Companies using offshore tax havens look to bill for windfall — FAC 2005-34, FAR Case 2008–009, Prohibition on Contracting with Inverted Domestic Corporations, 74 Fed. Reg. 31561 (July 1, 2009)
The Hill – By Walter Alarkon - 11/10/09
Multinational corporations are fighting to preserve language in a spending bill that would weaken a ban on federal contracts.
Only a handful of companies could benefit from the language, but they could receive a windfall if the Senate legislation is approved.
The language covers “inverted” corporations that operate mostly in the United States but incorporate overseas to ease their U.S. tax bills.
The provision, inserted in the Senate version of the bill at the request of the Obama administration, would weaken a ban on federal contracts for inverted companies by saying the ban will not apply if it is inconsistent with U.S. obligations under an international agreement.
Before the ban began in 2002, four of the 100 largest federal contractors were inverted, according to a Government Accountability Office (GAO) report.
In 2001, those four companies received $2.7 billion in federal contracts, but they have unable to win the contracts since the ban was put into place.
The largest of those four companies is McDermott International, an engineering and construction company incorporated in Panama that focuses on oil and energy projects.
McDermott, which is lobbying lawmakers on the ban, according to federal lobbying disclosure reports, received nearly $1.9 billion in federal contracts in 2001. Lobbyists for the company did not respond to a request for comment.
Sen. Byron Dorgan (D-N.D.) said last week in a floor speech that the proposed limit to the ban would allow an inverted company in Panama to get federal contracts it can’t acquire now. Dorgan was specifically referring to McDermott, his office said.
Accenture, a consulting, technology-services and outsourcing firm incorporated in Bermuda, has also lobbied on contracting provisions in the Senate financial services spending bill, according to the disclosure reports. It had the third-largest haul in federal contracts in 2001.
John Jaskot, a partner at Jones Walker lobbying for Accenture, said that the firm is monitoring the ban.
Dorgan and a bipartisan group of other lawmakers are looking to protect the ban and keep inverted companies from getting U.S. government contracts.
The Senate bill has yet to hit the floor, while a bill approved by the House does not include the language weakening the ban.
“The only reason you want to invert and get rid of your American citizenship is to avoid paying U.S. taxes,” Dorgan said. “We say: ‘You don’t want to pay U.S. taxes, you know what? You ought not get to do business with the federal government.’ ”
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August 31, 2009
General Services Administration
Regulatory Secretariat (VPR)
1800 F Street, NW, Room 4041
ATTN: Ms. Hada Flowers
Washington, D.C. 20405
Re: FAC 2005-34, FAR Case 2008–009, Prohibition on Contracting with Inverted Domestic Corporations, 74 Fed. Reg. 31561 (July 1, 2009)
Dear Ms. Flowers:
The U.S. Chamber of Commerce, TechAmerica, Associated General Contractors of America and the Professional Services Council appreciate the opportunity to submit comments on the above-referenced FAR Case. We believe that the Interim Rule contains serious substantive flaws stemming from the FAR Council’s adoption of an incorrect definition of an inverted domestic corporation.
Additionally, we reiterate the position mentioned in the July 23, 2009 letter5 that a rule of this substance should not have been rushed to be implemented as an Interim Rule. We urge the FAR Councils to withdraw this interim rule and ensure that the public comments submitted in response to this rule making be taken into account to improve the rule and limit the potential for unintended consequences.
Background on the Inverted Domestic Corporation Contracting Ban
The first Federal government restriction on doing business with inverted domestic corporations was enacted by Congress in 2002 through the Homeland Security Act and only applied to the Department of Homeland Security (“DHS”). In Fiscal Year 2006 and 2007, Congress applied the DHS restriction to several other agencies, including the Departments of Transportation, Treasury, and Housing and Urban Development.
This inverted domestic corporation restriction continued to apply only to selected agencies until Congress applied the restriction government-wide for the first time in appropriations act language for FY 2008 and then again for FY 2009.
In the FY 2006-2009 Appropriations Acts, Congress defined an inverted domestic corporation by reference to the Homeland Security Act of 2002. That is also the definition used by DHS when it issued the Homeland Security Acquisition Regulation to implement the DHS restriction. 48 C.F.R. § 3009.104.
