Will the “Inversion” Backlash Flow-Down to Subcontractors?
Washington policymakers are criticizing corporate “inversions”—i.e., U.S. companies that reincorporate abroad under lower corporate income tax rates—and contractors should take note. Currently, U.S. law bars an inverted domestic corporation (“IDC”) from receiving funds under a prime U.S. contract. See Consolidated Appropriations Act of 2014 (H.R. 3547); see also FAR 9.108-2. On July 29, 2014, lawmakers proposed a bill—the No Federal Contracts for Corporate Deserters Act (“NFCCDA”)—that would expand this prohibition in at least two ways. First, a company that reincorporates abroad will be considered an IDC if 50% of the shares of the new foreign company are held by the former shareholders of the domestic company (under current law, the threshold is 80%). Second, any federal contract exceeding $10 million will be required to contain a provision that prohibits the prime contractor from “awarding a first-tier subcontract with a value greater than 10 percent of the total value of the prime contract” to an IDC.
Other anti-IDC legislation is in the works. House appropriations bills have included amendments intended to prohibit federal contract awards to IDCs that are re-incorporated in Bermuda or the Cayman Islands. The Senate version of the FY15 Defense spending bill has a similar provision.
If passed into law, the NFCCDA could have a significant impact on the contracting industry, particularly given the continuing uncertainty regarding subcontractor relationships under various federal programs (such as TRICARE and Federal Employees Health Benefit Plan).