Congress Continues to Threaten Contracting by Inverted Domestic Corporations - Congressional Action May Further Restrict IDCs from Contracting with the Government

by Holland & Knight LLP
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HIGHLIGHTS:

  • Recent congressional action illustrates a renewed effort to permanently ban certain entities from receiving U.S. federal government contracts.
  • Inverted Domestic Corporations (IDCs) should closely monitor future developments and engage proactively as Congress considers various proposals that will impact companies’ ability to contract with the U.S. government.

Recent congressional action regarding Inverted Domestic Corporations (IDC) may lead to further limitations on the ability of IDCs to contract with the federal government. Starting with the 2002 legislation that established the Department of Homeland Security (DHS), and then extended to all government agencies through the appropriations legislation, Congress has placed contracting restrictions on government agencies prohibiting "contracts with expatriates." In that original DHS legislation, which is referenced in the later appropriations legislation, an IDC is relatively narrowly defined. However, proposals in the current session of Congress expand the definition considerably.

During recent considerations of the National Defense Authorization Act (NDAA) for FY 2016, members of the U.S. House of Representatives and the U.S. Senate attempted to include provisions limiting the ability of IDCs to contract with the Department of Defense (DOD). The first attempt was made during the House Armed Services Committee's consideration of the FY16 NDAA, at which Rep. Jackie Spier, D-Calif., introduced an amendment to "prohibit tax inverted companies from operating on military installations."

The second attempt, and perhaps the most consequential, was an amendment introduced by Sen. Richard Durbin, D-Ill., during the floor consideration of the Senate’s version of the FY16 NDAA. While most amendments, including Sen. Durbin's, were not considered on the Senate floor due to political maneuvering, Sen. Durbin’s amendment would have expanded the definition and permanently banned the DOD from contracting with certain entities after reincorporating abroad.

Legislative History

During the consideration of the Homeland Security Act of 2002 (P.L.107-296) and the DHS Appropriations Act for FY 2005, the U.S. Congress included provisions prohibiting the DHS from contracting with IDCs and their subsidiaries. Over the years, members of Congress introduced legislative proposals expanding IDC contracting bans across federal agencies.

The first IDC government-wide contracting prohibition was passed during the consideration of the Consolidated Appropriations Act for FY 2008. That year, Congress barred the use of appropriated funds from contracting with IDCs and their subsidiaries as prime contractors while allowing IDCs to receive appropriated funds in other than prime contractor arrangements. Similar contracting provisions were included in all subsequently approved appropriations bills, effectively barring IDC contracting on an annual basis (except in FY 2011).

Summary of Sen. Durbin’s Amendment

During the recent Senate consideration of the FY 2016 NDAA, Sen. Durbin introduced an amendment (SA 1559) designed to prohibit the DOD from awarding contracts to IDCs. The amendment contained several provisions that were significantly different from previously enacted legislation, including the following:

  • making the ban permanent (or until repealed) across the DOD
  • broadening the definition of an IDC by lowering the continuity of ownership threshold from 80 percent to 50 percent
  • requiring additional evaluation of the new entity’s U.S. presence of management and control activities, and significant U.S. business activity
  • prohibiting prime contractors from awarding first-tier subcontracts to IDCs with greater than 10 percent of the total value of the contract for every contract with a value in excess of $10 million
  • creating new 14-day waiver reporting requirements to the House and Senate Armed Services and Appropriations Committees

What to Expect from Congress

Recent congressional action illustrates a renewed effort to permanently ban certain entities from receiving U.S. federal government contracts after reincorporating abroad. Previous prohibitions were limited in scope and applied mostly to appropriated funds contracts. The renewed attempts to include provisions on must-pass legislative vehicles continue an alarming trend of inserting seemingly small issues in a legislative vehicle that will not allow those issues to be noticed, never mind properly considered.

Multinational companies with significant U.S. ownership and business activities need to understand fully the potential business, legal, and regulatory implications of these IDC proposals. It is prudent to closely monitor future developments and engage proactively as Congress considers various proposals that will impact companies' ability to contract with the U.S. government.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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