Contracting with Inverted Domestic Corporations: Answers to Frequently Asked Questions
Released: 2015-05-11T00:00:00

Recent reports that certain entities continued to receive federal government contracts after reincorporating overseas have prompted questions about current and proposed restrictions on contracting with "inverted domestic corporations." These questions are shaped, in part, by the broader debate over whether such corporations are to be seen as "deserters," who change their corporate citizenship to avoid paying U.S. taxes, or as evidencing systemic problems in the U.S. tax code. However, they also reflect long-standing debate over whether and to what degree the federal procurement process should be used to promote socioeconomic goals that one court described as "only indirectly related to conventional procurement considerations" (i.e., acquiring the supplies and services that best meet the government's needs at the lowest price).

Congress has sought to discourage corporate inversions by barring certain contracts with inverted domestic corporations ever since it enacted the Homeland Security Act of 2002 ( P.L. 107-296 , Â§835). As amended, this act prohibits the Department of Homeland Security from awarding a contract to an inverted domestic corporation, or a subsidiary thereof, unless the Secretary of Homeland Security determines that a waiver is necessary in the interest of national security. The act also establishes its own definition of inverted domestic corporation , which is different from that in the Internal Revenue Code. Subsequent legislation imposed similar prohibitions upon other agencies, although only as to funds appropriated or otherwise made available under specific acts of Congress. However, some commentators have argued that inverted domestic corporations have continued to receive federal contracts because of "loopholes" or "gaps" in these measures. Thus, some Members of the 114 th Congress have proposed legislation to reduce or remove opportunities for inverted domestic corporations to receive government contracts. Similar legislation was introduced in the 113 th Congress. There have also been calls by Members of both the 113 th and 114 th Congresses for the executive to take action to further restrict agencies' ability to contract with inverted domestic corporations.

This report provides the answers to 14 frequently asked questions regarding the current restrictions on contracting with inverted domestic corporations, proposed amendments thereto, and the relationship between the prohibitions upon contracting with inverted domestic corporations and other provisions of law that restrict dealings with "foreign" contractors.

Current Restrictions

Many questions pertain to the current restrictions on contracting with inverted domestic corporations, including (1) the nature of the restrictions, (2) what constitutes an inverted domestic corporation for purposes of the restrictions, and (3) whether the restrictions can be waived. This section provides answers to these and other questions.

What restrictions are there on contracting with inverted domestic corporations?

Several different provisions of federal law bar government agencies from awarding "contracts" to inverted domestic corporations or their subsidiaries. (See " To what types of contracts does the proposed legislation apply? " for further discussion of what is meant by contract here.) However, each provision in current law applies to different federal agencies and/or funds.

The earliest provision, and the only one that is permanent law, applies to the Department of Homeland Security (DHS). As initially enacted, Section 835 of the Homeland Security Act of 2002 ( P.L. 107-296 ) generally barred DHS from contracting with any "foreign incorporated entity" that met the definition of inverted domestic corporation given by the act. (See " Can the restrictions be waived? " for a discussion of waivers of this prohibition.) Subsequently, Section 835 was amended ( P.L. 108-334 , Â§523) to bar contracting with subsidiaries of inverted domestic corporations, as well as the corporations themselves.

Subsequent measures have generally been modeled on the Homeland Security Act, although their restrictions apply only to specific funds. Initially, the measures reached funds "appropriated or otherwise made available" to specified agencies under particular acts, such as the Transportation, Treasury, Housing and Urban Development, the Judiciary, the District of Columbia, and Independent Agencies Appropriations Act, 2006 ( P.L. 109-115 , Â§724). Subsequent measures, though, were "consolidated" or "omnibus" ones that generally applied government-wide, as was the case with Section 738 of the Consolidated Appropriations Act, 2012 ( P.L. 112-74 ).

These statutory restrictions are implemented through Subpart 9.1 of the Federal Acquisition Regulation (FAR) and agency FAR supplements. However, the FAR does not impose any restrictions on contracting with inverted domestic corporations that do not have a basis in statute.

What constitutes an inverted domestic corporation for purposes of theseÂ restrictions?

