Emanuel Provision to Close KBR Payroll Tax Loophole Signed Into Law

WASHINGTON, D.C.—Today, the Heroes Earnings Assistance and Relief Tax act (HEART Act) was signed into law by President Bush. The law includes a provision authored by U.S. Representatives Rahm Emanuel (IL) and Brad Ellsworth (IN) and U.S. Senators John Kerry (MA) and Barack Obama (IL) closing a tax loophole that has allowed the defense contractor Kellogg, Brown, and Root (KBR) to avoid paying almost $100 million a year in payroll taxes for its U.S. employees. 

“American taxpayers deserve a tax system where companies cannot use every trick in the book to rig the system to avoid paying their fair share,” said Emanuel.

Prior to the HEART Act, American companies who were benefiting from U.S. government contracts were able to set up foreign subsidiaries in tax havens and treat American workers employed in connection with the contract as employees of the foreign subsidiary.  As a result, those employers could avoid their obligation to pay Social Security and Medicare payroll taxes on behalf of their employees.  Recently, the Boston Globe reported that Kellogg Brown & Root had avoided its payroll taxes by hiring workers through shell companies in the Cayman Islands. 

“KBR has been taking advantage of a tax loophole that hurts Social Security and Medicare and prevents their own U.S. employees working abroad from potentially being able to qualify for these vital programs.  Closing this loophole is a victory for both the U.S. employees of these companies as well as hardworking Americans who pay their fair share of taxes,” said Emanuel.

The Emanuel provision in the tax bill closed the payroll tax loophole by amending the Internal Revenue 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 will apply to foreign subsidiaries of a U.S. parent corporation.  The degree of common ownership applied by the legislation is 50 percent, meaning that the U.S. parent corporation would have to own more than 50 percent of the subsidiary.