Emanuel, Neal, DeLauro, Doggett Release Letter to Paulson

Letter

Today, U.S. Representatives Rahm Emanuel (D-IL), Richard Neal (D-MA), Rosa L. DeLauro (D-CT) and Lloyd Doggett (D-TX) released the following letter to Treasury Secretary Henry Paulson expressing concern about reports that multiple federal contractors are using offshore tax havens to avoid paying millions in payroll taxes for their U.S. employees.

Text of the letter:

May 8, 2008

The Honorable Henry M. Paulson, Jr.

Secretary, Department of Treasury

1500 Pennsylvania Avenue, NW

Washington , D.C. 20220

Mr. Secretary,

We are writing to express our serious concern about reports that multiple federal contractors are using offshore tax havens to avoid paying millions in payroll taxes, including Social Security and Medicare, and unemployment insurance, for their U.S. employees. We wanted to bring this issue to your attention in your capacity as the managing Trustee for the Social Security and Medicare trust funds, and request your assistance in ensuring that the Administration protects the Trust Funds from further damage by closing these tax loopholes.

On March 6, 2008, The Boston Globe reported that Kellogg Brown & Root (KBR) has avoided hundreds of millions of dollars in Medicare and Social Security taxes by "hiring workers through shell companies" based in the Cayman Islands . Specifically, KBR has used two foreign subsidiaries, Service Employees International, Inc. and Overseas Administrative Services to employ thousands of U.S. citizens who perform work in Iraq and other countries under KBR's contracts with the United States government. While these companies are technically based in the Cayman Islands , the article describes that these companies only exist in a computer file on the fourth floor of the building in this jurisdiction. Neither company has an office or phone number at this address.

Recently, we met with officials of the Defense Contract Audit Agency, who told us that not only were they aware of this tax avoidance arrangement, but that it had gone on for some time and that KBR was likely not alone in exploiting this loophole.

The impact of this arrangement affects not only the employees of these companies but more broadly the Social Security and Medicare Trust Funds into which these employers and employees would have made contributions if KBR did not engage in the use of this offshore tax loophole. The employees of the foreign subsidiaries were not able to contribute to Social Security and Medicare, as KBR would have had to enter into an agreement with Treasury for such as arrangement and did not. Since Social Security is an "earned benefit" where an individual must contribute for a minimum period of time, this arrangement could prevent these employees from being able to qualify for Social Security benefits, including disability benefits that are provided through the Social Security program, or may result in a lower benefit later. Moreover, the Social Security and Medicare Trust Funds rely on contributions from millions of Americans each year to, in turn, pay benefits to millions of other Americans. For this reason, federal contractors that use offshore companies to avoid paying payroll taxes decreases the overall amount of funding available to these Trust Funds, while increasing the burden on Americans who play by the rules and make their contributions as required by law.

To address this problem, Representative Brad Ellsworth introduced The Fair Share Act of 2008 (H.R. 5602). The bill would end the practice of U.S. government contractors setting up shell companies in foreign jurisdictions to avoid payroll taxes. The legislation amends the Internal Revenue Code and the Social Security Act to treat foreign subsidiaries of U.S. companies performing services under contract with the United States government as American employers for the purpose of Social Security and Medicare payroll taxes. The House of Representatives passed this legislation as part of the Taxpayer Assistance and Simplification Act of 2008 (H.R. 5719) on April 15, 2008.

Since this legislation has passed the House of Representatives, The Boston Globe reported on May 4th that another major federal contractor, MPRI, set up companies in tax havens with the intent of using these foreign subsidiaries to avoid payroll taxes for their U.S. employees. The article reports that MPRI "appears to be avoiding the payment of roughly $4 million dollars a year in Social Security and Medicare taxes." In many cases, these companies deem their employees ‘independent contractors' and avoid federal and state income tax withholding as well. As the lead Administration official charged with closing the tax gap, this would seem an area ripe for your review.

The Secretary of the Treasury has primary responsibility within the Administration for enforcement of the Internal Revenue Code, and thus, we ask for your support of The Fair Share Act of 2008 as it will close an abusive tax loophole that undermines the integrity of the Code. Moreover, we ask that you conduct an examination of the loopholes described in recent news reports and advise of any actions that Treasury has taken or plans to take to address them. In reporting the results of your examination to us, please include recommendations for any additional tools that you believe would be helpful to Treasury and the IRS in order to be effective in preventing payroll tax avoidance by federal contractors.

We thank you for your attention to this matter and look forward to working with on this issue.

Sincerely,

____________________ ____________________

RAHM EMANUEL RICHARD NEAL

Member of Congress Member of Congress

____________________ ____________________

ROSA L. DELAURO LLOYD DOGGETT

Member of Congress Member of Congress

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