Senator John Kerry (D-MA) has proposed legislation, co-sponsored by Senators Clinton and Obama and others, that would close the loophole used by Kellogg Brown & Root (KBR), the former subsidiary of Halliburton, to avoid paying Social Security and Medicare taxes for the Americans it employs to work in Iraq. On Thursday similar provisions were added to the emergency supplemental bill for military operations in Iraq and Afghanistan as it was being marked up and approved in the Senate Appropriations Committee.

KBR has made a special arrangement to avoid paying taxes on about 10,500 of its American employees who are working in Iraq on various reconstruction programs. KBR recruits people to work on reconstruction-related projects, but when the workers get their first paycheck, they see that it's not coming from KBR, but from a KBR subsidiary, Service Employers International Inc, (SEI).

SEI's corporate home is the Grand Cayman Islands, although it has no actual offices there. While KBR employees working in Iraq would be subject to the 15.3 percent payroll tax for Social Security and Medicare (half of which is paid by the employer, the other half of which is paid by employees), SEI employees don't incur federal payroll tax liability because they're not working for a US-based company.

Kerry's bill, the Fair Share Act (S. 2775) would basically treat the foreign shell companies used in this scheme as American employers for the purposes of Social Security and Medicare taxes.

A similar provision was included in the Taxpayer Assistance and Simplification Act of 2008 (H.R. 5719) which was approved by the House on "tax day." That bill has drawn a veto threat from the White House because it would end the IRS's use of private debt collection agencies to locate unpaid taxes.

If the amendment does not survive in the final version of the supplemental war funding bill, responsibility falls mainly with the Senate Finance Committee, of which Senator Kerry is a member. As reports, the companies that apparently want to keep the loophole are trying to influence the process.

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