War profiteering by tax dodge
March 7, 2008
FOR YEARS, companies more interested in profits than patriotism have registered overseas or used foreign subsidiaries to avoid US taxes. Now a major Pentagon contractor once managed by Vice President Dick Cheney is using Cayman Islands shell companies to help it and its workers escape US payroll taxes.
KBR, the largest private contractor for the Pentagon in Iraq, has two shell companies in the Caymans, that, for bookkeeping purposes, employ about 10,500 Americans in Iraq. Because the companies are offshore, neither KBR nor the workers must pay Social Security and Medicare taxes, allowing the company and its workers to avoid paying about $100 million a year, according to Globe reporter Farah Stockman.
The revelation should give impetus to bills, including one sponsored by Senator John F. Kerry, that would close loopholes for companies registering overseas. "Failing to contribute to Social Security and Medicare thousands of times over isn't shielding the taxpayers they claim to protect," Kerry said. "It's costing our citizens in the name of short-term corporate greed."
The principal losers in KBR's tax dodge are US taxpayers. Even though KBR and the workers do not pay Medicare taxes, the employees still will be eligible for benefits eventually, hastening the predicted depletion of the Medicare fund. The workers themselves stand to lose out if they are laid off. Through its shell companies, KBR also avoids unemployment taxes in Texas, where it is registered, and its employees get no unemployment benefits.
When KBR set up the second of its two shells in the Caymans, it was still owned by Halliburton. Halliburton's chief executive then was Cheney. His office referred inquiries into the matter to Cheney's personal lawyer, who has not replied to inquiries from the Globe.
A KBR spokeswoman said the company does not save money by avoiding the taxes, because its contracts call for the Pentagon to reimburse it for all its employee costs. But evading the payroll taxes gives KBR a competitive edge when it bids against other contractors in Iraq. KBR cannot claim that everyone is doing it. Stockman could identify just one other major contractor among the 10 leading ones in Iraq that has set up a foreign subsidiary in this way.
The Pentagon has known of the KBR loophole, but has not complained about it, on the grounds that the savings are passed on to the military. This is a short-sighted view. The Pentagon should not be encouraging contractors to work tax angles that damage the fiscal well-being of the country, even if they provide short-term savings to the military.
Ultimately, though, it is up to Congress to protect the country from these Benedict Arnold CEOs, in Kerry's phrase, by ending all overseas tax havens.
