Top Iraq contractor skirts US taxes offshore

We've recently blogged about the newspaper investigations into the tax avoidance strategies of Britain's Tesco supermarket; about the banana industry, and about Dutch multinationals avoiding tax. Now there's a story on tax avoidance in the United States.

Now read the lead into a story based on a new Boston Globe investigation.

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.

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. One of these Cayman companies was established two months after current US Vice President Dick Cheney was appointed chief executive of KBR's parent company Halliburton in 1995.

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.

According to the US-based Citizens for Tax Justice, summarising the story:

The Globe estimates that SEI (KBR subsidiary Service Employers International) is avoiding about $101 million in payroll taxes every year using this scam. If this has been going on throughout SEI's 5-year stint in Iraq, that's more than $500 million in revenue that won't be shoring up the Social Security system. KBR representatives breezily dismiss this by pointing out that "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." So, for those looking for a more creative way of subverting Social Security than John McCain's privatization plans, here it is: reduce future Social Security benefits by pretending your employees aren't entitled to them!

One glitch in this clever plan, as the Globe alertly points out, is that Medicare benefits are not reduced for those who don't contribute. So the Medicare portion of the foregone 15.3 percent tax is money that is going to have to be raised through taxes on the rest of us. And Texas-based KBR is also avoiding state unemployment taxes on these workers, when means that they'll be ineligible for unemployment benefits later on.

No wonder Democratic Senators Barack Obama and Carl Levin, and Republican Senator Norm Coleman, have been pushing the Stop Tax Haven Abuse Act. Senator Levin said last year (in a statement that quotes TJN):

The latest estimate from the Internal Revenue Service (IRS) is $345 billion in unpaid taxes each year owed by individuals, corporations, and other organizations who stiff Uncle Sam and offload their tax burden onto the backs of honest taxpayers. Of that $345 billion annual tax gap, tax evasion that makes use of offshore tax havens is estimated to account for as much as $100 billion.... At one of our Subcommittee hearings, a former owner of an offshore bank in the Cayman Islands testified that he believed 100 percent of his former bank clients were engaged in tax evasion.

Now KBR is not being accused here of tax evasion, which is (by definition) illegal, but of tax avoidance, which is legal. But as is abundantly clear, both kinds are extremely harmful - and the legal kind may be in many cases even more harmful than the illegal kind, because it is so insidious. Levin's statement reported on studies that estimate offshore tax haven abuses by individuals costing the US treasury $40-70 billion a year; a further $50 billion in annual tax revenues is lost due to profit-shifting by corporations to low-tax countries; another study measured transfer pricing abuses by corporations costing the U.S. Treasury an additional $53 billion per year, much of which use offshore schemes.

Fifty billion here, fifty billion there - and soon we are talking real money (but note we can't simply add up these above numbers, as some of the estimates overlap or include domestic, not offshore, tricks.) And this is just tax losses to the United States from the offshore scandal. Less sophisticated countries are yet more vulnerable to offshore abuse.

Just as is happening in response to the Liechtenstein affair in Europe, politicians in the U.S. are girding themselves for an assault on tax havens. This adds weight to the argument that the world may have reached, or be reaching, some kind of grand tipping point on tax havens, after which greater political will emerges to crack down on the scandal. Democrat Representative Richard E. Neal of Massachusetts, chairman of the House subcommittee on select revenue measures, called for hearings on the emerging KBR affair.

"Tax avoidance has become an art form for powerful corporations," Neal said. "It is both shocking and disappointing that some American companies continue to exploit our system in wartime by setting up shell corporations via a tax haven mailbox." He said congressional tax-writing committees should empower the Internal Revenue Service to take more aggressive action against shell corporations. And, as CNN reports, Congressional investigators are in Cayman this week to look into U.S. businesses' efforts to escape paying their taxes.

One focus for the GAO this week will be Ugland House (see picture), a five-story building in George Town that is listed as the headquarters for thousands of U.S. and international companies.

Cayman Islands financial and tax officials also will meet with the GAO team, and one official said the visit provides "a unique opportunity" to demonstrate the legitimacy of the British dependency's financial industry.

Cayman is a British Overseas Territory. In Levin's statement there is more, this time in an example regarding one of Britain's Crown Dependencies:

Six U.S. taxpayers relied on phantom stock trades between two offshore shell companies in the Isle of Man to generate fake stock losses which were then used to shelter billions of dollars in income.

Britain again. It is not living up to its responsibilities. We look forward to the US investigators' reports.