Inverted Domestic Corporations - Status Change During Contract Performance

Inverted Domestic Corporations (IDCs) are companies that used to be incorporated in the US (or used to be partnerships in the US), but are now incorporated in a foreign country, or are subsidiaries whose parent corporations are incorporated in a foreign country. The technical definition of an inverted domestic corporation is codified in 6 U.S.C. 395(b):

(b) Inverted domestic corporation For purposes of this section, a foreign incorporated entity shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions)—      (1) the entity completes before, on, or after November 25, 2002, the direct or indirect acquisition of 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) after the acquisition at least 80 percent of the stock (by vote or value) of the entity is 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) the expanded affiliated group which after the acquisition 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. 

Since 2008, the Federal Acquisition Regulations (FAR) have prohibited 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 such entity.

But, what happens when, after contract award, the contractor becomes an inverted domestic corporation or a subsidiary of an inverted domestic corporation? Well, nothing really, but the Government wants to know if that happens. Last week, the FAR Councils (DoD, GSA, and NASA) published a final rule that requires two things.

First, offerors (and contractors) will be required to represent their current status at the earlier of an offer submission or the annual anniversary of the registration in the System for Award Management (SAM). In SAM's representations and certifications section, there are now check boxes to represent whether an offeror or contractor is or is not an inverted domestic corporation and is or is not a subsidiary of an inverted domestic corporation.

Second, FAR 52.209-10, Prohibition on Contracting with Inverted Domestic Corporations, now requires affirmative notification by contractors if they become inverted domestic corporations. The provision reads:

In the event the Contractor becomes either an inverted domestic corporation, or a subsidiary of an inverted domestic corporation during contract performance, the Contractor shall give written notice to the Contracting Officer within five business days from the date of the inversion event.

The new provision does not address the actions to be taken by a contracting officer in the event a contractor becomes an inverted domestic corporation during contract performance. It seems logical that contracts will be allowed to run their course. However, contract modifications and perhaps IDIQ contracts may be in jeopardy of continuance.

Level the Playing Field - No Contracts to Companies Skipping the Country

The Federal Acquisition Regulation was recently amended to implement a section of the Consolidated Appropriations Act of 2012 that 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 such entity. Actually, this prohibition has been effective for some time but the provision was about to sunset. This new regulation extends it indefinitely.

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 (see FAR 9.108-1).

The purpose of the statute and regulation is to help keep Government work here in the U.S. rather than have it sent offshore. Respondents to the proposed rule were overwhelmingly supportive of the restriction. Several respondents stated that when millions of people in the US are unemployed or under-employed, corporation that have "turned their back" on the US and eliminated jobs for American personnel should not receive Government contracts. Many respondents had an income tax angle. They contend that companies should not be rewarded for tax avoidance, which enables them to compete unfairly with U.S. companies.

The FAR councils acknowledged that there may be certain situations where there is no alternative but to purchase or contract with an inverted domestic corporation so they made a provision for this. The regulations allow for a waiver of the prohibition, if an agency head determines in writing that the waiver is required in the interest of national security, documents the determination, and reports it to Congress.