[Dialogue] Top Iraq Contractor Skirts US Taxes Offshore

[Harry Wainwright]

Published on Thursday, March 6, 2008 by The Boston Globe
<http://www.boston.com/news/world/articles/2008/03/06/top_iraq_contractor_sk
irts_us_taxes_offshore/>  

Top Iraq Contractor Skirts US Taxes Offshore
Shell companies in Cayman Islands allow KBR to avoid Medicare, Social
Security deductions

by Farah Stockman

CAYMAN ISLANDS - Kellogg Brown & Root, the nation's top Iraq war contractor
and until last year a subsidiary of Halliburton Corp., has avoided paying
hundreds of millions of dollars in federal Medicare and Social Security
taxes by hiring workers through shell companies based in this tropical tax
haven. <http://www.commondreams.org/archive/wp-content/photos/0306_02.jpg>
<http://www.commondreams.org/archive/wp-content/photos/0306_02.jpg> 0306 02
<http://www.commondreams.org/archive/wp-content/photos/0306_02.jpg> 

More than 21,000 people working for KBR in Iraq - including about 10,500
Americans - are listed as employees of two companies that exist in a
computer file on the fourth floor of a building on a palm-studded boulevard
here in the Caribbean. Neither company has an office or phone number in the
Cayman Islands.

The Defense Department has known since at least 2004 that KBR was avoiding
taxes by declaring its American workers as employees of Cayman Islands shell
companies, and officials said the move allowed KBR to perform the work more
cheaply, saving Defense dollars.

But the use of the loophole results in a significantly greater loss of
revenue to the government as a whole, particularly to the Social Security
and Medicare trust funds. And the creation of shell companies in places such
as the Cayman Islands to avoid taxes has long been attacked by members of
Congress.

A Globe survey found that the practice is unusual enough that only one other
major contractor in Iraq said it does something similar.

"Failing to contribute to Social Security and Medicare thousands of times
over isn't shielding the taxpayers they claim to protect, it's costing our
citizens in the name of short-term corporate greed," said Senator John F.
Kerry, a Massachusetts Democrat on the Senate Finance Committee who has
introduced legislation to close loopholes for companies registering
overseas.

With an estimated $16 billion in contracts, KBR is by far the largest
contractor in Iraq, with eight times the work of its nearest competitor.

The no-bid contract it received in 2002 to rebuild Iraq's oil infrastructure
and a multibillion-dollar contract to provide support services to troops
have long drawn scrutiny because Vice President Dick Cheney was
Halliburton's chief executive from 1995 until he joined the Republican
ticket with President Bush in 2000.

The largest of the Cayman Islands shell companies - called Service Employers
International Inc., which is now listed as having more than 20,000 workers
in Iraq, according to KBR - was created two years before Cheney became
Halliburton's chief executive. But a second Cayman Islands company called
Overseas Administrative Services, which now is listed as the employer of
1,020 mostly managerial workers in Iraq, was established two months after
Cheney's appointment.

Cheney's office at the White House referred questions to his personal
lawyer, who did not return phone calls.

Heather Browne, a spokeswoman for KBR, acknowledged via e-mail that the two
Cayman Islands companies were set up "in order to allow us to reduce certain
tax obligations of the company and its employees."

Social Security and Medicare taxes amount to 15.3 percent of each employees'
salary, split evenly between the worker and the employer. While KBR's use of
the shell companies saves workers their half of the taxes, it deprives them
of future retirement benefits.

In addition, the practice enables KBR to avoid paying unemployment taxes in
Texas, where the company is registered, amounting to between $20 and $559
per American employee per year, depending on the company's rate of turnover.

As a result, workers hired through the Cayman Island companies cannot
receive unemployment assistance should they lose their jobs.

In interviews with more than a dozen KBR workers registered through the
Cayman Islands companies, most said they did not realize that they had been
employed by a foreign firm until they arrived in Iraq and were told by their
foremen, or until they returned home and applied for unemployment benefits.

"They never explained it to us," said Arthur Faust, 57, who got a job
loading convoys in Iraq in 2004 after putting his resume on KBRcareers.com
and going to orientation with KBR officials in Houston.

But there is one circumstance in which KBR does claim the workers as its
own: when it comes to receiving the legal immunity extended to employers
working in Iraq.

In one previously unreported case, a group of Service Employers
International workers accused KBR of knowingly exposing them to
cancer-causing chemicals at an Iraqi water treatment plant. Under the
Defense Base Act of 1941, a federal workers compensation law, employers
working with the military have immunity in most cases from such employee
lawsuits.

So when KBR lawyers argued that the workers were KBR employees, lawyers for
the men objected; the case remains in arbitration.

"When it benefits them, KBR takes the position that these men really are
employees," said Michael Doyle, the lawyer for nine American men who were
allegedly exposed to the dangerous chemicals. "You don't get to take both
positions."

Founded by two brothers in Texas in 1919, the construction firm of Brown &
Root quickly became associated with some of the largest public-works
projects of the early 20th century, from oil platforms to warships to dams
that provided electricity to rural areas.

