DoD Powerless To Stop KBR's $500 Million Federal Tax Evasion Scheme, Congress Vows To End Practice

Press Release

Representatives Rosa L. DeLauro (CT-03) and Richard Neal (MA-02) met with Department of Defense representatives today to question why Kellogg Brown & Root (KBR), the top U.S. contractor in Iraq , has been allowed for the past four years to avoid paying Medicare and Social Security taxes by hiring U.S. workers through shell companies based in the Cayman Islands . This meeting follows a DeLauro led March letter to Secretary of Defense Robert M. Gates regarding KBR's longstanding use of foreign front companies to avoid paying U.S. taxes.

"Coming days after millions of Americans filed their taxes, it is outrageous that the Department of Defense continues to allow KBR's use of foreign front companies to avoid more than $500 million in federal Medicare and Social Security taxes. When questioned on this matter today in my office, Defense Department officials admitted these practices had occurred for years. Since the Pentagon refuses to protect American taxpayers in this matter, Congress must take immediate action to stop this case of gross negligence and fraud," DeLauro stated.

"The continued exploitation of our tax system by a handful of American corporations is shocking enough. It becomes unconscionable when the Pentagon does not hold the top U.S. contractor in Iraq accountable for paying its fair share of taxes. As Chairman of the Subcommittee on Select Revenue Measures, I plan to investigate this matter, and KBR is the best place to start, said Congressman Richard E. Neal.

In March, it was reported in the Boston Globe that the DoD has known since 2004 that KBR has avoided paying hundreds of millions of dollars in federal Medicare and Social Security taxes by hiring workers, including 10,500 Americans, through shell companies based in the Cayman Islands . Because KBR's contracts require DoD to pay all reasonable labor costs, DoD officials viewed the practice as saving the department money, although 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.

While KBR has declined to release salary information, interviews of workers 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.

Congressman Lloyd Doggett, a fellow signatory to the March letter, reitereated his concern about KBR taking advantage of Caribbean tax havens. "None of the defense the DOD provides should be to tax cheats," said Rep. Doggett. He added: "Companies who play by the rules are punished when scofflaws are permitted to get away with it."

"We have recently found out that KBR not only gives our troops tainted water, but is also taking advantage of a tax loophole that hurts Social Security and Medicare and prevents their own U.S. employees working abroad from being able to qualify for these vital programs. While the Bush Administration is content to look the other way, this Congress will not," said Congressman Rahm Emanuel, a fellow signatory to the March letter.

Source