First, a recap of how this all went down. It started with this story in the Boston Globe:
Top Iraq contractor skirts US taxes offshore
Shell companies in Cayman Islands allow KBR to avoid Medicare, Social Security deductions
March 6, 2008
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.
Kerry and Obama immediately sprang into action, calling for an investigation and penning a bill to immediately close this loophole with a companion bill in the House by Rahm Emanuel and Brad Ellsworth. It passed both Houses in May, and now …. it is law!!
President Bush signs bill closing tax loophole used by defense contractors
By RICHARD LARDNER , Associated Press
Last update: June 17, 2008 – 7:06 PM
WASHINGTON – President Bush on Tuesday shut a loophole that defense contractors had been using to avoid paying millions of dollars in payroll taxes.
Bush signed into law the Heroes Earnings Assistance and Relief Tax Act, which provides tax relief for military families. Included in the legislation is a provision that would treat foreign subsidiaries of U.S. government contractors as American employers. That means they now have to pay the taxes that finance Social Security and Medicare programs.
Defense companies such as Combat Support Associates and KBR Inc. set up shell companies in the Cayman Islands and other tax havens to avoid paying those taxes on their American workers.
The president shut a loophole?? More like the president was forced into shutting down a loophole it was so beyond the pale and embarrassing, even Dick wasn’t going to step in and stop it from being shut down. The way this whole thing happened, and how swiftly it got done (the first story on it was March, and here we are in June and it is already outlawed) is a sign that pretty soon there will be a new sheriff in town, President Obama, who will not look the other way when corruption rears its ugly head. (And, no, this isn’t technically “corruption”, but it oozes of the culture of corruption the Republicans flourished in).
But this is more than just kicking greedy war profiteering corporations to the curb. This bill also helps veterans in so many ways. As was reported in Mass., this bill will actually affect lives, with the proceeds of closing the loophole:
Included in the bill is a tax provision written by U.S. Sens. John F. Kerry, D-Mass., and Barack Obama, D-Ill., that will provide revenue for the tax breaks for members of the Armed Services and their families by sewing up a tax loop that allowed defense contractors, in particular, KBR (formerly a Halliburton subsidiary known as Kellogg, Brown & Root), to avoid paying their full share of payroll takes by creating shell companies in the Cayman Islands.
The practice allowed contractors to short-change their taxes by $100 million to Social Security and Medicare, according to Kerry’s staff.
With the passage of the bill, Kerry said, “thousands of military families in Massachusetts will receive the benefits they deserve and big companies will pay their fair share of taxes rather than leaving hard working Americans with the bill.”
Obama said that for “the sake of transparency and fairness in our tax system, we cannot allow federal contractors to set up shell corporations in tax shelters and shirk their responsibility to pay payroll taxes for their American employees.”
The HEART Act includes another provision Kerry wrote with U.S. Sen. Gordon Smith, R-Oregon, called the Active Duty Military Tax Relief of 2007 that is designed to bolster small businesses that employ reservists.
The Kerry-Smith language included in the HEART bill provides small businesses that employ fewer than 50 workers with a 20 percent tax credit of the salary differential they pay the reservist employee who is called up for active duty.
This was a great week, righting a terrible wrong perpetrated by KBR while helping our service members and their families. Thank you Senator Kerry and Senator Obama. I will end this diary with the portion of the press release which gives all the details of how the HEART Act will help veterans for the policy wonks who want to know exactly what is in the bill.
The HEART Act includes several provisions included in legislation introduced by Kerry and Senator Gordon Smith (D-Oregon) in January of 2007. The Active Duty Military Tax Relief of 2007 aimed to bolster military families and small businesses that employ reservists.
The HEART Act would:
* Enable active duty military personnel to qualify for economic stimulus payments. The HEART Act would clarify that active military who file a joint tax return would be eligible for the stimulus rebate payment even if the spouse does not have a Social Security number;
* Make permanent the ability to include combat pay as earned income for purposes of the Earned Income Tax Credit. The earned income tax credit (EITC) is a refundable tax credit for eligible low-income workers. Generally, “earned income” includes taxable wages, salaries, tips, and other employee compensation. Some low-income military families who receive the EITC based on taxable military pay could lose this tax credit if they begin receiving non-taxable combat pay and have no other earned income on which to claim the EITC. The HEART Act would extend the provision that allows America’s military men and women to count combat pay for the purposes of qualifying for the earned income tax credit.
