Shell Firms Shielded US Contractor From Taxes
WASHINGTON - In March 2005, one of the Pentagon’s most trusted contractors - Virginia-based MPRI, founded by retired senior military leaders - won a $400 million contract to train police in Iraq and other hotspots. Two months later, MPRI set up a company in Bermuda to which it subcontracted much of the work.
It was not the first time that MPRI executives had used a shell company in an offshore tax haven to perform government-funded work. A year earlier, MPRI headed a joint venture that won a $1.6 billion contract to provide US peacekeeping forces in Kosovo and elsewhere. Three months later, MPRI set up a company in the Cayman Islands to do the work.
Like MPRI’s Bermuda subsidiary, the Cayman Islands company appears to have no phone number, website, or staff of its own there.
Rick Kiernan, an MPRI spokesman, declined to explain why the company created the two offshore entities and stressed that MPRI operates in “total adherence or compliance with the current law.”
But tax lawyers say that MPRI appears to be avoiding the payment of roughly $4 million dollars a year in Social Security and Medicare taxes for the police-training contract alone and is sidestepping scrutiny by hiring workers through offshore entities based outside the jurisdiction of the Internal Revenue Service.
“The employer is trying to take itself out of the audit reach of the IRS,” said California-based tax lawyer James R. Urquhart III.
If MPRI had not set up the shell company, it would have been vulnerable to an audit, tax specialists said, because it classifies a significant portion of its roughly 400 American police trainers and advisers working in Iraq and elsewhere as self-employed independent contractors, a practice that allows MPRI to avoid paying Social Security, Medicare, and unemployment taxes.
As a result, workers cannot receive unemployment compensation when their jobs end and may be deprived of other protections under US law.
“They are taking steps to reduce the audit risk,” said H. David Rosenbloom, director of the International Tax Program at New York University Law School. “If there is concern about the classification [of workers], as there undoubtedly is, from the company’s standpoint they are better off being in a foreign corporation.”
Workers classified as self-employed must pay Social Security and Medicare taxes themselves, the equivalent of 15.3 percent of their salaries. If they were classified as employees of MPRI, rather than independent contractors, they would split the cost with their employer.
But sometimes the taxes are not paid at all. A former MPRI worker in Iraq said he was unaware of his tax obligations and did not pay self-employment tax for an entire year on his salary of $154,000. Such levies are very difficult for the IRS to collect, specialists say, and frequently go unpaid.
To combat the problem, the IRS has aggressively audited companies registered in the United States that try to avoid payroll taxes by reporting their workers as independent contractors. The IRS conducts a rigorous test to determine whether a worker is genuinely self-employed and applies heavy penalties to companies that misclassify their workers.
But the IRS cannot conduct audits on overseas employers, such as the shell companies that MPRI set up in Bermuda and the Cayman Islands.
Companies that use such offshore entities to avoid taxes, even as they profit from lucrative federal contracts, have captured the attention of Congress in recent months.
After a Globe article in March detailed how former Halliburton subsidiary KBR avoided hundreds of millions of dollars in payroll taxes by hiring employees through a Cayman Island shell company, the House of Representatives passed a bill prohibiting the practice. Senator John F. Kerry of Massachusetts and Senator Barack Obama of Illinois are cosponsoring a similar effort in the Senate, and they have called on a Senate subcommittee to investigate the practice.
Two weeks ago, Representative Henry Waxman, a California Democrat who heads the House Oversight Committee, launched an investigation, sending letters to 15 federal contractors seeking information about their offshore subsidiaries.
But the business community has begun to defend the practice.
“There is nothing wrong with tax avoidance, particularly for work that is done outside the United States,” said Alan Chvotkin, executive vice president of the Professional Services Council, a trade association of companies that perform government work.
Initially, a spokesman for L-3 Communications, the defense giant that owns MPRI, told the Globe that L-3 does not use offshore subsidiaries to hire its American workers.