Its political clout, particularly with fellow Texan Lyndon Johnson, was
legendary, and it became a major overseas contractor, building roads and
ports during the Vietnam war.

Halliburton, a Houston-based oil conglomerate, acquired Brown & Root in
1962. And after the Vietnam cease-fire agreement in 1973, it all but stopped
doing overseas military work for two decades.

But in 1991, during the Gulf War, Halliburton decided to try to revive its
military business. The next year, Brown & Root won a $3.9 million contract
from the Defense Department under Secretary Dick Cheney to develop
contingency plans to support, feed, house, and maintain the US military in
13 hot spots around the world.

That small contract soon grew into a massive logistical-support contract
under which the company did everything from building military camps to
cooking meals and providing transportation for troops. Under the contract,
the military agreed to reimburse Brown & Root for all expenses, and to pay a
profit of between 1 and 9 percent, depending on performance.

In Somalia, starting in December 1992, Brown & Root employees helped US
soldiers and UN workers dig wells and collect garbage, among many other
tasks. The company quickly became the largest civilian employer in the
country, with about 2,500 people on its payroll. Its headquarters in Texas
had a "war room," where executives would get daily updates about events in
Mogadishu.

Later the company would play similar roles supporting US troops in Haiti,
Rwanda, Bosnia, Uzbekistan, and Afghanistan.

As its military work increased, Brown & Root sent more American workers
overseas. Americans working and living abroad receive significant breaks on
their income tax, but still must pay Social Security and Medicare taxes if
they work for an American company. The reasoning is that such workers are
likely to return to the United States and collect benefits, so they and
their employers ought to help pay for them.

But the taxes drive up costs. A former Halliburton executive who was in a
senior position at the company in the early 1990s said construction
companies that avoid taxes by setting up foreign subsidiaries have obvious
advantages in bidding for military contracts.

Payroll taxes can be a significant cost, he said, speaking on the condition
of anonymity. "If you are bidding against [rival construction firms] Fluor
and Bechtel, it might give you a competitive advantage."

Service Employers International was set up in 1993, as Brown & Root was
ramping up its roster of overseas workers. Two years later, the company set
up Overseas Administrative Services, which serves more senior workers and
provides a pension plan.

The parent company became Kellogg Brown & Root in 1998, when it joined with
the oil-pipe manufacturer, M. W. Kellogg.

Around that time, KBR lost its exclusive contract to provide logistical
support to the US military. But in 2001 it outbid DynCorp to win it back, by
agreeing to a maximum profit of 3 percent of costs.

Then, in 2002, the firm received a secret contract to draw up plans to
restore Iraq's oil production after the US-led invasion of Iraq. The Defense
Department has said the firm was chosen mainly for its assets and expertise,
not its ability to control costs.

Nonetheless, KBR's top competitors in Iraq do not appear to have gone to the
same lengths to avoid taxes. Other top Iraq war contractors - including
Bechtel, Parsons, Washington Group International, L-3 Communications,
Perini, and Fluor - told the Globe that they pay Social Security and
Medicare taxes for their American workers.

"It has been Fluor Corporation's policy to compensate our employees who are
US citizens the same as if they worked in the geographic United States,"
said Keith Stephens, Fluor's director of global media relations. "With the
exception of hardship and danger pay additives for work performed in Iraq,
they receive the same benefits as their US-based colleagues, and Fluor pays
or remits all required US taxes and payroll burdens, including FICA payments
and unemployment insurance."

Only one other top contractor, the construction and logistics firm IAP
Worldwide Services Inc., said it employs a "limited number" of Americans
through an offshore subsidiary.

Officials at DynCorp, the company that KBR outbid for the logistics
contract, did not return numerous calls.

KBR is now widely believed to be the largest private employer of foreigners
in Iraq, and it hires twice as many workers through its Cayman Island
subsidiaries as it does by direct hires. Service Employers International
alone employs more than 20,000 truck drivers, electricians, accountants, and
engineers, roughly half of whom are American, according to Browne, the KBR
spokeswoman.

KBR declined to release salary information. But workers interviewed by the
Globe who served in a range of jobs said they earned between $48,000 and
$85,000 per year. If KBR's American workers averaged even as much as $63,000
per year, they and KBR would have owed more than $100 million per year in
Social Security and Medicare taxes, split evenly between them. Over the
course of the five-year war, their tax bill would have been more than $500
million.

In 2004, auditors with the Pentagon's Defense Contract Audit Agency
questioned KBR about the two Cayman Island companies but ultimately made no
complaint. The auditors told the Globe in an email exchange facilitated by
Pentagon spokesman Lieutenant Colonel Brian Maka that any tax savings
resulting from the offshore subsidiaries "are passed on" to the US military.

Browne, the KBR spokeswoman, said the loss to Social Security could
eventually be offset by the fact that the workers will receive less money
when they retire, since benefits are generally based on how much workers and
their companies have paid into the system.