* Make permanent and modify qualified mortgage bonds used to finance residences for veterans. To give our nation’s brave veterans greater access to homeownership, the HEART Act would permanently extend the provision that allows veterans to qualify for state-operated, tax-exempt mortgage revenue bond programs. This program provides financing to provide lower-income individuals without regard to the general first-time home buyer requirement;
* Modify retirement plan protections for reservists who have given their lives in service or who are disabled while serving our country. The HEART Act would modify the Uniformed Services Employment and Re-employment Rights Act to: 1) allow the day prior to the date of death to be treated as the date the employee returned to work for purposes of triggering payment of benefits under a qualified plan; and 2) permit an employer to make certain contributions to a qualified pensio
n plan on behalf of an employee who is killed or becomes disabled in combat;
* Modify treatment of differential wages paid by an employer to an employee who becomes active duty military. In the case of an employee who is called to active duty with the United States uniformed services, some employers voluntarily agree to continue paying the level of compensation that the service member would otherwise have received from the employer during the service member’s period of active duty. This “differential pay” is not treated as wages for purposes of the federal income tax withholding rules that apply to an employer’s payment of wages. The HEART Act would treat differential wages paid by an employer to an employee who becomes active duty military as wages for withholding and retirement plan purposes;
* Extend the period for filing tax refund credit claims arising from Department of Veterans Affairs (DVA) disability determinations. Because of the lapse of time between retirement and the determination of, or the onset and determination of, a service connected disability, the HEART ACT would extend the statute of limitations to permit retired military personnel to file claims for refunds one year after the date of the determination of a service-connected disability is made;
* Make permanent the special rules that permit penalty-free withdrawals from retirement plans. Generally, there is a ten percent withdrawal tax on early distributions from certain retirement plans. Because reservists called to active duty may need access to amounts that they have contributed to their retirement plans in order to meet their personal financial obligations while serving our country, the HEART Act would extend special rules that permit active duty reservists to make penalty-free withdrawals from their retirement plans, and a reservist has two-years from the last day of the active duty period to contribute distributions to an IRA;
* Permit recipients of military death benefit gratuities to roll over the amounts received to tax-favored accounts for retirement and education savings. To enable survivors of servicemembers should be able to contribute death benefit proceeds to accounts to save for future retirement and education needs, the HEART Act would permit recipients of military death benefit gratuities to roll over the amounts received, tax-free, to a Roth IRA or an Education Savings Account; and
* Provide a tax credit for small employers with respect to differential wage payments to employees who are on active military duty. Many employers voluntarily eliminate any pay gap between the reservists’ civilian pay and military pay by paying the difference. The proposal would treat the pay gap as wages requiring information reporting and subject the differential pay payments to withholding. The proposal would also make it easier for employers to contribute to their activated employee’s retirement plans.
The HEART Act would also permanently allow the Social Security Administration to disclose tax return information to the DVA for purposes of determining eligibility for certain veteran’s programs; clarify that certain tax rebates and benefits are excludible from income for volunteer firefighters; clarify the application of the “five-year requirement” to the sale of a principal residence by a Peace Corps volunteer; clarify that state payments to service members are treated as qualified military benefits; and provide for permanent exclusion of gain from the sale of a principal residence by certain employees of the intelligence community.
Supplemental Social Security Income
To ensure fairer treatment of military families who depend on Supplemental Security Income payments, the HEART Act would:
* Allow most military cash allowances beyond basic pay to be treated as earned income for purposes of determining Supplemental Security Income (SSI) eligibility and benefit amounts for military families, and treat certain housing payments as in-kind support and maintenance;
* Disregard state annuity payments paid to blind, disabled, and aged veterans when determining SSI eligibility and benefits; and
* Disregard allowances paid to all Americorps volunteers for the purpose of determining SSI eligibility and benefit amounts.
* The HEART ACT would, revise tax rules on expatriation. American citizens and long-term U.S. residents are subject to tax on their worldwide income. Under current law, taxpayers can avoid taxes by renouncing their citizenship or terminating their residence. The Heart Act would tighten current law rules to ensure that certain high net-worth taxpayers cannot renounce their citizenship or terminate their residence in order to avoid U.S. taxes. Under this provision, high net-worth individuals would be treated as if they sold all of their property for its fair market value on the day before such individual expatriates or their residency would be terminated. The gain would be recognized to the extent that the aggregate gain recognized exceeds $600,000 (which will be adjusted for cost of living in the future).
* Modify treatment of certain foreign persons performing services under contract with United States. The Heart Act generally would treat foreign subsidiaries of American companies performing services under a U.S. government contract as American employers for employment tax purposes. The domestic parent would be jointly liable for employment taxes imposed on the foreign subsidiary.
* Increase general failure to file return penalty. The Heart Act would increase the general penalty for failure to file tax returns to the lesser of $135 or 100 percent of the amount required to be shown on such return.
Mental Health Parity
* The HEART Act would extend current law excise tax for failure to comply with the mental health parity requirements for benefits for services furnished on or after the date of enactment through December 31, 2008. Current law requires certain group health plans to provide the same coverage for mental health benefits that they provide for medical and surgical health benefits. The HEART Act would extend the imposition of a $100-per-day excise tax on group health plans that fail to comply with this requirement.