But a Globe investigation found that MPRI, which L-3 acquired in 2000, hires roughly 400 American workers through its Bermuda shell company, called MPRI International Services. Some workers are classified as employees of the Bermuda company, allowing both the workers and MPRI to avoid paying payroll taxes, resulting in a net loss to Social Security and Medicare funds.
Others are hired as independent contractors, a practice that forces the worker to shoulder the entire tax burden and makes it more difficult for the IRS to collect. Classifying workers as independent contractors has enabled MPRI and some other defense contractors working in Iraq to hire and fire more easily and to avoid some legal obligations to its workers.
Georgetown professor Albert Lauber said it is unlikely that police trainers in Iraq would pass the IRS test for self-employment. He said that genuine independent contractors come into a job with their own equipment, require little training and oversight, and generally get the job done on their own schedule.
MPRI’s police trainers, who asked not to be identified, said they do not work that way. One former trainer working for MPRI in Iraq said that police trainers in Baghdad received letters at the end of 2005 saying that they might experience a brief disruption in their payments because “payroll was being moved to Bermuda to satisfy US tax code.”
The letters became a running joke among the trainers. “We said, ‘What do you mean, to avoid tax codes?’ ” the former trainer recalled.
Independent contractors living overseas are required to pay self-employment tax, regardless of whether they work with a foreign company or a domestic one. But those taxes often go unpaid when work is contracted through foreign companies that provide no documentation to the IRS.
The former trainer said that during 2005 he paid no payroll taxes and was given no record of his salary, which was directly deposited into his bank account. MPRI provided him with so little salary documentation, he said, that he had difficulty refinancing his home and was confused about his tax obligations.
The following year, he said, MPRI gave him a 1099 form, which American companies are required to provide to self-employed contractors. The trainer said he then paid self-employment tax on his work in 2006.
MPRI remains one of the Pentagon’s most favored contractors. Founded in 1987 as Military Professionals Resources, Inc., the company has maintained such close ties with the US armed forces that it once ran the ROTC training programs in more than 200 universities, and it still recruits soldiers for the US military.
Federal contracts helped MPRI grow from a company of a few hundred people in 1997 to nearly 3,000 worldwide. MPRI is a cornerstone of L-3’s government services companies, which take in more than $2 billion in annual revenues.
MPRI has had close ties to the US reconstruction effort in Iraq. Jay Garner, the retired US Army general who was the Bush administration’s first leader of US-occupied Iraq, had been president of Virginia-based SYColeman, another L-3 subsidiary. One of Garner’s top aides in Iraq, retired Army Lieutenant General Jared Bates, took a leave of absence from his job as senior vice president and general manager of MPRI’s National Group to serve in Iraq and later became president of SYColeman.
Following the US invasion in 2003, MPRI received a contract to build a training center for the new Iraqi Army. At the time, MPRI’s workers in Iraq were employed directly through the company, said Kiernan, the MPRI spokesman.
In 2004, MPRI joined with KBR and two other federal contractors to form Civilian Police International, a joint venture that successfully bid on a $1.6 billion State Department contract to deploy US peacekeepers around the world.
Three months after winning the contract, MPRI formed CPI Police Services Ltd. in the Cayman Islands. More than 200 Americans, mostly retired police officers, work in Kosovo and Afghanistan in full-time posts under the State Department contract, according to State Department officials.
Rex Estilow, president of Civilian Police International, referred all inquiries to Kiernan, who declined to explain why the Cayman Islands entity was set up. “We don’t discuss our specific modus operandi,” Kiernan said.
MPRI’s use of offshore shell companies has received little notice from the agencies that pay for their services. State Department officials say that their contractors have a right to subcontract work, even to their own wholly-owned subsidiaries set up in offshore tax havens.
“A contractor generally has the right to retain and terminate subcontractors as it deems necessary,” a State Department official said in an e-mail response to a Globe inquiry.
The US Army, for its part, also has declined to condemn the practice.
