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Congress acts to close loophole that allows offshore subsidiaries
By Richard Lardner
Associated Press
Published on Thursday, May 08, 2008
WASHINGTON: When the Pentagon announced an obscure California company had won a lucrative military contract, no one mentioned any plans for a Caribbean outpost — a tropical shell the company quickly created that allowed it to duck millions in taxes and deflect U.S. lawsuits.
It's legal, at least for now. Contractors large and small have been heading offshore to shield piles of taxpayer dollars, according to an Associated Press investigation, but lawmakers are thundering that they'll put an end to it.
Almost a decade ago, a few months after winning the deal that has totaled more than $2 billion, Combat Support Associates established its subsidiary in the Cayman Islands, a British territory and tax haven.
The subsidiary, CSA Ltd., now employs about 2,000 American citizens in Kuwait, where they support U.S. forces moving in and out of Iraq. Yet as a foreign corporation doing work outside the United States, CSA Ltd. does not pay Social Security and Medicare taxes for these workers. Also, company officials maintain the subsidiary is outside the jurisdiction of U.S. courts, so federal labor rules and anti-discrimination laws don't apply, either.
In fact, there's scant evidence that CSA Ltd. exists — at least physically. There's no listed office address or phone number in the Cayman Islands. Records show the corporation is registered with Close Brothers, an investment house that serves as its shallow footprint in the Caymans.
Close Brothers operates out of a five-story, blue-windowed office building across the street from the docks used by cruise ships visiting the island paradise. There's no sign of CSA Ltd., however. ''We can't make any comments in regards to our clients,'' Close Brothers director Roger Priaulx said by telephone.
Measure adopted
Back in the U.S., the House of Representatives passed tax legislation a few weeks ago that would treat foreign subsidiaries of U.S. government contractors as American employers. That means they would have to pay the taxes that finance Social Security and Medicare programs. The Senate now is considering the legislation.
''Companies that avoid this responsibility undermine the country,'' said John Kerry, D-Mass., chairman of the Senate subcommittee on Social Security, pensions and family policy. ''If everybody avoided their responsibility, where would we be?''
The Joint Committee on Taxation estimates shutting the employment tax loophole would bring in about $846 million in revenue over 10 years. That figure could be higher, lawmakers say, since it's unclear how widespread use of the opening is.
''People are constantly looking for ways to jilt the system,'' said Rep. Brad Ellsworth, D-Ind., one of the authors of the measure. ''Where there's smoke there could be fire, and you go investigate that.''
Indeed, the House Oversight and Government Reform Committee has asked 15 Defense and State Department contractors for information about any foreign entities they may have in tax-friendly countries.
The request followed a meeting with representatives from KBR Inc., which had more than $6 billion in government contracts in 2006 alone. According to the committee, KBR has two subsidiaries in the Cayman Islands that are used to reduce the company's tax payments.
The panel is trying to determine how much these contractors earn, how much they pay their U.S. workers holding overseas jobs and how much in taxes goes unpaid.
Name game
It can be hard to keep track of company names.
One of the businesses on the committee's list is AECOM Government Services of Fort Worth, Texas. In 1998, AECOM and two other little-known companies — Research and Analysis Maintenance of El Paso, Texas, and Space Mark Inc. of Alaska — set up Combat Support Associates as a privately held joint venture.
Then CSA set up CSA Ltd. in the Caymans.
Gary Lewi, a spokesman for Combat Support Associates, said CSA Ltd.'s nearly 2,000 U.S. employees in Kuwait are roughly 30 percent of the company's work force there. The rest are Kuwaitis and third-country nationals, who usually are less expensive to recruit and retain. The company did not respond to additional questions from AP, however, about its business operations and employee compensation.
For a U.S. employee making $55,000 a year — the salary stated in a recent online ad for one CSA Ltd. job for emergency services — an employer would pay $4,208 in Social Security and Medicare taxes.
Pinpointing total savings depends on how much workers are paid. If, for example, the American employees of CSA Ltd. make an average of $30,000 a year, the company would owe about $4.6 million in employment taxes.
John Krieger of U.S. PIRG, a federation of public interest groups, said companies with overseas outposts have lower overall expenses and therefore an unfair advantage when competing for work against American businesses that don't.
Groups that represent contractors take an opposite view.
They say tighter controls could make U.S. companies less competitive in the global marketplace.
Businesses in Europe and Asia that go after U.S. contracts might be the winners if American companies have fewer ways to keep costs down, said Alan Chvotkin, senior vice president of the Professional Services Council in Arlington, Va.
WASHINGTON: When the Pentagon announced an obscure California company had won a lucrative military contract, no one mentioned any plans for a Caribbean outpost — a tropical shell the company quickly created that allowed it to duck millions in taxes and deflect U.S. lawsuits.
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