Congress has therefore always used the same definition for inverted domestic corporation for purposes of contracting bans – whether the ban applied to DHS, other limited agencies, or government-wide. The definition used for the contracting ban has never incorporated the Tax Code definition.
The Interim Rule Inappropriately Broadens the Prohibition by Referring to the Tax Code
Any rulemaking on the domestic inverted corporation ban should be based on the appropriations acts from FY 2006-2009 which define inverted domestic corporations by reference to the Homeland Security Act of 2002. The Tax Code also includes a definition of inverted corporations but Congress never incorporated that definition in any restriction on eligibility to receive federal contracts. Inexplicably, the FAR Council chose to incorporate the Tax Code definition, speculating that Congress did not “intend to set up two different statutory schemes for handling inverted domestic corporations.” 74 Fed. Reg. 31562.
There was no need, however, for the FAR Council to engage in such speculation – the appropriations acts are explicit.
The Interim Rule indicates that a corporation that is treated as an inverted corporation for purposes of the Tax Code is also an inverted domestic corporation for purposes of the DHS statute and the FAR. 74 Fed. Reg. 31564.
The FAR Council’s interpretation has no basis in the DHS statute, the relevant appropriations acts, or the relevant legislative histories – none of which incorporate the Tax Code definition. 6 U.S.C § 395(b); Pub. L. 109-115, 110-161, 111-8.
Since the inverted domestic corporation restriction acts essentially as a constructive debarment statute, amendments to the Tax Code could change with each revision to the applicable definition in the Tax Code. The FAR Council simply does not have the authority to interpret or implement the Tax Code for tax purposes. See 43 U.S. Op. Atty. Gen. 150 (1979) (Office of Federal Procurement Policy (OFPP)
Administrator’s power does not extend to construction of the substantive provisions of the labor statutes at issue because OFPP’s responsibility is to set government-wide procurement policy while other agencies interpret their own substantive regulations.)
Accordingly, we recommend that the FAR Council adopt an approach that will not require updating the FAR definition and instead directly incorporates the DHS definition.
The Interim Rule Fails to Properly Implement Appropriations Language
The Interim Rule erroneously applies the prohibition to all contracts funded with FY 2006 and FY 2007 appropriations acts. Specifically, in FY 2006 and 2007, the restriction did not apply government-wide, yet the Interim Rule explicitly applies the restriction to all agencies using FY 2006-09 funds. See 74 Fed. Reg. 31564.
Therefore, there is no statutory basis for extending the prohibition to agencies not covered by the prohibition and the FAR Council does not have authority to retroactively impose this government-wide rule for these years.
Additionally, the restrictions at issue have been imposed through annual appropriations acts and do not constitute a permanent government-wide restriction against doing business with inverted domestic corporations.
Even the FAR Council recognized that the Interim Rule only applies to FY 2006-2009 appropriations yet there is now a permanent FAR clause with the unusual caveat that it only applies to contracts funded with FY 2006-2009 appropriations.
Given that the prohibition applies only to certain contracts funded with current or prior appropriations, the FAR will need to be updated every year. The scope of the restriction has also changed from time to time and may change again.
For example, if the current FY 2010 Senate Financial Services Appropriations bill is enacted in its current form, the FAR prohibition would need to be revised to include an exception to the restriction if it would violate any international treaties. See S. 1432, 111th Cong. § 740 (2009).
The Interim Rule Uses an Inefficient Procedure to Determine Inverted Domestic Corporation Status
If the FAR Council does not significantly revise the procedure detailed in the Interim Rule, we anticipate significant confusion and inconsistent results. Each time a company contracts with the government, it will have to certify it is not an inverted domestic corporation.
The Contracting Officer (“CO”) must then “rigorously examine circumstances known to them that would lead a reasonable business person to question the contractor self-certification, and after consultation with legal counsel, take appropriate action where questionable self-certification cannot be verified.” FAR 9.108-3(b).
