the potential prime and subcontractors from lobbying multiple state governments for these types of contingent tax credits. And it remains to be seen if state governments will become regular–if unofficial–teaming partners for large Federal procurements.

Interesting side note. An early employee of Lockheed was some guy named Jack Northrop who went on to found Northrop Corporation…in California.

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New DFARS Tax Exemption Rule Sets U.S. Contractors On A Collision Course With Afghan Government

Posted on Thursday, Jul 10, 2014

BY Kenneth B. Weckstein and Aidan J. Delgado

What happens when the irresistible force meets the immovable object?  Well, in the case of a recent diplomatic dispute between the U.S. and Afghan governments, the answer is that the contractor pays out of pocket. The issue of U.S. defense contractors paying taxes to a foreign government is, unsurprisingly, a thorny one, deeply entangled with diplomatic and national security concerns that go far beyond your typical tax treaty.  And, you can imagine the sort of briar patch faced by defense contractors trying to negotiate the Afghan tax system, under the shadow of a U.S. military presence and the still-unsteady Karzai government.  Thorny may not be the right word; untenable is more like it.

In 2013, a report by the Special Inspector General for Afghanistan found that U.S. contractors had been charged nearly $1 billion in business taxes and penalties by the Afghan government, despite the fact that many of the projects in question were exempted from taxation under diplomatic agreements between the Afghan government and the U.S. [1]   This has put dozens of U.S. contractors in a catch-22 situation.  U.S. law and the diplomatic agreements with Afghanistan say they don’t have to pay those local taxes; but the Afghan government says they do, and has taken steps to collect on the mostly-unpaid penalties, including denying business licenses and arresting contractor personnel. [2]

Into this politically-fraught situation steps the Department of Defense, with a proposed DFARS clause (DFAR Case 2014-D0003) stipulating that contractors performing work in Afghanistan are exempt from most local taxes and duties charged by the Afghan government. [3]   Unfortunately for the contractors, as a fallout of declaring U.S. contractors immune to Afghan taxation, the proposed DFARS clause also states that no such taxes or fines shall be included in contract pricing. [4] In short, because the U.S. government will not reimburse contractors for Afghan taxes and fees—and because the Afghan government is likely to continue demanding them—contractors may be forced to absorb those costs out of pocket, treaty or no treaty.

While the proposed DFARS clause appears to have been drafted with the best of intentions—namely, to clarify U.S. contractors’ legal responsibility regarding Afghan taxes—ironically, the proposed rule is likely to have an overall negative effect on U.S. contractors: denying them reimbursement for actual contract costs while doing nothing to resolve the diplomatic impasse that created the situation in the first place.  Contractors are unlikely to take much comfort in a DFARS “piece of paper” saying they are immune to local taxation when, on the ground, they face the real possibility of being denied a business license or having their personnel detained by the Afghan Ministry of Finance (which does not share the U.S. government’s interpretation of the relevant agreements).  More importantly, the diplomatic shoving match between the U.S. and Afghanistan is not something private businesses are equipped to or should be expected to handle on their own.  Given the U.S. government’s own report acknowledging that contractors continue to be charged Afghan taxes (diplomatic accords notwithstanding), it seems patently unfair for the DFARS to turn a blind eye to that reality and force contractors to absorb the costs of a foreign policy dispute over which they have no control.  In short, while we may not know who wins when the irresistible force strikes the immovable object, we definitely know who loses.  Whoever’s standing in the middle.

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[1] See Federal Contracts Report, Afghanistan Reconstruction: Afghan Government Wrongly Taxing U.S. Contractors, SIGAR Report Says, Bloomberg BNA (May 21, 2013), available at:  ≪http://news.bna.com/fcln/FCLNWB/split_display.adp?fedfid= 31182616&vname=fcrnotallissues&jd=a0d8q5e4v9&split=0≫ (last visited July 1, 2014).

[2] See Federal Contracts Report, Afghanistan Reconstruction: Proposed Rule Clarifies No Afghan Taxation On Contractors, Bloomberg BNA (June 24, 2014), available at: ≪http://news.bna.com/fcln/FCLNWB/split_display.adp?fedfid=48539338&vname=fcrnotallissues&jd=a0f2b1q6v5&split=0≫ (last visited July 1, 2014).

[3] See DFARS Case 2014-D0003, Defense Federal Acquisition Regulation Supplement: Taxes―Foreign Contracts in Afghanistan, available at: ≪http://www.ofr.gov/OFRUpload/OFRData/2014-14595_PI.pdf≫ (last visited July 1, 2014).

[4] See id.

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