Published March 31, 2014
Caterpillar avoided $2.4 billion in federal taxes between 2000 and 2012 by shifting $8 billion in profits from international parts sales to a tax haven in Switzerland, said Chairman Carl Levin, (D-MI), of the Senate Permanent Subcommittee on Investigations on Monday.
Joining Microsoft (MSFT), Hewlett Packard (HPQ) and Apple (AAPL), Caterpillar (CAT) is the latest target of the committee’s investigations into complex international tax planning. “You can’t get much clearer than this,” said Levin of Caterpillar’s intent to structure its business to avoid paying billions in U.S. taxes. Levin is recommending greater scrutiny and clarity from the IRS on multinational corporations’ treatment of overseas income.
On Tuesday, several current and former tax executives from Caterpillar and PricewaterhouseCoopers will appear before the subcommittee in a hearing titled “Caterpillar’s Offshore Tax Strategy.” The committee subpoenaed none of the witnesses as they agreed to appear voluntarily, according to committee staff.
“Caterpillar takes very seriously its obligation to follow tax law and pay what it owes, said Julie A. Lagacy, the vice president of Caterpillar’s Financial Services Division, in remarks prepared for Tuesday’s hearing. “Our average effective tax rate of 29 percent is one of the highest for a multinational manufacturing company, and 3 percentage points higher than the average effective income tax rate for U.S. corporations, according to the U.S. Department of the Treasury.”
In its investigation, the committee focused on Caterpillar’s international replacement parts business and a 1999 overhaul of its tax structure. Caterpillar then “paid millions of dollars for a tax strategy that shifted billions of dollars in profits away from the United States and into Switzerland, where Caterpillar had negotiated an effective corporate tax rate of 4% to 6%,” said the committee’s report.
Before then, Caterpillar reported to the IRS the “vast majority” of its worldwide profits on replacement parts. After 1999, Caterpillar reported “15% or less of those profits in the United States and shifted 85% or more of the profits to Switzerland,” said the committee report. The profit shift followed no substantial changes to Caterpillar’s business operations, said committee staff.
Caterpillar paid more than $55 million to PricewaterhouseCoopers to develop its Swiss tax strategy, according to the report. In 1999 planning documents, PWC claimed its proposed strategy “will migrate profits from CAT Inc. to low-tax marketing companies … We are effectively more than doubling the profit on parts,” according to the committee report.
Caterpillar’s 15-year-old tax strategy is the result of a “series of complex transactions” that designated a Swiss affiliate, CSARL, as its “global parts purchaser” to enable it to “sell Caterpillar’s third party manufactured replacement parts to its non-U.S. dealers and customers without showing the parts profits as U.S. income,” said the report. That strategy reduces Caterpillar’s overall tax bill by $250 to $300 million annually, said committee staff.
“CSARL is no mere shell, but rather a major operating company employing hundreds of personnel in Geneva, including many of the people who perform the strategically critical work of interfacing with dealers in non-U.S.markets,” said Lagacy’s prepared remarks. “CSARL and its predecessor developed the dealer networks in much of the world outside the United States. The amount of income and eligibility for deferral of U.S. tax are well policed by existing transfer pricing and Subpart F rules. The structure complies with existing law and offends no U.S. tax policy. Caterpillar stands by this structure.”
The subcommittee’s Republican staff worked with their Democratic counterparts on the report, according to majority staffers. However, the panel’s top Republican, Sen. John McCain, (R-AZ), refused to sign on to the report’s findings. “Senators McCain and Levin have a very productive working relationship, but they respectfully disagree on this one,” said Brian Rogers, a McCain spokesman. McCain’s office failed to detail specifically how he and Levin disagree.