Congress May Close Loophole for Defense Contractors

According to the Associated Press, as reported in the Orlando Sentinel, Congress is moving to close a loophole that until now has permitted military contractors to avoid paying taxes and evade the strictures of U.S. employment law by setting up off-shore shell corporations. 

According to the report, U.S.-based military contractors have been setting up subsidiaries in places like the Cayman Islands.  These subsidiaries then employ U.S. citizens who provide support services for the U.S. military abroad.  As foreign corporations doing work abroad, these subsidiaries do not pay social security or medicare taxes for their workers and need not abide by federal labor and anti-discrimination laws.  The A.P.’s investigation suggests that the off-shore subsidiaries exist only on paper, without an address or phone number. 

The House passed tax legislation two weeks ago that would treat  foreign subsidiaries of U.S. government contractors as U.S. corporations.  The Senate is now considering the measure.  Today’s New York Times features an editorial urging passage of the legislation. 

[Jeremy Telman]