An American company which won a multi-million-dollar US government contract to train police officers in Iraq has been accused of using its Bermuda-based shell company to shield itself from US taxes.

Yesterday's edition of the Boston Globe reported that Virginia-based MPRI's subsidiary on the Island appeared to have no staff, telephone number, or website. MPRI International Services Ltd. appears in the records of the Bermuda Registrar of Companies and was incorporated in April 2005.

The previous month the Pentagon had awarded MPRI a $400 million contract to train police officers in several world hotspots, including Iraq. Much of that work has been subcontracted to the Bermuda subsidiary, the Globe reported.

The paper reported that MPRI also owned a subsidiary in the Cayman Islands, to which it subcontracted work related to a $1.6 billion contract to provide US peacekeeping forces in Kosovo and elsewhere. The Cayman company had been formed three months after the contract had been awarded.

The Globe's investigation found that MPRI hires roughly 400 American workers through its Bermuda shell company. Some workers are classified as employees of the Bermuda company, allowing both the workers and MPRI to avoid paying payroll taxes, resulting in an estimated loss of some $4 million to US Social Security and Medicare funds.

Others are hired as independent contractors, a practice that forces the worker to shoulder the entire tax burden and makes it more difficult for the IRS to collect. Classifying workers as independent contractors has enabled MPRI and some other defence contractors working in Iraq to hire and fire more easily and to avoid some legal obligations to its workers, the Globe reported.

The report will do nothing to quell political attacks on offshore jurisdictions that have caused concern in Bermuda. Both Democratic Party presidential candidates have sounded warnings to low-tax jurisdictions during their campaigns, Sen. Barack Obama promising to "close down the tax havens" and Sen. Hillary Clinton through her "insourcing" proposals.

Companies that use offshore entities to avoid taxes, even as they profit from lucrative federal contracts, have captured the attention of the US Congress in recent months. After Halliburton subsidiary KBR avoided hundreds of millions of dollars in payroll taxes by hiring employees through a Cayman Islands shell company, the House of Representatives passed a bill prohibiting the practice.

Sen. John Kerry, who repeatedly mentioned Bermuda during his own presidential campaign four years ago, and Sen. Obama are cosponsoring a similar effort in the Senate, and they have called on a Senate subcommittee to investigate the practice.