The Boston Globe ran a story today about how Houston-based KBR uses shell companies based in the Cayman Islands to avoid paying millions of dollars in U.S. Medicare and Social Security taxes (free registration required).
“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 KBR spokeswoman acknowledged to the Globe the businesses were set up “in order to allow us to reduce certain tax obligations of the company and its employees.”
The practice also has some impact on Texas’ tax rolls:
“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.”