http://www.boston.com/news/nation/washington/articles/2008/05/04/shell_firms_shielded_us_contractor_from_taxes/WASHINGTON - In March 2005, one of the Pentagon's most trusted contractors - Virginia-based MPRI, founded by retired senior military leaders - won a $400 million contract to train police in Iraq and other hotspots. Two months later, MPRI set up a company in Bermuda to which it subcontracted much of the work.
It was not the first time that MPRI executives had used a shell company in an offshore tax haven to perform government-funded work. A year earlier, MPRI headed a joint venture that won a $1.6 billion contract to provide US peacekeeping forces in Kosovo and elsewhere. Three months later, MPRI set up a company in the Cayman Islands to do the work.
Like MPRI's Bermuda subsidiary, the Cayman Islands company appears to have no phone number, website, or staff of its own there.
Rick Kiernan, an MPRI spokesman, declined to explain why the company created the two offshore entities and stressed that MPRI operates in "total adherence or compliance with the current law."
But tax lawyers say that MPRI appears to be avoiding the payment of roughly $4 million dollars a year in Social Security and Medicare taxes for the police-training contract alone and is sidestepping scrutiny by hiring workers through offshore entities based outside the jurisdiction of the Internal Revenue Service.
"The employer is trying to take itself out of the audit reach of the IRS," said California-based tax lawyer James R. Urquhart III.
If MPRI had not set up the shell company, it would have been vulnerable to an audit, tax specialists said, because it classifies a significant portion of its roughly 400 American police trainers and advisers working in Iraq and elsewhere as self-employed independent contractors, a practice that allows MPRI to avoid paying Social Security, Medicare, and unemployment taxes.
As a result, workers cannot receive unemployment compensation when their jobs end and may be deprived of other protections under US law.
"They are taking steps to reduce the audit risk," said H. David Rosenbloom, director of the International Tax Program at New York University Law School. "If there is concern about the classification [of workers], as there undoubtedly is, from the company's standpoint they are better off being in a foreign corporation."
Workers classified as self-employed must pay Social Security and Medicare taxes themselves, the equivalent of 15.3 percent of their salaries. If they were classified as employees of MPRI, rather than independent contractors, they would split the cost with their employer.
But sometimes the taxes are not paid at all. A former MPRI worker in Iraq said he was unaware of his tax obligations and did not pay self-employment tax for an entire year on his salary of $154,000. Such levies are very difficult for the IRS to collect, specialists say, and frequently go unpaid.
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