The FAR Council takes the unusual step of identifying potential criminal penalties for COs who fail to adequately review contractor’s certifications. The procedure in the Interim Rule may thus result in inconsistent determinations because multiple contracting officers could reach different conclusions regarding the same contractor.
The FAR Council Did Not Follow Proper Rulemaking Procedures.
The FAR Council issued the Interim Rule on July 1, 2009 without giving the public an opportunity in advance to provide comments. The only explanation offered was that “urgent and compelling reasons exist to promulgate this interim rule without prior public comment.” 74 Fed. Reg. 31563.
The Interim Rule also cited FAR 1.501-3(b), which provides that “urgent and compelling circumstances” may exist “when a statute must be implemented in a relatively short period of time.” However, as noted above, the restrictions have been in place for several years and have been applicable government-wide starting in FY 2008.
Issuance of the interim rule in these circumstances is contrary to the Office of Federal Procurement Policy Act, 41 U.S.C. § 418b(a)(2) which provides that “no procurement policy, regulation, procedure, or form . . . may take effect until 60 days after [it] is published for comment in the Federal Register.”
The 60 day advance notice requirement may only be waived “if urgent and compelling circumstances make compliance with such requirements impracticable.” 41 U.S.C. § 418(d).
The FAR Council apparently justifies the unusual action on the grounds that the FY 2009 appropriations language is “currently in effect.” The prohibition, however, has been in effect for quite some time – it is essentially the same provision that Congress has applied to some or all agencies for several years.
Even the first government-wide restriction was put in place in December 2007, nearly two years ago. This raises the question as to why it was necessary to forego the normal rulemaking processes.
If the FAR Council wishes to depart from past practice, some meaningful explanation must be provided; otherwise, the rulemaking is arbitrary and capricious. See Atchison, Topeka & Santa Fe Ry. Co. v. Wichita Bd. of Trade, 412 U.S. 800, 808 (1973).
In that case, the Supreme Court stated that any grounds for departure from prior norms “must be clearly set forth so that the reviewing court may understand the basis of the agency’s action and so may judge the consistency of that action with the agency’s mandate.” Here, there is no reasonable explanation for why the FAR Council did not initiate a rulemaking for identical or substantially similar statutory restrictions dating back several years.
Recommendation
We recommend the FAR Council rescind the Interim Rule and issue a new proposed rule for public comment after taking into account these comments and recommendations.
The definition of an inverted domestic corporation found in the Appropriations Act is clear and complete. The FAR Council should employ that definition in the new Proposed Rule. Referencing anything other than the DHS definition is both inappropriate and unnecessary.
We appreciate the opportunity to comment on these issues. Please do not hesitate to contact us if we can provide any further information or assistance. Chris Braddock of the U.S. Chamber of Commerce serves as our point of contact. He can be reached at (202) 463-5891 or at CBraddock@USChamber.com.
Sincerely,
U.S. Chamber of Commerce
TechAmerica
Associated General Contractors of America
Professional Services Council
DEPARTMENT OF DEFENSE GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 4, 9, and 52 [FAC 2005–34; FAR Case 2008–009; Item II; Docket 2009–0020, Sequence 1] RIN 9000–AL28
Federal Acquisition Regulation; FAR Case 2008–009, Prohibition on Contracting with Inverted Domestic Corporations
AGENCIES: Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Interim rule with request for comments.
SUMMARY: The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (Councils) have agreed on an interim rule amending the Federal Acquisition Regulation (FAR) to implement Section 743 of Division D of the Omnibus Appropriations Act, 2009 (Public Law 111–8). Section 743 of Division D of this Act prohibits the award of contracts using appropriated funds to any foreign incorporated entity that is treated as an inverted domestic corporation or to any subsidiary of one.
The Department of Homeland Security (DHS) has had its own rule prohibiting contracting with inverted domestic corporations since December 2003 (see 48 CFR Subpart 3009.1). The DHS rule implements section 835 of the Homeland Security Act of 2002 (P.L.107–296, 6 U.S.C. 395).
DATES: Effective Date: July 1, 2009.
