Politics & Policy

Fat Federal Contracts for Tax-Evading U.S. Companies


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Ingersoll-Rand (IR) is a great American success story. Founded 143 years ago by a Connecticut farmer who invented a steam-powered rock drill, the company made tools that carved out the Panama Canal and shaped Mt. Rushmore. More recently it’s become a leader in energy-efficient air conditioners: Ingersoll-Rand’s Trane unit has won more than $350 million worth of federal contracts to retrofit government buildings and military facilities as part of a U.S. Department of Energy conservation program. When President Obama announced an expansion of the initiative in May, Chief Executive Officer Michael Lamach was a guest. Obama offered “thanks to all the companies who are doing the great work.”

What Obama didn’t mention is that Ingersoll-Rand is no longer a U.S. company, at least not on paper. In 2001, amid a wave of corporate expatriations, it shifted its legal address to Bermuda, cutting its tax bill in half. Other companies that did business with the U.S. government, including Tyco International (TYC) and Accenture (ACN), had also adopted Bermuda addresses, prompting members of Congress to say they’d punish corporations that pull up stakes. “There is no reason the U.S. government should reward tax runaways with lucrative government contracts,” fumed Democratic Senator Harry Reid of Nevada, whose father wielded an Ingersoll-Rand jackhammer as a hard-rock miner. Republican Charles Grassley of Iowa called for an end to “fat government contracts” for such companies.

In the years since, Congress has passed several pieces of legislation to limit or ban these contracts. Yet the law is riddled with exemptions that allow the offshore companies to legally bid for government work. A company that avoids domestic taxes by shifting its address abroad can still be eligible for federal contracts if it has “substantial business” in its new home—thus nominally demonstrating its move wasn’t solely for tax reasons. The rules also don’t cover U.S. companies that acquire foreign addresses, and tax benefits, through takeovers of overseas competitors.

More than 40 U.S. companies have reincorporated in tax havens, a strategy known as inversion, 11 of them since 2012. Seven more are in the process of doing so. Last month, Medtronic (MDT), a Minnesota medical device maker whose customers include the Veterans Affairs Department, announced plans to become Irish. The government awards more than a dozen companies that have left the U.S. contracts worth more than $1 billion a year.

The law defining inverted companies doesn’t cover Accenture, a company with Chicago roots that incorporated in Bermuda in 2001. The same is true for Chicago Bridge & Iron (CBI), a Texas-run corporation with a Dutch address. According to public records, Accenture earned $960 million from federal contracts in 2013, and CB&I made $734 million. A spokesman for CB&I says the company complies with the law. Accenture spokesman James McAvoy says the company is eligible for government contracts because it was never incorporated in the U.S. When it first separated from Chicago-based Arthur Andersen in 1989, it was set up as a network of separate partnerships around the world overseen by a Swiss entity. For that reason the U.S. General Accounting Office concluded in 2002 that Accenture wasn’t an inverted company. McAvoy says a 2012 review by the U.S. Department of Homeland Security confirmed that Accenture, now based in Ireland, isn’t subject to the ban.

$1b

Amount U.S. companies with overseas addresses earn from federal contracts annually

In its brochures, Ingersoll-Rand touts its projects for the Army and Navy. Yet for years it told shareholders and customers in public filings that it might be subject to the law. Recently the company conducted an “exhaustive legal analysis” and decided it’s not covered, says spokeswoman Misty Zelent. The government relies on contractors to police themselves. Zelent says the company works closely with government contracting officials to ensure compliance with a “complex area of the law.” Its contracts show just how complex it is and how many legal ways there are around the rules.

For the most part, Ingersoll-Rand has been able to sidestep the question of whether it’s inverted. Three separate gaps have allowed the company to continue doing business with the U.S. government. First, the ban applies only to contracts funded by annual congressional appropriations. Ingersoll-Rand sought contracts paid for with other money, including a contract to maintain equipment at military-base supermarkets. Signed in March 2010, it’s funded with a 5 percent surcharge on purchases at the stores.

Second, Ingersoll-Rand was awarded contracts during periods when the rules had lapsed. Congress’s first government-wide contracting ban expired in September 2008 and didn’t go back into effect until the following March, when Congress passed a funding bill for the 2009 fiscal year. In the interim, Energy Department officials added the company to a list of contractors authorized to pursue up to $5 billion in government work over as many as 10 years. Ingersoll-Rand has been awarded two projects under authority of the DOE deal.

Third, some contracts allow Ingersoll-Rand to bid on new projects under what spokeswoman Zelent calls a “grandfather clause,” without running afoul of the law. Thus Ingersoll-Rand has bid for and won energy-saving projects under the authority of Energy Department contracts signed years earlier.

The biggest was a $124 million project at Naval Air Station Oceana in Virginia Beach, Va., the East Coast home of the Navy’s fighter jets. In August 2009, Ingersoll-Rand’s Trane unit was hired to replace an old steam plant with a more efficient heating system, with the cost covered by the Navy’s energy savings. It was Trane’s third such job at the base. The project came under the authority of a Trane contract from 1999. “The Navy had no legal basis for not considering Trane’s proposal, which the Navy found to be the best value to the government,” a Navy spokesman said in an e-mail.

Democratic Representative Rosa DeLauro of Connecticut, who was instrumental in passing the first federal contracting ban in 2002, says she’s working on a bill to expand the prohibition to cover more corporate runaways, including most of the current crop. “We should not be rewarding them,” DeLauro says. “Let’s give it to the companies that stay here, employ people here, and pay their taxes here.”

The bottom line: U.S. companies that head overseas to avoid taxes are still able to win lucrative government contracts.

Mider is a reporter for Bloomberg News in New York.

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Companies Mentioned

  • IR
    (Ingersoll-Rand PLC)
    • $60.06 USD
    • 0.49
    • 0.82%
  • TYC
    (Tyco International Ltd)
    • $44.45 USD
    • 0.23
    • 0.52%
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