In a move that should surprise no one, the Councils responsible for the Federal Acquisition Regulation (“FAR”) have adopted a final rule prohibiting the award of a government contract using 2012 appropriated funds to an inverted domestic corporation or a subsidiary of one. First published in May 2012, the rule extends a de facto ban on direct contracting with inverted domestic corporations that first appeared in the 2008 Appropriations Act, and has been in each subsequent Appropriations Act, except the one from 2011.
For the purposes of the rule, the term “inverted domestic corporation” is 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).” (The Internal Revenue Code defines the term differently.) As noted above, the ban extends only to direct contract awards; inverted domestic corporations and their subsidiaries are still eligible for subcontracts, and may be suppliers to government contractors and subcontractors. The ban may only be waived by an agency head in the interest of national security, and the waiver must be documented and reported to Congress.
Though fiscal year 2012 is long over, the presence of the Continuing Appropriations Act keeps the government’s use of 2012 funds relevant (at least until that Act expires March 27). When seeking a prime contract, a contractor must represent that it is not an inverted domestic corporation or subsidiary of one. If a contractor reorganizes as an inverted domestic corporation while performing a contract, it may be required to complete performance without payment. Thus any contractor in the midst of performance on a 2012 contract and thinking about relocating to Bermuda or the Caymans should consider itself duly warned.