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 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 Globe survey found that
the practice is unusual enough 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 Senator John F. 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, with 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., which is
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, which
now is 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
Heather Browne, a
spokeswoman for KBR, acknowledged via e-mail that the two Cayman Islands
companies were set up "in order 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
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.
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 and were told by their foremen, 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, from oil platforms to warships to dams that provided electricity to
Its political clout,
particularly with fellow Texan Lyndon Johnson, 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. And 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 US 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 US soldiers and UN workers dig
wells and collect garbage, among many other tasks. The company quickly became
the largest civilian employer in the country, with about 2,500 people on its
payroll. Its headquarters in Texas had a "war room," where executives
would get daily updates about events in Mogadishu.
Later the company would
play similar roles supporting US troops in Haiti, Rwanda, Bosnia, Uzbekistan,
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, so they and their employers ought to help pay for
But the taxes drive up
costs. A former Halliburton executive who was in a senior position at the
company in the early 1990s said construction companies that avoid taxes by
setting up foreign subsidiaries have obvious advantages in bidding for military
Payroll taxes can be a significant
cost, he said, speaking on the condition of anonymity. "If you are bidding
against [rival construction firms] Fluor and Bechtel, it might give you a
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
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 US 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 US-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.
Nonetheless, 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 - told the Globe
that they pay Social Security and Medicare taxes for their American workers.
"It has been Fluor
Corporation's policy to compensate our employees who are US citizens the same
as if they worked in the geographic United States," said Keith Stephens, Fluor's
director of global media relations. "With the exception of hardship and
danger pay additives for work performed in Iraq, they receive the same benefits
as their US-based colleagues, and Fluor pays or remits all required US taxes
and payroll burdens, including FICA payments and unemployment insurance."
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
Officials at DynCorp, the
company that KBR outbid for the logistics contract, did not return numerous
KBR is now widely believed
to be the largest private employer of foreigners in Iraq, and it hires twice as
many workers through its Cayman Island subsidiaries as it does by direct hires.
Service Employers International alone employs more than 20,000 truck drivers,
electricians, accountants, and engineers, roughly half of whom are American,
according to Browne, the KBR spokeswoman.
KBR declined to release
salary information. But workers interviewed by the Globe 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
Island companies but ultimately made no complaint. The auditors told the Globe
in an email exchange facilitated by Pentagon spokesman Lieutenant Colonel Brian
Maka that any tax savings resulting from the offshore subsidiaries "are
passed on" to the US military.
Browne, the KBR
spokeswoman, said the loss to Social Security could eventually be offset by the
fact that the workers will receive less money when they retire, since benefits
are generally based on how much workers and their companies have paid into the
Medicare, however, does not
reduce benefits for workers who don't contribute, and Browne acknowledged that
KBR has not calculated the impact of its tax practices on the government as a
She said KBR does not save
money from the practice, since its contracts allow for its labor expenses to be
reimbursed by the US military. But the practice gives KBR a competitive
advantage over other contractors who pay their share of employment taxes.
And critics of tax
loopholes note that the use of offshore shell companies to avoid payroll taxes
places a greater burden on other taxpayers.
"The argument that by
not paying taxes they are saving the government money is just absurd,"
said Robert McIntyre, director of Citizens for Tax Justice, a Washington advocacy
To the people listed as its
workers, Service Employers International Inc. - known to them as SEII - remains
something of a mystery.
"Does anybody know
what or where in the Grand Cayman Islands SEII is located?" a recently
returned worker wrote in a complaint about the company on JobVent.com, an employment
website. He speculated that the office in the Cayman Islands must be "the
size of a jail cell . . . with only a desk and chair."
In fact, the address on
file at the Registry of Companies in the Cayman Islands leads to a nondescript
building in the Grand Cayman business district that houses Trident Trust, one
of the Caymans' largest offshore registered agents. Trident Trust collects
$1,000 a year to forward mail and serve as KBR's representative on the island.
The real managers of
Service Employers International work out of KBR's office in Dubai. KBR and
Halliburton, which also moved to Dubai, severed ties last year.
Both KBR and the US
military appear to regard Service Employers International and KBR
interchangeably, except for tax purposes. According to the Defense Contract
Auditing Agency, KBR bills the Service Employers workers as "direct labor
costs," and charges almost the same amount for them as for direct hires.
The contract that workers
sign in Houston before traveling to Iraq commits workers to abide by KBR's code
of ethics and dispute-resolution mechanisms but states that the agreement is
with Service Employers International.
Some workers said they were
told that Service Employers International was just KBR's payroll company.
Others mistook the name as a reference to the well-known, large union, Service
Henry Bunting, a Houston
man who served as a procurement officer for a KBR project in Iraq in 2003, said
he first found out that he was working for a foreign subsidiary when he looked
closely at his paycheck.
"Their whole mindset
was deceit," Bunting said. He said that he wrote to KBR several times
asking for a W-2 form so he could file his taxes, but that KBR never responded.
David Boiles, a truck
driver in Iraq from 2004 to 2006, said that he realized he was working for
Service Employers International when he arrived in Iraq and his foreman told
him he was not a KBR employee, despite the fact that his military-issued
identification card said "KBR."
"At first, I didn't
believe him," Boiles said.
Danny Langford, a Texas
pipe-fitter who was sent to work in a water treatment plant in southern Iraq in
July 2003, said he, too, initially believed that he was an employee of KBR.
But when he allegedly got
ill from chemicals at the plant and was terminated that fall, he said, his
application for unemployment compensation was rejected because he worked for a
"Now, I don't know who
I was working for," he said in a telephone interview.
For decades Congress has
sought to crack down on corporations that use offshore subsidiaries to lower
their taxes, but most of the debates have focused on schemes that reduce
corporate income taxes, not payroll taxes. Last year a Senate subcommittee
estimated that US corporations avoid paying $30 and $60 billion annually in
income taxes by using offshore tax havens.
Senators Carl Levin, a
Michigan Democrat; Barack Obama, an Illinois Democrat; and Norm Coleman, a
Minnesota Republican, are trying to pass the Stop Tax Haven Abuse Act, which
would give the US Treasury Department the authority to take special measures
against foreign jurisdictions that impede US tax enforcement.
American companies that
evade payroll taxes face fines or other criminal penalties. The use of foreign
subsidiaries to avoid payroll taxes, while allowed by the Defense Department,
may still be subject to challenge by the Internal Revenue Service, according to
Eric Toder, a former director of the office of research for the IRS.
Toder said the IRS could
try to take action against a firm if the sole purpose of setting up an offshore
subsidiary was to reduce tax liability. The practice could become a more costly
problem in the future, Toder said, as an increasing number of American
companies register subsidiaries overseas and bring American employees to work
"It obviously looks
unseemly where you have a situation where, if you did it in a straightforward way,
they would pay payroll taxes," Toder said. "If this becomes the norm,
and other companies do that as well, it could further erode the tax base."
Peter Singer, a specialist
in the outsourcing of military functions at the liberal-leaning Brookings Institution,
said the practice will probably attract more scrutiny in the future, as the
military expands its outsourcing and as workplaces become increasingly global.
"It is fascinating and
troubling at the same time," Singer said. "If you are an executive in
a company, you are thinking: 'Wow. Cash savings and a potential loophole from
certain domestic laws, lawsuits, and taxes. It's win-win.' But if you are a US
taxpayer, it is not a positive synergy."