Friday, January 29, 2010
Setting up foreign subsidiaries allows American defense contractors not only to utilize cheaper labor and more favorable regulations, but also avoid paying taxes that fund key government safety net programs. This conclusion was reached by the Government Accountability Office (GAO), which examined 29 defense contractors and their reliance on offshore companies for their work overseas from 2003 to 2008.
GAO investigators found that companies primarily used offshore subsidiaries to avoid contributing to Social Security and Medicare. This avoidance was perfectly legal, thanks to the way Congress crafted the Federal Insurance Contributions Act. Since then, lawmakers passed new legislation in 2008, the Heroes Earnings Assistance and Relief Tax Act, which sought to close this loophole.
Countries and regions with reputations as tax havens that were most often used by defense contractors to set up subsidiaries included Singapore, Hong Kong, Ireland, Luxembourg and the Cayman Islands. The biggest offender studied was Kellogg Brand and Root (KBR), which was registered in the Cayman Islands.
-Noel Brinkerhoff
Offshore Means Never Having to Pay Payroll Taxes (by David Isenberg, Huffington Post)
Defense Contracting: Recent Law Has Impacted Contractor Use of Offshore Subsidiaries to Avoid Certain Payroll Taxes (Government Accountability Office) (pdf)
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