Medicare, however, does not reduce benefits for workers who don't
contribute, and Browne acknowledged that KBR has not calculated the impact
of its tax practices on the government as a whole.

She said KBR does not save money from the practice, since its contracts
allow for its labor expenses to be reimbursed by the US military. But the
practice gives KBR a competitive advantage over other contractors who pay
their share of employment taxes.

And critics of tax loopholes note that the use of offshore shell companies
to avoid payroll taxes places a greater burden on other taxpayers.

"The argument that by not paying taxes they are saving the government money
is just absurd," said Robert McIntyre, director of Citizens for Tax Justice,
a Washington advocacy group.

To the people listed as its workers, Service Employers International Inc. -
known to them as SEII - remains something of a mystery.

"Does anybody know what or where in the Grand Cayman Islands SEII is
located?" a recently returned worker wrote in a complaint about the company
on JobVent.com, an employment website. He speculated that the office in the
Cayman Islands must be "the size of a jail cell . . . with only a desk and
chair."

In fact, the address on file at the Registry of Companies in the Cayman
Islands leads to a nondescript building in the Grand Cayman business
district that houses Trident Trust, one of the Caymans' largest offshore
registered agents. Trident Trust collects $1,000 a year to forward mail and
serve as KBR's representative on the island.

The real managers of Service Employers International work out of KBR's
office in Dubai. KBR and Halliburton, which also moved to Dubai, severed
ties last year.

Both KBR and the US military appear to regard Service Employers
International and KBR interchangeably, except for tax purposes. According to
the Defense Contract Auditing Agency, KBR bills the Service Employers
workers as "direct labor costs," and charges almost the same amount for them
as for direct hires.

The contract that workers sign in Houston before traveling to Iraq commits
workers to abide by KBR's code of ethics and dispute-resolution mechanisms
but states that the agreement is with Service Employers International.

Some workers said they were told that Service Employers International was
just KBR's payroll company. Others mistook the name as a reference to the
well-known, large union, Service Employees International.

Henry Bunting, a Houston man who served as a procurement officer for a KBR
project in Iraq in 2003, said he first found out that he was working for a
foreign subsidiary when he looked closely at his paycheck.

"Their whole mindset was deceit," Bunting said. He said that he wrote to KBR
several times asking for a W-2 form so he could file his taxes, but that KBR
never responded.

David Boiles, a truck driver in Iraq from 2004 to 2006, said that he
realized he was working for Service Employers International when he arrived
in Iraq and his foreman told him he was not a KBR employee, despite the fact
that his military-issued identification card said "KBR."

"At first, I didn't believe him," Boiles said.

Danny Langford, a Texas pipe-fitter who was sent to work in a water
treatment plant in southern Iraq in July 2003, said he, too, initially
believed that he was an employee of KBR.

But when he allegedly got ill from chemicals at the plant and was terminated
that fall, he said, his application for unemployment compensation was
rejected because he worked for a foreign company.

"Now, I don't know who I was working for," he said in a telephone interview.

For decades Congress has sought to crack down on corporations that use
offshore subsidiaries to lower their taxes, but most of the debates have
focused on schemes that reduce corporate income taxes, not payroll taxes.
Last year a Senate subcommittee estimated that US corporations avoid paying
$30 and $60 billion annually in income taxes by using offshore tax havens.

Senators Carl Levin, a Michigan Democrat; Barack Obama, an Illinois
Democrat; and Norm Coleman, a Minnesota Republican, are trying to pass the
Stop Tax Haven Abuse Act, which would give the US Treasury Department the
authority to take special measures against foreign jurisdictions that impede
US tax enforcement.

American companies that evade payroll taxes face fines or other criminal
penalties. The use of foreign subsidiaries to avoid payroll taxes, while
allowed by the Defense Department, may still be subject to challenge by the
Internal Revenue Service, according to Eric Toder, a former director of the
office of research for the IRS.

Toder said the IRS could try to take action against a firm if the sole
purpose of setting up an offshore subsidiary was to reduce tax liability.
The practice could become a more costly problem in the future, Toder said,
as an increasing number of American companies register subsidiaries overseas
and bring American employees to work abroad.

"It obviously looks unseemly where you have a situation where, if you did it
in a straightforward way, they would pay payroll taxes," Toder said. "If
this becomes the norm, and other companies do that as well, it could further
erode the tax base."

Peter Singer, a specialist in the outsourcing of military functions at the
liberal-leaning Brookings Institution, said the practice will probably
attract more scrutiny in the future, as the military expands its outsourcing
and as workplaces become increasingly global.

"It is fascinating and troubling at the same time," Singer said. "If you are
an executive in a company, you are thinking: 'Wow. Cash savings and a
potential loophole from certain domestic laws, lawsuits, and taxes. It's
win-win.' But if you are a US taxpayer, it is not a positive synergy."

Globe correspondents Stephanie Vallejo and Matt Negrin contributed to this
report.

C 2008 The Boston Globe

Article printed from www.CommonDreams.org 

URL to article: http://www.commondreams.org/archive/2008/03/06/7510/

 

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