For purposes of these restrictions, a foreign corporation is an inverted domestic corporation if it acquires "substantially all" of the properties held by a U.S. corporation and, after the inversion, at least 80% of its stock is owned, by vote or value, by former shareholders of the U.S. corporation by reason of their holding stock in the U.S. corporation (in other words, there is not a significant change in ownership post-inversion). However, an entity is not treated as an inverted domestic corporation if, post-inversion, the foreign corporation and its expanded affiliated group (the companies connected to it by at least 50% ownership) have "substantial business activities" in its home country when compared to the group's total business activities. There are analogous rules for partnerships.

This definition of "inverted domestic corporation" is based on Section 7874 of the Internal Revenue Code (IRC), which treats corporations meeting these criteria as domestic corporations for U.S. tax purposes, thus significantly limiting the tax benefits of the inversion. However, there are differences between the contracting restrictions and the IRC provision. For example, the IRC provision applies only to inversions completed after March 3, 2003, while the contracting restrictions contain no such limitation. Another key difference is that, while both have the 80% ownership threshold, the IRC provision also captures situations where the former shareholders of the U.S. corporation own between 60% and 80% of the foreign corporation after the inversion (in these cases, the entity is treated as foreign but limited in its ability to claim credits and deductions). Furthermore, the Internal Revenue Service (IRS) has promulgated regulations defining and clarifying certain terms and concepts for purposes of IRC Section 7874, which are not applicable to the contracting prohibitions. For example, IRS regulations define "substantial business activities" to mean that at least 25% of the expanded affiliate group's employees, employee compensation, assets, and income must be in or derived from the foreign country.

Can the restrictions be waived?

All the restrictions on contracting with inverted domestic corporations have provided for waivers, although the circumstances in which such waivers are permitted have varied in different enactments. Initially, Section 835 of the Homeland Security Act of 2002 ( P.L. 107-296 ) provided that the prohibition "shall" be waived if the Secretary of Homeland Security determines that a waiver is required "in the interest of homeland security, or to prevent the loss of any jobs in the United States or prevent the Government from incurring any additional costs that it would otherwise not incur." However, Congress subsequently amended the waiver provisions of the Homeland Security Act in 2003-2004, first by striking the provisions about job loss and additional costs ( P.L. 108-7 , Â§101(2)) and later by changing "homeland security" to "national security" ( P.L. 108-334 , Â§523). The Homeland Security Act's waiver provisions, as amended, generally served as a model for later provisions, although Congress in 2005 ( P.L. 109-115 , Â§724(b)(2)) added a requirement that agencies waiving the prohibition on contracting with inverted domestic corporations on national security grounds report such waivers to Congress. Subsequent legislation has incorporated this requirement ( P.L. 110-161 , Â§745(b)(2); P.L. 111-8 , Â§743(b)(2); P.L. 111-117 , Â§740(b)(2); P.L. 112-74 , Â§738(b)(2); P.L. 113-76 , Â§733(b)(2)).

The FAR provisions implementing the restrictions on contracting with inverted domestic corporations generally reflect the statutory provisions previously discussed. However, while the various statutory provisions state that agencies "shall" waive the prohibition when a waiver is determined to be "required in the interest of national security," the regulations codified in FAR Â§9.108-4 provide that the prohibition "may" be waived in such circumstances.

Do the restrictions apply to contracts for commercial items?

The enactments to date do not directly address whether the prohibitions upon contracting with inverted domestic corporations extend to contracts for commercial items , or items (other than real property) "of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes." However, the executive branch has promulgated regulationsâcodified in FAR Â§52.212-3(n) (Offeror Representations and CertificationsâCommercial Items)âthat apply the prohibitions to such contracts.

The Federal Acquisition Streamlining Act (FASA) of 1994 ( P.L. 103-355 ) established a general "preference" for the acquisition of commercial items, and provided that contracts for commercial items are to be exempted from certain generally applicable procurement laws listed in Subpart 12.5 of the FAR. Under FASA, as amended, the Federal Acquisition Regulatory Council (Council) has arguably broad discretion as to which laws to list in Subpart 12.5. However, the council has, to date, opted not to include the prohibitions on contracting with inverted domestic corporations in Subpart 12.5 on the grounds that it is not in the best interest of the federal government to exempt contracts for commercial items from these prohibitions.

