Dear Senators Levin and Coleman:
Recently, we introduced S. 2775, the Fair Share Act of 2008, which ends the practice of U.S. government contractors setting up shell companies in foreign jurisdictions to avoid payroll taxes. Representatives Ellsworth and Emanuel also introduced companion legislation. This 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 legislation was introduced in response to a Boston Globe article in which Farah Stockman reported that Kellogg Brown & Root (KBR) has avoided payroll taxes by hiring workers through shell companies in the Cayman Islands. American companies who are benefiting from U.S. government contracts are able to set up foreign subsidiaries in tax havens and treat American workers employed in connection with the contract as employees of the subsidiary. As a result, those employers can avoid Social Security and Medicare payroll taxes and their employees are denied the contributions for Federal benefits purposes.
We bring this issue to your attention because we think it is another example of the abuse of offshore tax havens used in order to avoid the payment of U.S. taxes. We believe closing this glaring loophole is consistent with your efforts to address tax shelters and tax havens. It is unclear how pervasive the practice used by KBR is, but there are numerous federal contractors that have subsidiaries located in tax havens and, as your investigations have uncovered, an abundance of tax professionals willing to help companies shirk their tax responsibilities whenever a loophole can be found.
We are working with the Finance Committee to close this tax loophole, and the House recently included this legislation as part of the Taxpayer Assistance and Simplification Act of 2008. The Joint Committee on Taxation estimates that closing this loophole raises $846 million over ten years.
We request that the Permanent Subcommittees on Investigations investigate this and similar abuses by federal contractors to avoid payroll taxes, and we look forward to continuing to work with you on measures to ensure fairness for American taxpayers.
Sincerely,
JOHN F. KERRY
US Senator
BARACK OBAMA
US Senator
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