“We know that it is a practice that goes on,” said Jeffrey Parsons, director of contracting for the Army Materiel Command. “I would not say anyone encourages it, but there are no rules or pratices that would prohibit it. I think that is why Congress is weighing in.”
© 2008 The Boston Globe
war is a racket ! there is nothing else to say…..
it’s all part of the old pattern: the rich believe the rest of us should be their slaves.
While many of our veterans,who will now bear lifelong scars from this ill conceived war, are deprived of adequate care; such profiteering only adds to the outrage. If only there were more legislators like Henry Waxman and Harry Truman.
It’s too bad we don’t live in a democratic country, because shit like this would never go unchecked by elected officials, who represent the best interest of the people. Fxxcking fascists.
Where is Harry S Truman when we need him.
The Grand Oil Party, Bush and his Evilgelicals, care
only about plunder - any treasury including our childrens.
Isn’t it high time to hang war profiteers?
“I would not say anyone encourages it, but there are no rules or pratices that would prohibit it. I think that is why Congress is weighing in.”
Well! I guess I don’t understand English. It seems this story is saying we work like hell paying taxes to the gov’t and it pays our taxes to contractors who in turn pays no taxes into the fund that sustains its business….ummm.
I remember back in law school, when the kids who were the best students got caught cheating, the dean said he thought it demonstrated initiative more than dishonesty.
For those folks suffering from the lingering hangover of nationalism, this must be a painful story. Isn’t the real problem that there are contractors in Iraq and not whether or not they pay their taxes?
But all MPRI executives wear a flap lapel pin at all times, even when naked, so it’s all f**kin good…
And they swear they are adhereing to current law, although they weren’t specific about which country’s laws they’re talking about.
At least they’re not alone down there in the islands:
“…specifically the origin of a $5 million loan she gave her campaign around the time her husband, former President Bill Clinton, received a $20 million payout from Yucaipa, “a supermarket holding company that invests in tax shelters in the Cayman Islands.”
Haven’t heard either corporate candidate mention the club med tax hide-aways yet…
Either President Nader or President Paul, of course, would end the practice of overcharging fellow Americans for half-assed services delivered without paying a nickel in taxes by hiding off-shore during the first 100 days…
If this is the golden standard of US entities, then everyone should refuse to pay taxes to their corrupt and evil federal government.
There should be a clause in any federal contract that employees of the company and subsidiaries are treated as full time employees and subject to taxes like any other American citizen. Any independent contractor gets a 1099 and is required to pay taxes on the amount on the 1099. No more Cayman, Bermuda, bullshit…Just do the right thing for the federal government if you are receiving a federal government contract. Retired military personnel should be a little more patriotic, don’t you think? Or am I being delusional again…Do the right thing or you don’t get the contract…With this administration we have created the sleaziest, most corrupt, murderous group of contractors ever. And the republicans want to grow this mess…Astonishing….
If they don’t have to pay taxes then neither do i and i don’t and won’t until we get our country back. Its all the big companies, and were stuck with the bill while they make all the cash. Until there made to pay and that means back taxes and penalties then nobody else should.
This quote has cropped up a lot recently, but worth another airing:
“I am shocked, shocked to find gambling is going on in here.”
” … founded by retired senior military leaders … ”
I keep looking for indication of “MILITARY HONOR” and see damned little from Pentagon brass. Just media manipulation and then, at retirement, the revolving door onto the board of some corporation dealing in military hardware.
As regards the old saying, “Patriotism is the last refuge of scoundrels”, this use of the label pin is a good example.
simply change the rules in the Congress - mandate that all government contracts must go to American businesses and cannot be sub contracted to foreigners. While they are it maybe they will consider providing the troops whom we need to “support” with the same health care plans they have in Congress.
Those “Off Shore Shell Companies”, as well as, Out of country - relocated Corporations such as HALLIBURTON and all of its subsidiaries, that have U.S. Government contracts, payed with U.S. Txpayers Dollars should be held legally accountable. They should also pay taxes.