Do the restrictions apply to FY2013 or subsequent funds?

The regulations until recently codified in FAR Â§9.108-2 seem to have prompted some confusion as to whether the prohibition upon contracting with inverted domestic corporations lapsed with the funds appropriated or otherwise made available by the Consolidated Appropriations Act, 2012 ( P.L. 112-74 ). This is because, prior to December 15, 2014, FAR Â§9.108-2 expressly referenced the FY2012 appropriations act, but did not mention any later provisions. However, on December 15, 2014, the FAR was amended to make clear that various enactments had continued the restrictions on contracting with inverted domestic corporations to FY2013-FY2015 funds.

In its current form, FAR Â§9.108-2 no longer notes the applicability of restrictions on contracting with inverted domestic corporations to specific FY2012 and earlier appropriations measures, but instead emphasizes the continuity of these restrictions between FY2008 and the present. Specifically, it provides that

Section 745 of Division D of the Consolidated Appropriations Act, 2008 ( P.L. 110-161 ) and its successor provisions in subsequent appropriations acts (and as extended in continuing resolutions) prohibit, on a Governmentwide basis, the use of appropriated (or otherwise made available) funds for contracts with either an inverted domestic corporation, or a subsidiary of such a corporation, except as provided in paragraph (b) of this section [which exempts contracts awarded prior to the date of enactment of P.L. 110-161 , or task or delivery orders issued under such contract] and in 9.108-4 Waiver.

Do these restrictions constitute debarment?

As reflected by their implementation through regulations in Subpart 9.1 of the FAR ("Responsible Prospective Contractors"), instead of Subpart 9.4 ("Debarment, Suspension, and Ineligibility"), the statutory restrictions on contracting with inverted domestic corporations are effectuated through responsibility determinations, not debarment and suspension (collectively known as "exclusion"). Agencies use both responsibility determinations and exclusion in an effort to avoid nonresponsible contractors , or contractors who may be unlikely to perform the contract work on time and in a satisfactory manner. However, responsibility determinations and exclusion involve different processes, and contractors' rights in these processes also differ.

A responsibility determination is a contract-specific determination as to whether a prospective awardee meets certain criteria prescribed by statute and elaborated upon by regulation (e.g., adequate financial resources; satisfactory record of integrity and business ethics). One of these criteria is that the contractor be "otherwise qualified and eligible to receive an award under applicable laws and regulations." This criterion encompasses the so-called "collateral requirements," or other provisions of law specifying when contractors are disqualified from or ineligible for awards. The prohibitions upon contracting with inverted domestic corporations discussed in this report are such provisions, making them collateral requirements of responsibility.

Agencies generally may not award a contract to a contractor who is non-responsible under the relevant criteria. However, determinations as to responsibility are made on a contract-by-contract basis. Once an entity can satisfy the criteriaâincluding any collateral requirementsâit could be found to be affirmatively responsible. In other words, it is not barred from contracting with the government for any period of time, unlike with exclusion, as discussed below.

Exclusion , in contrast, is imposed for certain causes specified by statute or regulation (e.g., fraud in obtaining or performing a government contract, intentional misuse of the "Made in America" designation), and generally lasts for a prescribed period of time. Specifically, debarments under the FAR last for a "period commensurate with the seriousness of the cause(s)," generally not exceeding three years, while suspension lasts as long as any agency investigation of the underlying conduct or ensuing legal proceeding. Contractors who are excluded are generally barred not only from new contracts (or other purchases) from any government agency, but also from serving as a subcontractor on certain contracts or as an individual surety on a government contract.

