(Bloomberg) The Obama administration quietly handed a victory to U.S. companies that avoid taxes by claiming a foreign address, suggesting that virtually all of them are still eligible for government contracts.
The Department of Homeland Security last year endorsed a legal memorandum that argued in part that a 2002 law banning such companies from federal contracts was invalid, according to a copy of the memo obtained by Bloomberg News. Although President Barack Obama later began publicly criticizing the tax maneuvers known as inversions, there’s no sign that he has reversed the department’s decision.
The March 2013 memo was submitted to Homeland Security by one of the country’s largest inverted companies, the manufacturer Ingersoll-Rand Plc. The company argued in part that U.S. trade agreements with foreign governments invalidated the law that would prohibit it from winning federal contracts.
In a written response last year, a Homeland Security lawyer cleared Ingersoll-Rand for government work without explaining his reasoning, saying only that “we do not have reason to disagree” with the company’s argument. While it was known that Ingersoll-Rand received a green light, it hadn’t been reported that the government accepted a line of reasoning that called the whole law into question.
The correspondence came during a record wave of corporate address changes, including moves by Burger King and medical device-maker Medtronic Plc. Almost 50 companies have now inverted, most of them in the past five years, and a Congressional panel estimated last year that future inversions would cost the Treasury $19.5 billion in forgone revenue over the following decade.
A Homeland Security spokeswoman said the department follows the law and declined to comment further. The White House also declined to comment.
Corporate Deserters’
Rosa DeLauro, part of a group of liberal Congressional Democrats who want to tighten the law, called it “abhorrent” that Homeland Security would allow such companies to get contracts. “The federal government should be making it harder for corporate deserters to get contracts, not easier,” she said in a statement.
The administration’s support for Ingersoll-Rand’s reasoning suggests that bills submitted by DeLauro’s group to expand the contracting prohibition to a broader range of companies would have little or no effect. That’s good news for corporate expatriates like Medtronic, Eaton Corp. and Tyco International Plc, which aren’t covered by the current prohibition but are targets of the Democrats’ bill.
Ingersoll-Rand’s decision to switch its tax address from New Jersey to Bermuda in 2001, after more than a century as an American industrial icon, helped cut hundreds of millions of dollars from its tax bills and spur Congress to pass the 2002 contracting ban.
The company later changed addresses again, to tax-friendly Ireland in 2009, after increased U.S. scrutiny of tax havens. The top executives never left the U.S., and Chief Executive Michael Lamach now runs the company from a suburb of Charlotte, North Carolina. The company makes Club Car golf carts, Trane air conditioners, and Thermo King refrigerated trucks.
Legal Arguments
Ingersoll-Rand provided the memo to Bloomberg News this week on the condition that it not publish the document and that the news organization drop an effort to obtain it through a public-records request filed with Homeland Security last September. Homeland Security had previously disclosed the letter from Principal Deputy General Counsel Joseph Maher endorsing the memo, but fought the release of the memo itself, saying that it contained confidential information that could damage Ingersoll- Rand.
The memo demonstrates the “care and transparency with which Ingersoll Rand interacts with its federal customers,” spokeswoman Misty Zelent said in a statement.
It’s unclear whether Homeland Security endorses all three of Ingersoll-Rand’s arguments or just one or two of them. In addition to arguing the entire law is invalid, the memo puts forth two other arguments that would cripple the contracting prohibition.
Ingersoll-Rand argued that companies like itself that inverted to one foreign country and then switched to a third shouldn’t be considered inverted anymore. Under the law, it said, companies have to start out as U.S. firms to be inverted, and during its 2009 address change Ingersoll-Rand wasn’t American anymore.
That logic would also apply to many other inverted companies that fled Bermuda and the Cayman Islands to Switzerland or Ireland, such as oil-services providers Weatherford International Plc and Transocean Ltd. It would also mean that inverted companies could qualify for contracts simply by switching their legal address a second time.
Ingersoll-Rand also argued that firms that have business operations in their new corporate homes—even modest ones—should be allowed to bid on contracts under an exception in the law for companies with “substantial business” in their new domicile.
Trade Agreement
The company said that it had more than 700 employees and a Thermo King factory in Ireland when it adopted the address there in 2009. It didn’t mention that these represented less than 2 percent of both its global employees and of its major factories at the time. Ingersoll-Rand also argued that the Internal Revenue Service’s much stricter interpretation of “substantial business,” which now stands at 25 percent of employees, assets, and sales, should not apply.
Ingersoll-Rand’s most sweeping argument is that the government’s obligations under trade agreements trump the contracting law. Ireland and the U.S. are both bound by the World Trade Organization’s Government Procurement Agreement, which requires members not to discriminate against each other’s companies in government contracting.
An endorsement of that argument would represent a reversal for the Obama administration. In 2011, a government rulemaking committee said the law doesn’t conflict with the GPA.
The victory at Homeland Security is already bearing fruit for Ingersoll-Rand, which won a contract in May from the Army Corps of Engineers to install energy-saving equipment on U.S. military bases. The award allows Ingersoll-Rand to compete with 13 other companies over the next two decades for $1.5 billion of government work.
