Waxman probes contractors' use of off-shore subsidiaries

The House Oversight and Government Reform Committee wants information from defense contractors such as KBR and Blackwater Worldwide on their use of off-shore subsidiaries to avoid taxes.

In letters sent Monday to 14 government contractors active in Iraq and Afghanistan, House Oversight and Government Reform Chairman Henry Waxman, D-Calif., asked the companies if they have affiliates based in any of 39 locations designated as tax havens by the Organization for Economic Cooperation and Development.

For such affiliates, Waxman sought estimates of tax savings the subsidiaries have generated and data on gross profits, owners, employees and benefits.

A separate committee letter to KBR describes two company subsidiaries based in the Cayman Islands that "employ thousands of U.S. citizens who perform work in Iraq and other countries under KBR's contracts with the U.S. government."

The letter cites a March 28 briefing with committee staff during which KBR representatives said the arrangement is meant "to reduce KBR's tax obligations." Use of the subsidiaries, which appears legal, may help KBR avoid tens of millions of dollars in annual payroll taxes.

It is unclear if the other contractors contacted by the committee have similar arrangements, but the committee's inquiry could be a step toward congressional efforts to block government contractors from using off-shore subsidiaries or other adjustments in their business models to avoid taxes.

Waxman and Senate Majority Whip Dick Durbin, D-Ill., and Sen. Barack Obama, D-Ill., have asked the IRS and other agencies to investigate if Blackwater improperly classified its employees as independent contractors to avoid employment taxes and workers' compensation obligations. Durbin and Obama have introduced a bill to bar employers from calling full-time employees independent contractors to skirt taxes. Any House legislation on contractors' use of tax havens would involve several committees.

Republicans on the panel had no comment on Waxman's inquiry to the defense contractors, but one aide said the investigation appears to be an effort to publicize legal business practices to "feed the anti-Iraq narrative." Democrats in both chambers are stepping up scrutiny of alleged waste and fraud by military contractors, with KBR, a former Halliburton subsidiary, a frequent target.

Waxman and Sen. Robert Casey, D-Pa., have sought information on the firm's role in maintaining a facility in Iraq where faulty wiring caused the accidental electrocution of a U.S. solider this year.

KBR will also face criticism at a Democratic Policy Committee hearing Monday on abuses in Iraq contracting. Two former KBR employees are among four whistleblowers scheduled to testify at the hearing. A spokeswoman said KBR will provide the information sought. But she emphasized that the company created the subsidiaries in the mid-1990s "in accordance with IRS rules and regulations."