HamptonRoads.com: Top Iraq contractor skirts U.S. taxes offshore (*Shell has strong connections with Halliburton…)

© March 7, 2008
By Farah Stockman, The Boston Globe

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.

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 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 Department 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 Boston Globe survey found 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 Sen. John 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. It has 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. and 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, now 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 ” 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.

The practice also 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 Islands 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 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, including oil platforms, warships and dams that provided electricity to rural areas.

Its political clout 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. 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 U.S. 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 U.S. soldiers and U.N. workers dig wells and collect garbage, among many other tasks. The company quickly became the largest civilian employer in the country.

Later the company played similar roles 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.

But the taxes drive up costs. A former Halliburton executive said on the condition of anonymity that 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.

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 U.S. 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 U.S.-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.

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 – said they pay Social Security and Medicare taxes for their American workers.

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 declined to release salary information. Workers interviewed 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 Islands companies but ultimately made no complaint.

http://hamptonroads.com/2008/03/top-iraq-contractor-skirts-us-taxes-offshore

*Headline comment in brackets added by John Donovan

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