Inverted domestic corporations are an increasingly popular means of reducing corporate tax rates in the United States by shifting profits from the U.S. to foreign subsidiaries. This activity is a source of controversy and public concern. Congress has responded through a variety of measures. These include both tax code regulations and government contracting prohibitions. The latter are implemented through Federal Acquisition Regulations. This interim rule amends FAR 9.108-2, FAR 9.108-3 and FAR 9.108-4 to reflect the continuing Governmentwide statutory prohibition on awarding contracts to inverted domestic corporations or their subsidiaries that has been in effect since Fiscal Year (FY) 2008, as extended in each subsequent full-year and short-term appropriations acts.
The interim rule expands the affiliate group which can be used to determine whether a company is an inverted domestic corporation for purposes of the contracting prohibition by removing a restriction that required that a foreign parent company must have at least 80% ownership of the inverted domestic subsidiary before it could qualify as an inverted domestic corporation. In its place, the rule establishes that a foreign parent company may be included in the expanded affiliate group if it controls, manages, or has significant financial interests in, and a substantial portion of the income of, the inverted domestic corporation. The determination is based on factors such as management control, location of assets, and derivation of income.
This rule also clarifies that a contracting officer can waive the inverted domestic corporation prohibition on a case-by-case basis when the agency head finds that a waiver is necessary in the interest of national security. This is in response to concerns that the existing procedures for contracting officers to make this determination, set out in the Federal Register preamble, may place an undue burden on them and that they may reach inconsistent conclusions about a single offeror.