SUPPLEMENTARY INFORMATION:
A. Background
This rule implements section 743 of Division D of the Omnibus Appropriations Act, 2009 (Public Law 111–8). Although this is effective for Fiscal Year 2009 funds, the Councils have included the clause requirement when using Fiscal Year 2006, 2007, and 2008 funds, when similar prohibitions were included in appropriations acts.
Section 743 of Division D of this Act prohibits the use of Federal appropriated funds for Fiscal Year 2009 to contract with any inverted domestic corporation, as defined at section 835(b) of the Homeland Security Act of 2002 (Pub. L. 107–296, 6 U.S.C. 395(b)) or any subsidiary of such an entity.
What is an inverted domestic corporation. An inverted domestic corporation is one that used to be incorporated in the United States, or used to be a partnership in the United States, but now is incorporated in a foreign country, or is a subsidiary whose parent corporation is incorporated in a foreign country.
The reason a corporation would do this is to avoid United States taxes on business income generated in foreign countries. Bermuda, Barbados, and the Cayman Islands are well known tax havens; the statute is not restricted to these countries however. A term in wide use for these corporations is ‘‘corporate expatriate’’.
Congress has enacted both contract statutes and tax statutes to try to discourage corporations from expatriating themselves.
Tax statute. Congress enacted 26 U.S.C. 7874 to remove the tax benefits from the most egregious of these transactions, where at least 80 percent (80%) of the stock is now held by former shareholders or partners and where the foreign entity plus companies connected to it by 50 percent (50%) or more ownership do not have substantial business activities in the foreign country.
The tax consequence is that the parent foreign corporation must then file a United States income tax return as a domestic corporation, not a foreign corporation.
Contracting and appropriations statutes.
The contracting statutes are similar to the tax statute, but not identical. Congress, in 6 U.S.C. 395, restricted the Department of Homeland Security (DHS) from awarding contracts to inverted domestic corporations, either parent or subsidiary. Congress further restricted all executive branch agencies in Public Law 111–8, from using Fiscal Year 2009 monies ‘‘for any Federal Government contract with any…inverted domestic corporation…’’.
This statute borrowed the definition of inverted domestic corporation from the DHS statute, which in turn is related to the tax statute. The FAR is implementing Public Law 111–8 by further reliance on the tax statute and Internal Revenue Service regulations, as the Councils do not believe that Congress intended to set up two different statutory schemes for handling inverted domestic corporations.
A foreign corporation that has to file a tax return as a domestic corporation is automatically going to be an inverted domestic corporation for contracting purposes as well. The Councils note that there is an important difference between the tax statute and the other statutory definitions: the tax statute only applies to incorporations completed after March 4, 2003. An incorporation that took place on or before March 4, 2003, will not escape the contracting and fiscal ban.
Statutory definition of inverted domestic corporation. Section 835(b) defines an inverted domestic corporation to mean a foreign incorporated entity that, pursuant to a plan (or a series of related transactions) (1) directly or indirectly acquires substantially all of the properties held directly or indirectly by a domestic corporation or substantially all of the properties constituting a trade or business of a domestic partnership; (2) acquires at least eighty percent (80%) of the stock (by vote or value) of the entity held (a) in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation; or (b) in the
case of an acquisition with respect to a domestic partnership, by former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership; and (3) after the acquisition, the expanded affiliated group that includes the entity does not have substantial business activities in the foreign country in which or under the law of which the entity is created or organized when compared to the total business activities of such expanded affiliated group.
Which contractors are inverted domestic corporations. The Councils do not have this information. The Councils and Government contracting officers by law do not have access to tax return information. We cannot determine whether a contractor’s status and history mean it falls under the statutory requirements. Each contractor will have to analyze its own history and current status.
This should be very easy to determine for sole proprietorships, partnerships, and domestic corporations without a foreign parent, as none of these could be inverted domestic corporations. It will also be easy for a foreign corporation which filed last year’s income tax return as a domestic corporation and its subsidiaries, which automatically fall under the contracting ban.
