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

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.

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.