Bill would close offshore loophole
Defense firms use 'shell' ruse to dodge taxes
WASHINGTON - Expressing outrage at US companies that win lucrative defense contracts but avoid Social Security and Medicare taxes, top Democrats were expected to introduce legislation today to prohibit federal contractors from using offshore shell companies to dodge payroll taxes.
Senator John F. Kerry, Democrat of Massachusetts, said the proposed law would amend the Internal Revenue code and the Social Security Act to require American companies with US government contracts to pay payroll taxes for their workers abroad, even if they employ them through foreign subsidiaries.
Kerry drafted the legislation after a Globe report about how KBR, an engineering, construction and support services company, hires the bulk of its American workforce in Iraq through two shell companies registered in the Cayman Islands, a practice that has allowed Houston-based KBR to avoid paying hundreds of millions of dollars in Social Security, Medicare, and unemployment taxes.
"It's beyond disgraceful," Kerry said in a telephone interview yesterday, adding that KBR "has found a brand new way to abuse the public trust."
Representative Brad Ellsworth, an Indiana Democrat, plans to introduce the bill in the House, with Illinois Representative Rahm Emanuel, chairman of the House Democratic Caucus, as a cosponsor.
"They are gaming the tax system," Emanuel said yesterday. "It is wrong and it needs to stop."
But the bill could face an uphill battle in both chambers, where leading Defense Department contractors have cultivated relationships with key members. KBR and its government-support arm, KBR Government Operations, have spent at least $700,000 between 2004 and early last year on lobbying Congress and the Defense Department, according to congressional records.
KBR, the largest US contractor in Iraq, says hiring Americans through companies registered in the Cayman Islands reduces their costs, and that those savings are passed on to the US military, which reimburses KBR for all expenses, including labor. But the practice results in a greater loss to Social Security and Medicare, and gives KBR a competitive advantage over companies that pay their share of payroll taxes.
Until last year, KBR, which was formerly known as Kellogg Brown & Root, was a subsidiary of
KBR spokeswoman Heather Browne said yesterday that KBR has not yet reviewed the proposed legislation and therefore would have no comment.
Social Security and Medicare taxes amount to 15.3 percent of a worker's wage, split between the employer and employee.
Under current law, US companies are required to pay Social Security and Medicare taxes for their American workers overseas. But some firms have been able to get around that requirement by hiring workers through offshore shell companies or foreign subsidiaries. Under Kerry's proposal, any foreign company that is at least 50 percent owned by a US federal contractor would be required to pay payroll taxes for its American employees. The law would also apply to US subsidiaries of foreign companies that have contracts with the US government, according to a draft of the bill and a summary provided by Kerry.
Alan Chvotkin, executive vice president and counsel for the Professional Services Council, a national trade association representing many government contractors, said his organization opposes "companies that try to evade their obligations by using alternative business structures." But he questioned why Kerry's bill applies only to US government contractors, rather than all companies that do business abroad.
"There should not be separate tax laws for people who do business with the federal government," he said. "If the policy is right, it ought to apply to all companies. We ought to have that debate as a matter of tax policy."
But yesterday, the members of Congress who support the new bill said that companies paid with taxpayer dollars have a special responsibility to pay their fair share of taxes.
"This is the kind of thing that drives people nuts," said Ellsworth. "We're paying them millions if not billions of dollars in contracts. Yet they still have the audacity to circumvent our tax system."
Ellsworth is also the sponsor of another bill that seeks to withhold large federal contracts from companies that fail to file tax returns or are delinquent in paying payroll taxes for an extended period of time. The House Committee on Oversight and Government Reform was expected to consider that bill today.
Members of Congress have long debated the best way to approach US companies that try to reduce their tax burden through off-shore subsidiaries. Last week, investigators from the Government Accountability Office, the investigative arm of Congress, traveled to the Cayman Islands to research that tax implications of shell companies there.
KBR has faced a litany of complaints from members of Congress in recent months, including a series of angry statements following a recent Pentagon inspector general report that concluded KBR provided unsafe water to US troops in Iraq that may have causes illness to up to 38 soldiers.
Yesterday, Emanuel said the news that KBR was using companies registered in the Cayman Islands to avoid payroll taxes took anger at the company, which separated from Halliburton last year, "to a new height."
Kerry, a member of the Senate Finance Committee's subcommittee on Social Security and Family Policy, plans to hold a news conference today on the new bill. "It's an enormous issue," he said.