These hidden corporations are criminally avoiding ACCOUNTING of their contracts.
We, the U.S. citizens are being “Ripped-Off” !!!!!!!!!!
.
“captured the attention of Congress” “Congress is weighing in”
Oooooh! I bet they’re shaking in their jackboots. It’s not enough that these traitorous “retired senior military leaders” are ripping off their own country through the military-industrial complex’s revolving door with record war profiteering while our government, the military and the IRS give a wink-and-a-nod, but then they can’t even own up to honestly paying taxes. But if a private citizen refuses to pay federal taxes based on moral grounds or in accordance with anti-terrorism laws, they try to bulldoze you into the ground. Believe me I know from personal experience. And even if Congress passes some law, is it retroactive? You know, like telecom immunity.
Let’s also recall that, as CEO of Halliburton, Dick Cheney used offshore corporations to evade the law and do business with Saddam Hussain’s government–the very one against which he was calling, even then, for military action. He has no scruples and no shame; thanks to the Democrats, he also has no accountability and no fear of prosecution.
Our system is good in that if we make below a certain amount; you don’t pay tax. If you want to accumulate wealth it takes its toll on the biodiversity of the planet 98% of the time.
Failing Oceans and Rising Energy Prices
These are my reasons for the economy failing.
Then we reassess our assets. I hope they include taking care of the planet and revalue resources!
I hope they [the future government] include taking care of the planet by placing a value on a healthy environment.
You can’t kill it and expect it to keep reproducing itself.
The only way “she” can save herself is to get sick.
As long as avoiding taxes through the use of offshore shell companies is legal, and the companies continue to pay off lobbists who in turn pay off congress, this tax avoidance will continue.
Congress will never bite the hand that feeds it.
And in November, the righteous indignation of a pissed off and bitter electorate will take out its wrath on the incumbent criminals who stand by and feign shock over this bullshit.
We need a third party in this country, because the current crew are all ass up at this trough of corruption.
This instance is part of a much larger problem: the off shoring of corporate bodies to avoid legitimate tax burdens. It should also be noted that it is much harder for an individual to do the same under US law since 1996 unless they incorporate themselves. This speaks to a couple of problems; the first is allowing corporations to do the majority of their business in one place while incorporating somewhere else. that should be an illegal act period. The second is the legal concept of corporate person hood, which gives corporations the same rights as a legal person while they also have the protection of a corporate shell (liability is limited to the assets of the corporation). Until a fair method is arrived at to countermand this unfair advantage, real people will always be at a disadvantage and corporate scum will be able to hide their ill-gotten gains in tax havens.
It’s been a while now since Old Gymlet Eyes (Gen. Smedley Butler, USMC) wrote “War is a Racket”. Look it up. It applies more than ever.
Wass it cindy Sheehan who said, “They burn our children in their wars while they grow rich.” (?)
If people could not make money from war-there would be no war. War is a heavily moneyed racket. That’s all it is. Shame on all concerned.
And the revolution was to begin when?
The revolution is not being televised.
shikantaza @ 7:50 pm:
“simply change the rules in the Congress - mandate that all government contracts must go to American businesses and cannot be sub contracted to foreigners.”
The late Paul Wellstone sponsored just such a bill, shikantaza, but given the campaign contributions theses companies make “That bill,” in the words of Molly Ivins, “was deader than same-sex marriage in the Texas Legislature.” (”Bushwhacked” p.47)
Edward1793 May 4th, 2008 11:55 pm
“As long as avoiding taxes through the use of offshore shell companies is legal, and the companies continue to pay off lobbists who in turn pay off congress, this tax avoidance will continue.
Congress will never bite the hand that feeds it.”
Edward nailed it.
Congress created this monster through corporate-friendly legislation.
nothing new here!
whatfools asks where is harry s truman when we need him??
Was he not the guy who ordered the atomic bombing of Hiroshima AND Nagasaki….Oh yeah didnt he send our sons to die in Korea in 1950 too?