Another important distinction between responsibility determinations and exclusion is that contractors have generally not been seen as entitled to due process, in the form of notice and an opportunity for a hearing, when they are determined nonresponsible, while they have been found to be entitled to due process when they are excluded. However, the legal rationale underlying this distinctionânamely, that a determination of nonresponsibility applies only to an individual contractâcould potentially be called into question by collateral requirements like those as to inverted domestic corporations. Other collateral requirements arguably either pertain to conduct that is contract-specific (e.g., failure to agree to an acceptable subcontracting plan as a term of a particular contract ), or that would not serve to effectively bar entities from doing any business with the federal government (e.g., felons prohibited from participating in the contract security guard program of the Federal Protective Service) . The prohibition upon contracting with inverted domestic corporations, in contrast, is neither contract- nor context-specific.

How do agencies ensure they do not contract with inverted domestic corporations?

The statutes prohibiting contracting with inverted domestic corporations do not specify how agencies are to determine whether contractors are inverted domestic corporations. However, the regulations implementing these provisionsâcodified in FAR Â§9.108-3âcall for contractors to represent that they are not inverted domestic corporations when submitting their bid or offer. Specifically, these regulations require that all solicitations include a standard clause (FAR Â§52.209-2) which provides that,

By submission of its offer, the offeror represents thatâ

(1) [i]t is not an inverted domestic corporation; and

(2) [i]t is not a subsidiary of an inverted domestic corporation.

FAR Section 9.108-3(b) further provides that contracting officers may generally rely upon the offeror's representation that it is not an inverted domestic corporation unless there is "reason to question" the representation. The regulations do not specify what might constitute such a reason. However, the Government Accountability Office (GAO), in the only decision that appears to have addressed this question, found that a competitor's allegations that the awardee was an inverted domestic corporation did not preclude the award of a new contract to such awardee when the agency had previously investigated the matter and found the awardee was not an inverted domestic corporation.

The Obama Administration has, however, proposed amending the FAR to require that contractors expressly represent whether they are an inverted domestic corporation or a subsidiary thereof as part of their offer or the annual anniversary of their registration in the System for Award Management (SAM), whichever is earlier. The proposed regulations would also require contractors to give written notice to the contracting officer within five business days "of the inversion event" if they become an inverted domestic corporation or a subsidiary of such a corporation.

What if a contractor falsely certifies that it is not an inverted domestic corporation?

The government has a number of potential avenues of recourse if a contractor falsely represents it is not an inverted domestic corporation in its bid or offer, or if it becomes an inverted domestic corporation during the course of performing a contract. Key among these is a standard solicitation and contract clause (FAR Â§52.209-10), which provides that,

[i]f the contractor reorganizes as an inverted domestic corporation or becomes a subsidiary of an inverted domestic corporation at any time during the period of performance of this contract, the Government may be prohibited from paying for Contractor activities after the date when it becomes an inverted domestic corporation or subsidiary. The Government may seek any available remedies in the event the Contractor fails to perform in accordance with the terms and conditions of the contract as a result of Government action under this clause.

Although not specified here, these "available remedies" could, depending upon the circumstances, include equitable reductions in price or other consideration, reprocurement at the contractor's expense, and reduction or withholding of award or incentive fees. The contractor could also be subject to termination for default, negative performance evaluations, or debarment or suspension. Monetary damages for fraud are also possible, as discussed in CRS Report R43460, Contractor Fraud Against the Federal Government: Selected Federal Civil Remedies , by [author name scrubbed].

Proposed Legislation

Other questions and answers pertain to legislation introduced in the 114 th Congress that would make the preexisting ban on contracting with inverted domestic corporations permanent law and strengthen it ( H.R. 1809 , the No Federal Contracts for Corporate Deserters Act; S. 975 , the American Business for American Companies Act).

How do H.R. 1809 and S. 975 differ from current law?

The restrictions on contracting with inverted domestic corporations contained in H.R. 1809 and S. 975 differ from earlier restrictions in several ways. Arguably the most significant of these pertains to the definition of inverted domestic corporations and, thus, which corporations would be excluded by the prohibition. However, there are also other differences, as noted below.

