Report: Caterpillar avoided $2.4 billion in taxes

Posted at 5:26 PM, Mar 31, 2014

NEW YORK (CNNMoney) — Caterpillar, the maker of industrial equipment, avoided or deferred $2.4 billion in U.S. taxes over a 13-year period by shifting profits to a Swiss affiliate, a Senate subcommittee majority report asserted Monday.

The report is part of the Senate Permanent Subcommittee on Investigation’s decade-long focus on whether some U.S. multinationals’ tax strategies violate the spirit — if not the letter — of tax laws and rules.

Subcommittee Chairman Carl Levin, a Michigan Democrat, will conduct a hearing Tuesday at which Caterpillar executives and representatives of its accounting firm, PricewaterhouseCoopers, will testify.

According to Levin’s report, before 1999, Caterpillar booked the vast majority of its profits from replacement part sales to non-U.S. customers in the United States. After 1999, it only booked 15% or less of them, shifting 85% or more of those profits to the Swiss unit.

But, Levin said, “nothing changed in the operations.”

That is, the bulk of the company’s worldwide parts business — the research, manufacturing, storage and delivery – continues to be conducted in the United States, according to the report.

More than half of Caterpillar’s 8,300 parts employees work in the United States, including “almost all” of the senior parts executives, according to the report, while just 65 employees working on parts are based in Switzerland.

The implication is that Caterpillar might not have been operating in accordance with what’s known as the economic substance doctrine which says that a company can’t engage in a transaction strictly for tax purposes. There must be a good business reason, too.

And likewise, it might not have met the “arms-length” standard in moving profits to the Swiss affiliate. The affiliate did pay Caterpillar a license fee — but the question Levin raises is did the unit pay as much as an outside party would have been asked to pay, or was it a sweetheart deal for the affiliate?

Levin is clear where he stands. “Caterpillar gave its Swiss sub $1 dollar of profits in exchange for 15 cents, a deal no reasonable business would offer. … [I]t was a tax deal pure and simple to shift profits between related parties,” he said in a statement.

Caterpillar Vice President Julie Lagacy countered that.

“Caterpillar takes very seriously its obligation to follow tax law and pay what it owes,” Lagacy said in a statement. “Caterpillar’s philosophy is that our business structure drives our tax structure. We comply with the tax laws enacted by Congress, by the states and by all of the many jurisdictions in which we conduct business.”

Caterpillar, of course, isn’t the only company that Levin’s subcommittee has scrutinized. Last year, for instance, it focused on Apple’s businesses in Ireland. And both Levin and the subcommittee’s top Republican, Sen. John McCain, presented a united front on Apple’s tax strategies.

This year, though, McCain isn’t signing on to the Caterpillar report.

“Senators McCain and Levin have a very productive working relationship, but they respectfully disagree on this one,” a spokesman for the Arizona senator said Tuesday.

What they disagree about specifically isn’t clear. McCain is expected to elaborate at Tuesday’s hearing.