Ban Contracting with Inverted Corporations?

The compatibility of procurement bans on inverted companies with trade agreements warrants consideration.

Congress is considering legislation to address the current rash of U.S. companies moving or planning to move their tax homes to a foreign country where they can take advantage of lower taxes. This process, referred to as a corporate inversion, involves a U.S. corporation changing its incorporation from the U.S. to a foreign country or becoming a subsidiary of a foreign firm.

The anti-inversion legislation that is under consideration includes a ban on federal contracting with inverted corporations. A procurement ban is attractive and seems inherently reasonable – former U.S. companies should not be able to profit with awards of federal contracts funded by tax dollars to which they have sought to avoid contributing by their inversions. Moreover, the ban is only directed at former U.S. companies. Nonetheless, its impact on U.S. obligations under trade agreements needs to be considered.

Procurement bans on inverted corporations are not new. Beginning in 2002 with the Department of Homeland Security, Congress has imposed bans on contracting with inverted corporations. The bans have subsequently been extended to all federal agencies. They prohibit federal agencies from using appropriated funds to award contracts to any foreign incorporated entity that is treated as an inverted domestic corporation or to any subsidiary of such a corporation.

A federal procurement regulation implemented the government-wide bans for funds appropriated in FY 2008 through FY 2010 and in FY 2012. Procurement bans are based solely on the status of the supplier (company), and not on where the goods are produced or the services are provided. Under the federal regulation, a supplier “must represent that it is not an inverted domestic corporation or subsidiary” whose parent corporation is incorporated in a foreign country in order to be eligible for a federal contract.

The federal agencies responsible for the regulation invited public comments before they finalized it. One of the comments argued that the procurement ban was not compatible with the non-discrimination provisions in trade agreements. The federal agencies responded that they did not consider the application of the prohibition to products, services or suppliers of a party to a trade agreement to be inconsistent with the non-discrimination obligations. They did not elaborate on their reasoning. Notwithstanding that conclusion, the potential impact of a procurement ban on U.S. trade obligations warrants further consideration.

The U.S. has trade agreements that include procurement obligations with 57 countries or economies. Those agreements — the WTO Government Procurement Agreement (GPA) and free trade agreements (FTAs) — obligate the U.S. to treat the goods, services and suppliers of its trading partners no less favorably than those of the U.S.

The GPA and other agreements restrict the conditions that suppliers must meet to participate in procurement covered by the agreements. They limit the conditions to those that are essential to ensure that a supplier has the legal and financial capacities and the commercial and technical abilities to undertake the relevant procurement. Thus, to justify a procurement ban, the U.S. would need to demonstrate that a supplier’s status as an inverted corporation relates to its ability to undertake a procurement.

To avoid trade challenges to a procurement ban, the so-called “savings clause” from the American Recovery and Reinvestment Act of 2009 (ARRA) could be incorporated into the ban. That savings clause excluded projects covered by trade agreements from the requirement that only U.S.-produced iron, steel and manufactured products could be used in ARRA-funded projects.

Incorporation of the savings clause – that the procurement ban had to be applied in a manner consistent with U.S. obligations under international agreements — would ensure that the ban would not violate trade agreements. However, it would render the ban largely meaningless. Most, if not all, of the locations or potential locations of inverted companies are in countries such as Ireland or the UK that are covered by the GPA. The ban would only apply to procurement not covered by the GPA or an FTA.

While U.S. trading partners questioned the consistency of earlier contracting bans with U.S. trade obligations, none has yet challenged the bans under the WTO dispute settlement mechanism.  Nonetheless, using restrictions on government procurement to accomplish other public policy purposes needs to be considered carefully.

Jean Heilman Grier

September 2, 2014

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