The harder case will be for foreign corporations that were domestic corporations or partnerships before 2004, and their subsidiaries. A list of high profile inversions occurring before February 2002 can be found in an article (Mihir A. Desai and James R. Hines, Jr., ‘‘Expectations and Expatriations:
Tracing the Causes and Consequences of Corporate Inversions,’’ 55 National Tax
Journal 409, 418–20 (2002)): Triton Energy, Tyco, Fruit of the Loom, Transocean, Everest Reinsurance, Foster Wheeler, Cooper Industries, Global Marine, Ingersoll Rand, Nabors Industries, and Noble Drilling. The Councils do not know whether these corporations would fall under the contracting ban (because of the 80percent (80%) rule and the substantial business test).
Funds covered. Section 743 of Public Law 111–8 contains the words ‘‘None of the funds appropriated or otherwise made available by this or any other Act may be used for any Federal Government contract…’’.
The Government Accountability Office (GAO) has stated that ‘‘The words ‘or any other Act’ in a provision addressing funds appropriated in or made available by ‘this or any other act’ are not words of futurity. They merely refer to any other appropriations act for the same fiscal year.’’ Volume One of the GAO Red Book at page 2–36. This means Section 743 does not apply to future fiscal years, unless Congress extends it in future legislation.
However, it does apply to all Fiscal Year 2009 monies, whether the agency appropriations are directly covered by Public Law 111–8 or by a different 2009 appropriations act. FAR coverage.
The Councils are considering the prohibition as a prohibited business practice and have chosen to place coverage in the FAR Subpart entitled Responsible Prospective Contractors, 9.1. In addition to the definition of inverted domestic corporation and the prohibition on contracting with one, newly added FAR section 9.108 includes the limited
Secretarial waiver authority granted by the statute and a representation requirement to be included in solicitations for goods and services.
The new solicitation provision at 52.209–2, Prohibition on Contracting with Inverted Domestic Corporations—Representation, provides the relevant definition and the condition that, by submission of its offer, the offeror represents that it is not an inverted
domestic corporation or a subsidiary of an inverted domestic corporation. If the offeror cannot affirmatively make the representation, then it is not allowed to submit an offer absent a Secretarial waiver that contracting with the inverted domestic corporation or its subsidiary is in the interest of national security.
Contracting officers should rigorously examine circumstances known to them that would lead a reasonable business person to question the contractor self certification, as the appropriation restriction applies to accountable Government officers, and if willfully and knowingly violated, may result in criminal penalties.
The Act does not require flow down of the representation provision. Section 743 addresses only contracts entered into by Executive agencies. However, the Councils are taking public comments on this issue.
Applicability to commercial item contracts. Section 8003 of Public Law 103–355 (41 U.S.C. 430) is intended to limit the applicability of procurement laws to commercial items. Section 430 only permits exemption from a covered law, which is ‘‘any provision of law that…sets forth policies, procedures, requirements, or restrictions for the procurement of property or services bythe Federal Government.’’
Also, exemption under section 430 is not permitted if the provision of law contains criminal or civil penalties. In any event, the law may be applied if the Federal Acquisition Regulatory Council makes a written determination that it is not in the best interest of the Federal Government to exempt commercial item contracts from the covered law.
Therefore, given that Section 743 of Division D of the Omnibus Appropriations Act, 2009 (Public Law 111–8) prohibits the use of funds for any Federal Government contract with an inverted domestic corporation or to any subsidiary of one, the FAR Council has determined that the rule applies to contracts for commercial items.
Applicability to Commercially Available Off-The-Shelf (COTS) item contracts. Section 4203 of Public Law 104–106, the Clinger-Cohen Act of 1996 (41 U.S.C. 431), governs the applicability of laws to the procurement of commercially available off-the-shelf (COTS) items, and is intended to limit the applicability of laws to them.
Clinger-Cohen provides that if a provision of law contains criminal or civil penalties, or if the Administrator for Federal Procurement Policy makes a written determination that it is not in the best interest of the Federal Government to exempt COTS item contracts, the provision of law will apply. The same applies for subcontracts for COTS items.
