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Focus on Regulation

USAID Implements New Grant Regulations, Clarifies Applicability to Foreign and For-Profit Awardees

Hogan Lovells Government Contracts Associate Ogechi Achuko contributed to this post.

On 17 September 2015, USAID finalized its regulatory supplement to the OMB “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards”, often referred to as the Uniform Guidance.  USAID’s regulations largely are consistent with the OMB Uniform Guidance at 2 CFR part 200, with some revised and complementary provisions.  Notably, these provisions incorporate USAID’s policy to apply different standards to foreign grantees, and to apply the Federal Acquisition Regulation (FAR) cost principles to for-profit grantees. Many grantees—particularly those with a large footprint abroad—will continue to face some classic compliance questions under the new rules.

A summary of key provisions follows.

Different Standards Apply to Non-U.S. Organizations

USAID will not apply the Uniform Guidance to foreign organizations and foreign public entities. This decision is consistent with USAID’s “longstanding practice” to treat foreign organizations differently by applying separate standards that purportedly reduce administrative and compliance burdens for non-U.S. entities.

Commenters voiced concern that USAID’s treatment of foreign grantees is at odds with aims of the Uniform Guidance to promote efficiency and “uniformity” across federal grants and cooperative agreements. For example, commenters noted that U.S. pass-through entities (i.e., prime awardees) would need to draft different subaward agreements for U.S. versus non-U.S. subrecipients, and monitor and enforce distinct requirements for each class of subrecipients. USAID resisted calls for uniformity in order to avoid “significant negative implications for USAID’s ongoing operations and awards involving foreign organizations.” USAID noted that foreign organizations, many who work in English as a second language, would face special challenges to comply with the Uniform Guidance, including “unfamiliar[ity] with the technical wording and systems logic of federal regulations primarily directed at U.S. recipients.”

Foreign recipients of USAID grants still must comply with USAID guidance and standard provisions that adopt several concepts from the Uniform Guidance related to financial management, award administration, and audits. The Final Rule also affirms USAID policy to apply to foreign organizations and subrecipients the Uniform Guidance cost principles in Subpart E, governing the allowability, allocability, and reasonableness of costs. As in the past, the question of whether foreign recipients and subrecipients have necessary cost accounting policies and infrastructure to comply with Subpart E is an issue, which is particularly acute for U.S. awardees who must monitor financial compliance of their foreign subrecipients.

For-Profit Grantees Subject to the FAR Cost Principles

As expected, the Final Rule clarifies that FAR Part 30 (Cost Accounting Standards) and Part 31 (Contract Cost Principles and Procedures) take precedence over the Uniform Guidance cost principles in Subpart E for awards made to for-profit entities. USAID also exercised its authority to apply much of the Uniform Guidance (Subparts A through D) to for-profit recipients, including the preaward and post-award administrative requirements.

Supplemental Provisions Tailored to USAID

The Final Rule includes additional provisions that supplement or clarify USAID-specific requirements. For example, the Final Rule adds language to the Uniform Guidance “Payment” provision to indicate that the requirement to expend program income before requesting payment does not apply to earnings which are generated as foreign currencies. Also, the Final Rule incorporates existing USAID marking and publication requirements, and dispute mechanisms.

Various Compliance Questions Remain Open

USAID grantees with large operations abroad will continue to face compliance challenges under the Uniform Guidance. For example:

  • The allowability of foreign taxes—particularly value added taxes (VAT)—has been the subject of inconsistent and ambiguous interpretation by regulators. Several organizations have pursued VAT exemptions in foreign jurisdictions, but foreign revenue authorities are neither quick nor enthusiastic to grant these exemptions, leaving many grantees with VAT payment obligations even where bilateral treaties purportedly exempt USAID awardees from taxes and where award terms, agreement officers, and auditors disfavor VAT charges. Subpart E of the Uniform Guidance provides that foreign VAT “charged for the purchase of goods or services that a non-Federal entity is legally required to pay in country is an allowable expense under Federal awards.” 2 C.F.R. 200.470(c). Whether and how grantees rely on this provision may depend on how USAID interprets the “legally required to pay” concept.
  • Section 200.440 of the Uniform Guidance allows for “cost increases for fluctuations in exchange rates” subject to the availability of funding and prior approval from the sponsor. Prior approval generally is not required every time the exchange rate changes and an award is charged, but approval of exchange rate fluctuations would be required when the change results in the need for additional funding, or the increased cost results in the need to significantly reduce the scope of the project. It seems unlikely that USAID routinely will augment awards to neutralize currency losses. But the new language would seem to support reasonable rebudgeting to manage the effect of such losses. Not included in the Uniform Guidance is guidance on how to financially track currency exchange gains and losses as money is sent to overseas accounts and converted to local currency. This area will continue to be susceptible to a spectrum of accounting methods.
  • Organizations previously subject to OMB Circular A-21 (colleges and universities) now must contend with Section 200.431(i) of the Uniform Guidance, which includes new guidance on severance payments to foreign nationals employed outside of the United States. Such payments, to the extent that the amount exceeds the customary or prevailing practices for the grantee in the United States, are unallowable, unless they are necessary for the performance of the program and approved by USAID. Furthermore, severance payments due to the termination of the foreign national as a result of the closing or curtailment of activities in the host country are unallowable, unless they are necessary for the performance of the program and approved by USAID. These allowability conditions apparently apply even where severance is required by host country law or employer-employee agreement.

Effective on 19 October 2015, the new USAID regulatory supplement will appear at 2 C.F.R. part 700 and supersede the former USAID grant regulations at 22 C.F.R. part 226.