AP IMPACT: An islands tax haven for US defense contractor

It's legal, at least for now. Contractors large and small have been heading offshore to shield piles of taxpayer dollars, according to an Associated Press investigation, but irate lawmakers are thundering that they'll put an end to it.

Almost a decade ago, a few months after winning the deal that has totaled more than $2 billion, Combat Support Associates established its subsidiary in the Cayman Islands, a British territory and tax haven.

The subsidiary, CSA Ltd., now employs about 2,000 American citizens in Kuwait, where they support U.S. forces moving in and out of Iraq. Yet as a foreign corporation doing work outside the United States, CSA Ltd. does not pay Social Security and Medicare taxes for these workers. Also, company officials maintain the subsidiary is outside the jurisdiction of U.S. courts, so federal labor rules and anti-discrimination laws don't apply either.

In fact, there's scant evidence that CSA Ltd. exists -at least physically. There's no listed office address or phone number in the Cayman Islands. Records show the corporation is registered with Close Brothers, an investment house that serves as its shallow footprint in the Caymans.

Close Brothers operates out of a five-story, blue-windowed office building across the street from the docks used by cruise ships visiting this island paradise. There's no sign of CSA Ltd., however. "We can't make any comments in regards to our clients," Close Brothers director Roger Priaulx said by telephone.

Back in the U.S., the House of Representatives passed tax legislation a few weeks ago that would treat foreign subsidiaries of U.S. government contractors as American employers. That means they would have to pay the taxes that finance Social Security and Medicare programs. The Senate is now considering the legislation.

"Companies that avoid this responsibility undermine the country," says John Kerry, D-Mass., chairman of the Senate subcommittee on social security, pensions and family policy. "If everybody avoided their responsibility, where would we be?"

The Joint Committee on Taxation estimates shutting the employment tax loophole would bring in about $846 million in revenue over 10 years. That figure could be higher, lawmakers say, since it's unclear how widespread use of the opening is.

"People are constantly looking for ways to jilt the system," says Rep. Brad Ellsworth, D-Ind., one of the authors of the measure. "Where there's smoke there could be fire, and you go investigate that."