Definition of Inverted Domestic Corporation

H.R. 1809 and S. 975 would broaden the definition of inverted domestic corporation used for purposes of the contracting prohibitions. As discussed above, one criterion under current law for treating a foreign corporation as an inverted domestic corporation is that the inversion does not result in a significant ownership change (i.e., after the inversion, at least 80% of the foreign corporation's stock is owned by former shareholders of the U.S. corporation). The bills would expand the definition of inverted domestic corporation by making two changes to the 80% ownership threshold. First, they would reduce the 80% threshold to 50%. Second, they would provide an alternative test, so that even if the new 50% ownership threshold is not met, a corporation would still be treated as an inverted domestic corporation if (1) the management and control of the expanded affiliated group occurred primarily within the United States and (2) the group had significant U.S. business activities, which would mean that at least 25% of the expanded affiliated group's employees, employee compensation, assets, or income were in or derived from the United States (with the Treasury Secretary given express authority to reduce the 25% threshold by regulation).

The bills would also address the exception for companies with "substantial business activities" in the foreign country by requiring the Treasury Secretary to issue regulations defining what the term means. The regulations could not treat any expanded affiliated group as having substantial business activities if the group would not be so treated under the existing IRC Â§7874 regulations. Those regulations require that at least 25% of the group's employees, employee compensation, assets, and income be in or derived from the foreign country.

Permanence of Restrictions

H.R. 1809 and S. 975 would amend Titles 10 and 41 of the United States Code to bar defense and civilian agencies, respectively, from contracting with inverted domestic corporations at any time (at least until such prohibitions are repealed). In contrast, all earlier enactments, with the exception of the Homeland Security Act of 2002 ( P.L. 107-296 ), apply only to funds appropriated or otherwise made available in particular fiscal years.

Relatedly, the restrictions provided for in H.R. 1809 and S. 975 would generally apply government-wide (i.e., to all agencies whose procurements are governed by the relevant provisions of Titles 10 and 41 of the United States Code ). Some earlier enactments, in contrast, applied to specific agencies (e.g., P.L. 107-296 , Â§835).

"Flow Down" to Subcontractors

H.R. 1809 and S. 975 would expressly provide for the "flow down" of the prohibition on contracting with inverted domestic corporations to first-tier subcontractors. That is, both measures would require that agencies include in each contract valued in excess of $10 million, other than a contract for "exclusively commercial items," a clause that prohibits the contractor from awarding a first-tier subcontract with a value greater than 10% of the total value of the prime contract to an inverted domestic corporation or a subsidiary thereof (or structuring the subcontract tiers to avoid this restriction). The clause would also provide that the contract may be terminated for default, and the contractor referred for debarment or suspension, if the contractor fails to comply, although such recourse would generally be available to the government even if the contract does not expressly provide for it. The current restrictions, in contrast, do not extend to subcontractors.

Reporting Requirements

H.R. 1809 and S. 975 would give additional direction as to when and to whom agencies must report any waivers. Prior enactments had prescribed that "[a]ny Secretary issuing a waiver ... shall report such issuance to Congress" (e.g., P.L. 113-76 , Â§733(b)(2)). However, these enactments did not require that the reports be submitted within any specific time after the waiver's issuance, or to any specific committees of Congress. The proposed legislation would change this by directing that reports be submitted within 14 days of the waiver's issuance to the "relevant authorizing committees" of the agency issuing the waiver.

Waivers

S. 975 (but not H.R. 1809 ) would also broaden the circumstances in which agencies may waive the restrictions on contracting with inverted domestic corporations. Currently, under the FAR (and under H.R. 1809 ), executive agencies may waive these restrictions when "required in the interest of national security." S. 975 , in contrast, would permit waivers not only when "required in the interest of national security," but also when "necessary for the efficient or effective administration of Federal or federally funded programs that provide health benefits to individual or public health programs." The scope of the latter waivers may be more limited than might first appear, however, since S. 975 also expressly excludes any non-FAR contracts from its restrictions (See " To what types of contracts does the proposed legislation apply? ").

Other

H.R. 1809 and S. 975 also refer to entities that the agency "head has determined" are inverted domestic corporations. This language could be construed as requiring agencies to make their own determinations as to whether contractors are inverted domestic corporations, rather than relying upon contractors' representations, as has historically been done (see " How do agencies ensure they do not contract with inverted domestic corporations? "). On the other hand, given that the measures would not expressly require that agencies make their own independent determinations, nothing would appear to preclude the executive branch from adopting the view that agencies may generally rely upon contractors' representations in making agency determinations.

