Banning Inverted Companies From Government Contracts Could Backfire | Commentary

Posted October 15, 2014 at 2:00pm

Recent announcements of planned mergers of U.S. companies with non-U.S. companies in Europe and other offshore locations with more favorable tax regimes has prompted frustration within Congress, as well as within the Obama administration. Such transactions, called inversions, have raised concerns over the erosion of the U.S. tax base and what President Barack Obama called a lack of “economic patriotism” on the part of U.S. companies that make use of these transactions to lower their tax bills.

While both Congress and the president scramble to devise various tools to disincentivize the use of inversion, many of which address flaws in the U.S. tax system, one troubling tool has come to prominence in the area of public procurement: the denial of U.S. government contracts to inverted companies on the theory that a corporation should not benefit from the U.S. government’s business if it does not pay its share of U.S. income taxes.

Congress should consider the compatibility of these proposed procurement bans with U.S. obligations under the World Trade Organization agreements and under its free trade agreements. Moreover, Congress must consider the message such measures send to those trading partners that are currently negotiating agreements with the United States. In particular, the European Union, where many of the newly-inverted companies are expected to be domiciled, must be struggling to grasp how these proposed bans reconcile with the explicit goals of the Transatlantic Trade and Investment Partnership “to enhance business opportunities through substantially improved access to government procurement opportunities.” In short, procurement bans are incompatible with the trade liberalizing goals of the United States and will undermine U.S. authority on trade matters.

Procurement bans are not new as a tool to combat inversion. In the wake of the 9/11 terrorist attacks, Congress passed laws to ensure that inverted companies could not receive contracts with the newly-established Department of Homeland Security. Congress eventually expanded the ban to cover virtually all federal contracts. However, the scope of the bans was so narrow that most companies were not affected.

Some of the procurement bans currently proposed would cast a much wider net. Indeed, in order to effectively capture most common forms of inversion and the most likely domiciles for the newly-inverted companies, the net, at the very least, must target Ireland and the U.K.

The WTO Agreement on Government Procurement in Article III obligates the United States and more than 40 other signatory countries, including the EU and its 28 member states, to treat the goods, services and suppliers of another signatory country no less favorably than a U.S. company in procurement (a principle of national treatment and non-discrimination). Further, the GPA in Article VIII requires that the process of qualifying suppliers for participation in tendering procedures be limited to those conditions necessary to ensure a firm’s capability to fulfill the contract. The U.S. free trade agreements each contain similar commitments.

The procurement bans, as proposed, would discriminate among companies based on the status of the supplier. That is, a company’s eligibility to participate in a U.S. government project would depend upon whether the foreign company is “an inverted domestic company” or a subsidiary of such an entity. Thus, the proposed bans would likely be inconsistent with Articles III and VIII of the GPA as they discriminate among the suppliers of other signatory nations based on their connections to formerly U.S.-based entities and set unnecessary conditions to participating in a tendering process. While the previous, narrower procurement bans had escaped scrutiny, it is unlikely that our trading partners will sit idle as an increasingly greater proportion of their corporations are shut out of U.S. government procurement.

Even assuming the proposed bans could withstand WTO scrutiny, the proposed bans should be reconsidered as they are in direct conflict with U.S. negotiating goals for TTIP and will undermine the ability of the United States to extract meaningful market access and trade liberalization in future negotiations. The United States has made clear that in stating its TTIP goals, there is much to be gained for U.S. companies in the further opening of government procurement markets.

Congressional efforts to address corporate inversion should not take the form of measures that will undermine U.S. goals of expanding trade liberalization and upholding existing trade disciplines. Politically expedient solutions will not solve the underlying problem—the US needs a tax code that allows businesses to compete globally.

Thomas Spulak is a partner and leader of King & Spalding’s Government Advocacy & Public Policy group. He served as staff director and general counsel of the House Rules Committee and general counsel of the House. Joseph Laroski is a counsel in the International Trade Practice Group. Both reside in King & Spalding’s Washington, D.C., office. He served as associate general counsel at the Office of the U.S. Trade Representative.