Therefore, given the requirements of Section 743 of Division D of the Omnibus Appropriations Act of 2009 (Public Law 111–8) which prohibits the use of funds for any Federal Government contract with an inverted domestic corporation or to any subsidiary of one, and the intent of the law, the Administrator of the Office of the Federal Procurement Policy, has determined that it is in the best interest of the Federal Government to apply this law to Commercially Available Off-The- Shelf (COTS) item contracts and subcontracts, as defined at FAR 2.101.
This is a significant regulatory action and, therefore, was subject to review under Section 6(b) of Executive Order 12866, Regulatory Planning and Review, dated September 30, 1993. This rule is not a major rule under 5 U.S.C. 804.
PART 52—SOLICITATION PROVISIONS AND CONTRACT CLAUSES
■ 5. Add section 52.209–2 to read as follows:
52.209–2 Prohibition on Contracting with Inverted Domestic Corporations—Representation. As prescribed in 9.108–5, insert the following provision:
PROHIBITION ON CONTRACTING WITH INVERTED DOMESTIC CORPORATIONS—REPRESENTATION (JUL 2009)
(a) Definition. Inverted domestic corporation means a foreign incorporated entity which is treated as an inverted domestic corporation under 6 U.S.C. 395(b), i.e., a corporation that used to be incorporated in the United States, or used to be a partnership in the United States, but now is incorporated in a foreign country, or is a subsidiary whose parent corporation is incorporated in a foreign country, that meets the criteria specified in 6 U.S.C. 395(b), applied in accordance with the rules and definitions of 6 U.S.C. 395©.
(b) Relation to Internal Revenue Code. A foreign entity that is treated as an inverted domestic corporation for purposes of the Internal Revenue Code at 26 U.S.C. 7874 (or would be except that the inversion transactions were completed on or before March 4, 2003), is also an inverted domestic corporation for purposes of 6 U.S.C. 395 and for this solicitation provision (see FAR 9.108). © Representation. By submission of its offer, the offeror represents that it is not an inverted domestic corporation and is not a subsidiary of one.
(End of provision)
■ 6. Amend section 52.212–3 by—
■ a. Revising the date of the provision;
■ b. In paragraph (a), adding, in alphabetical order, the definition
‘‘Inverted domestic corporation’’;
■ c. Removing from paragraph (b)(2) ‘‘(c)
through (m)’’ and adding ‘‘© through (n)’’ in its place;
■ d. Adding paragraph (n).
The revised and added text reads as follows: 52.212–3 Offeror Representations and Certifications—Commercial Items.
OFFEROR REPRESENTATIONS AND CERTIFICATIONS—COMMERCIAL ITEMS (JUL 2009)
(a) Inverted domestic corporation means a foreign incorporated entity which is treated as an inverted domestic corporation under 6 U.S.C. 395(b), i.e., a corporation that used to be incorporated in the United States, or used to be a partnership in the United States, but now is incorporated in a foreign country, or is a subsidiary whose parent corporation is incorporated in a foreign country, that meets the criteria specified in 6 U.S.C. 395(b), applied in accordance with the rules and definitions of 6 U.S.C. 395©.
(n) Prohibition on Contracting with Inverted Domestic Corporations. (1) Relation to Internal Revenue Code. A foreign entity that is treated as an inverted domestic corporation for purposes of the Internal Revenue Code at 26 U.S.C. 7874 (or would be except that the inversion transactions were completed on or before March 4, 2003), is also an inverted domestic corporation for purposes of 6 U.S.C. 395 and for this solicitation provision (see FAR 9.108). (2) Representation. By submission of its offer, the offeror represents that it is not an inverted domestic corporation and is not a subsidiary of one.
Related Links:
Remarks by Treasury Secretary John W. Snow at the Signing Ceremony for the U.S.-Barbados Income Tax Protocol
TESTIMONY OF THE STAFF OF THE JOINT COMMITTEE ON TAXATION BEFORE THE SENATE COMMITTEE ON FOREIGN RELATIONS HEARING ON THE PROPOSED TAX PROTOCOLS WITH BARBADOS AND THE NETHERLANDS1 SEPTEMBER 24, 2004
Tax Foundation: Corporate Inversions: An Introduction to the Issue and FAQ
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