To what types of contracts does the proposed legislation apply?

The restrictions of S. 975 are expressly limited to "contract[s] for the procurement of property or services" that are "subject to regulation under the Federal Acquisition Regulation." This means that its restrictions would only apply to what the Federal Grant and Cooperative Agreement Act ( P.L. 95-224 ) characterizes as procurement contracts , or contracts "the principal purpose of [which] is to acquire (by lease, purchase, or barter) property or services for the direct benefit or use of the United States government."

H.R. 1809 , in contrast, generally bars executive agencies from awarding "contracts" to inverted domestic corporations, but does not define what is meant by contract . Earlier enactments also used the terms contract or federal government contract without defining these terms (e.g., P.L. 109-115 , Â§724(a); P.L. 107-296 , Â§835(a)). However, these measures appear to have been implemented primarily, if not exclusively, through regulations in the FAR and agency FAR supplements. These regulations apply only to "procurement contracts," as previously noted. Thus, the prohibitions on contracting with inverted domestic corporations have, to date, not been extended to concession contracts (e.g., contracts whereby a vendor pays the agency for the right to operate a facility and charge fees to third-parties using the facility); contracts awarded by state or local governments, or other entities, pursuant to federal grants or cooperative agreements; or contracts whereby the federal government reimburses entities for services or supplies provided to beneficiaries of federal programs. Given this history, and the absence of a definition of the term contract in H.R. 1809 , it seems likely that the term contract would be construed in the same way, particularly since the measure would amend provisions in Titles 10 and 41 of the United States Code that generally govern procurement contracts. On the other hand, the word contract could be construed more broadly to encompass any agreement, and there have been calls for the restrictions on contracting with inverted domestic corporations to be extended to at least some nonprocurement contracts.

Would these restrictions apply to existing contracts, or orders under existing contracts?

Both H.R. 1809 and S. 975 provide that their restrictions, if adopted, "shall not apply to any contract entered into before the date of [their] enactment." However, both seek to impose these restrictions on any task or delivery order issued after their enactment, regardless of whether the contract under which the order was issued was formed before, on, or after the date of enactment.

In exempting existing contracts from their restrictions, the proposed legislation is not only consistent with earlier statutes (e.g., P.L. 110-161 , Â§745(c); P.L. 111-8 , Â§743(c)), but also avoids concerns about breach of contract. Such a breach could arise if the government, as a party to the contract, enacted legislation that purported to impose a requirement upon the other party which the parties had not agreed to at the time when the contract was formed. This is because the parties to a contract are generally bound by the terms of their agreements, and may not impose additional requirements upon one another without mutual agreement and consideration (i.e., something of value promised in return).

The proviso that the requirements would apply to any task or delivery orders under existing contracts issued after the legislation's enactment, in contrast, is an express departure from earlier statutes, which had exempted both existing contracts and new orders under existing contracts from their requirements (e.g., P.L. 110-161 , Â§745(c); P.L. 111-8 , Â§743(c)). The inclusion of new orders under existing contracts would appear to be intended to address what some commentators have characterized as a "loophole" in earlier enactments that permits inverted domestic corporations to receive task and delivery orders under contracts awarded years ago (either before the ban, or before they became inverted domestic corporations). However, questions could be raised as to whether subjecting certain task and delivery ordersâparticularly orders required to meet the guaranteed minimum order under indefinite delivery/indefinite quantity (ID/IQ) contracts âto conditions that were not included in the underlying contract constitutes breach of contract, as previously discussed.

Could the President bar contracting with inverted domestic corporations without congressional action?

