By: Theodore P. Watson, Esq.
Companies doing business with the federal government should be aware that a violation of the rule against doing business with an inverted domestic corporation is alive and well. If you a company with various aspects of the company operating overseas, you should carefully review the layout. Otherwise, you can lose a multi-million dollar contract if found in violation.
DoD, GSA, and NASA adopted as final, without change, an interim rule which amended the Federal Acquisition Regulation (FAR 52.209-2 Prohibition on Contracting with Inverted Domestic Corporations-Representation)to implement a section of the Consolidated Appropriations Act, 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.
An Inverted Domestic Corporation (IDC) is a company that was previously incorporated in the United States or was a partnership in the US but has now incorporated in a foreign country, or that have now become subsidiaries whose parent corporations are now incorporated in a foreign country. The technical definition of an inverted domestic corporation can be found in (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.
Effect on Your Government Contract?
The general rule is that the government should to contract to inverted domestic corporations. However, the Federal Acquisition Regulations (FAR) that implement the restrictions on government contracting with inverted domestic corporations generally reflect that agencies “shall” waive the prohibition when a waiver is determined to be “required in the interest of national security.” See FAR 9.108-4 providing that the prohibition “may” be waived in such circumstances.
- Disclosure is key. Bring the issue up to the contracting officer before it is too late
- Consider requesting a waiver. Keep in mind that national security is usually the bedrock for such a waiver.
As a Small Business Do You Feel Impacted? If So, Finding a Solution is in Order.
During the comment session for FAR 52.209-2 Prohibition on Contracting with Inverted Domestic Corporations-Representation, the government concluded that the final rule did not directly impact small business government contractors. The reason was that the rule only extended to the existing prohibition on contracting with inverted domestic corporations to acquisitions using FY funds, and the prohibition relates to foreign entities that are also generally large multinational corporations.
The government also felt that because that these particular entities are now prohibited from contracting with the Federal Government that it will not have a significant impact on a substantial number of small entities, because it would only remove an insignificant number of competitors and Government awards may still go to either large or small businesses, either domestic or foreign.
There may not be much hope for changing the rule. However, if you are domestic company and is significantly impacted by the rule, then you must come to the table and figure out how you can rearrange your business operations but still stay compliant with the rules.
Companies caught intentionally violating the inverted domestic corporation rule could potentially be charged with some level of criminal activity or recommended for suspension and debarment. The best thing to is to avoid confrontation from the government.
What is the Bottom Line for Government Contractors?
At the end of the day, the reality that the law stands. Although the government admits that there is some impact to small business, then if you are part of the impacted group, you may want to look at your business relationships to see if small business size status can be impacted ( if so, then the business future could be at risk). The other alternative would be to see if you are eligible for the inverted domestic corporation waiver.
What Happens If Your Status Changes During Contract Performance?
If your status changes to where you now meet the legal definition of an inverted domestic corporation or a subsidiary of an inverted domestic corporation, you must disclose this information to the contracting officer. Many government contractors find themselves investigated because they do not follow the FAR regulations or 6 U.S.C. 395.
When your company meets the legal definition of an inverted domestic corporation or a subsidiary of an inverted domestic corporation you will be required to represent your current status at the earlier of an offer submission or the annual anniversary of the registration in the System for Award Management (SAM).
If you forget to correctly represent your company, there could be consequences given the intent of the regulations.
For help complying with the inverted domestic corporation rules under 6 U.S.C. 395 (b) and FAR 52.209-2 Prohibition on Contracting with Inverted Domestic Corporations-Representation., call our government contracts law firm at 1-866-601-5518 for a FREE Initial Consultation.