Military Tax Relief Act Closes Offshore Loophole

by Leroy Baker, Tax-News.com, New York

27 May 2008

New legislation headed for President Bush's desk for his signature attempts to prevent US companies from using offshore structures to avoid paying domestic social security and medicare taxes, and tighten expatriation rules, Senators John Kerry (D - Mass.) and Barack Obama (D - Ill.) have announced.

The Heroes Earnings Assistance and Relief Tax Act of 2008 (The 'HEART Act') passed the House of Representatives on 21st May, and will provide tax relief to those serving in the US armed services and others volunteering service on behalf of the United States, including Peace Corps volunteers and AmeriCorps volunteers.

It is to be paid for by a Kerry-Obama tax reform that closes a tax loophole which supposedly allowed defense contractor KBR to avoid paying US taxes.

Kerry and Obama introduced the Fair Share Act of 2008 in March to close this loophole, after it was discovered that KBR and another defense contractor had avoided paying Social Security and Medicare taxes by creating "shell companies" in the Cayman Islands.

“This important bill will provide much needed tax relief to our brave service members and hold American companies accountable for paying taxes and guaranteeing that employees receive the benefits they are entitled to through their employment,” explained Obama.

“For the sake of transparency and fairness in our tax system, we cannot allow Federal contractors to set up shell corporations in tax shelters and shirk their responsibility to pay payroll taxes for their American employees. I commend Senator Kerry for his leadership on behalf of America's small businesses, workers, and service members and I call on the President to sign this bill into law," the Democrat presidential candidate added.

The HEART Act would also tighten expatriation rules to prevent certain high-net-worth individuals from renouncing their citizenship or terminating their residence in America in order to avoid US taxes.

Under this provision, these wealthy individuals would be treated as if they sold all of their property for its fair market value on the day before they expatriate or terminate their residence.

The gain would be recognized to the extent that the aggregate gain recognized exceeds USD600,000 (which would be adjusted for cost of living in the future).

A third revenue provision would modify treatment of certain foreign persons performing services under contract with the United States.

The HEART Act would generally treat foreign subsidiaries of American companies performing services under a US government contract as American employers for employment tax purposes. The domestic parent would be jointly liable for employment taxes imposed on the foreign subsidiary.

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