In an August 13, 2014, letter to President Obama, several Members of Congress urged that he use his "executive authority, to the maximum extent possible, to deny federal contracts" to inverted domestic corporations. This letter does not cite any specific authority for such presidential action. However, Sections 201 and 205(a) of the Federal Property and Administrative Services Act (FPASA) of 1949 (P.L. 81-152, codified, as amended, at 40 U.S.C. Â§Â§101 & 121) have generally been construed to grant the President broad authority to impose requirements that promote "economy" and "efficiency" in procurement. Presidents have, for example, relied on their authority under FPASA to bar federal contractors from discriminating on the basis of race, creed, color, or national origin (Executive Order 8802, June 25, 1941), and to require them to take affirmative action to ensure that job applicants are employed, and employees are treated during employment, without regard to race, color, religion, sex, or national origin (Executive Order 11246, October 12, 1965, as amended). Sections 201 and 205(a) of FPASA could similarly serve as the basis for executive action to restrict contracting with inverted domestic corporations.

A few actions have, however, been found to have been outside the President's authority under FPASA, either because their link to economy and efficiency in procurement was too attenuated, or because they were specifically barred by a federal statute. Here, at least one commentator has suggested that executive action barring agencies from contracting with inverted domestic corporations could perhaps be said to be barred by the Competition in Contracting Act (CICA, P.L. 98-369 ) of 1984, as amended. CICA generally requires agencies to "obtain full and open competition through the use of competitive procedures" when awarding contracts, and defines full and open competition to mean that "all responsible sources are permitted to submit sealed bids or competitive proposals on the procurement." Thus, an argument could be made that barring agencies from awarding contracts to inverted domestic corporations runs afoul of CICA by effectively excluding these sources from the competition. On the other hand, federal law defines a responsible source as one that is, among other things, "qualified and eligible to receive an award under applicable laws and regulations." Thus, an argument could also be made that, if the President barred the award of contracts to inverted domestic corporations, such corporations would not be responsible sources because they would no longer be eligible for award under the applicable regulations (i.e., the regulations promulgated to implement the executive action).

Relationship to Other Restrictions

Yet other questions concern the relationship between the current or proposed restrictions on contracting with inverted domestic corporations and other provisions of federal law that (1) generally require federal agencies to purchase "domestic" items, and (2) expressly or effectively preclude some or all foreign corporations from performing certain contracts.

Does the Buy American Act bar dealings with inverted domestic corporations?

The Buy American Act generally would not bar federal agencies from purchasing supplies or construction materials from foreign personsâincluding inverted domestic corporationsâso long as the supplies or construction materials are mined, produced, or manufactured in the United States, as required by the act. Where it applies, the Buy American Act generally requires that any "end products" or "construction" materials be mined or produced in the United States, in the case of unmanufactured items ; or manufactured in the United States "substantially all" from items mined, produced, or manufactured in the United States, in the case of manufactured items . The regulations implementing the Buy American Act further provide that items are manufactured "substantially all" from items mined, produced, or manufactured in the United States if either (1) at least 50% of the costs of their components are mined, produced, or manufactured in the United States, or (2) the item is a commercially available off-the-shelf (COTS) item. End products or construction materials that satisfy the act's requirements qualify as "domestic," regardless of the offeror's nationality. Purchases of services are generally not subject to the Buy American Act.

What about other restrictions on contracting with foreign corporations?

Foreign corporationsâor corporations that are not incorporated or legally organized within the United Statesâare not per se excluded from contracting with the U.S. government. There are certain provisions of federal law that expressly or effectively preclude some or all foreign corporations from performing specific contracts. For example, Section 836(a)(1) of the National Defense Authorization Act for FY1993 ( P.L. 102-484 , codified at 10 U.S.C. Â§2536) prohibits the Departments of Defense and Energy from awarding contracts under a "national security program" to entities "controlled" by foreign governments if that entity would need to be given access to a "prescribed category of information" (e.g., special access information) in order to perform the contract. Similarly, Sections 402 and 406(c) of the Omnibus Diplomatic Security and Antiterrorism Act of 1986 ( P.L. 99-399 , codified in 22 U.S.C. Â§4852) limit certain construction projects abroad to "U.S. persons" or "U.S. joint venture persons," and exclude entities that have "business arrangements" with Libya. However, as these examples illustrate, restrictions on contracting with foreign corporations are not synonymous with the current or proposed restrictions on contracting with inverted domestic corporations.