Industrial manufacturer Caterpillar shifted billions of dollars in profits from the United States to Switzerland over a decade to avoid paying $2.4 billion in U.S. taxes, according to a Senate report due out Tuesday.
The report from the Senate permanent subcommittee on investigations is the latest in a series of probes into multinational corporations, including Apple, Microsoft and Hewlett-Packard, accused of hiding portions of their global profits from taxation.
Lawmakers have argued that tax shelters are an outgrowth of a broken corporate tax code and allow homegrown companies to defer taxes on overseas income indefinitely if they don’t bring the proceeds home. But lawmakers also say the failings of the tax system are no excuse for companies not to pay their fair share.
“Caterpillar is an American success story, but it is also a member of the corporate profit-shifting club that has shifted billions of dollars in profits offshore to avoid paying U.S. taxes,” Sen. Carl Levin (D-Mich.), chairman of the subcommittee, said during a news conference Monday.
The subcommittee staff found that from 2000 to 2012, Peoria, Ill.-based Caterpillar moved $8 billion it earned in the United States to Switzerland after negotiating an effective tax rate of 4 percent with the Swiss government. Caterpillar redirected the money it made selling replacement parts for its machines to Swiss affiliate CSARL, according to the report.
CSARL sells parts to Caterpillar’s foreign dealers and pays the parent company a royalty equal to about 15 percent of the parts profits while keeping the remaining 85 percent on its books in Switzerland. Investigators say that Caterpillar started logging a majority of its profits from replacement parts in Switzerland in 1999, although no personnel or business activities were moved to that country.
At least 70 percent of the
replacement-parts business — manufacturing, warehousing and distribution — is housed in the United States. There are nearly 5,000 U.S. employees handling the manufacturing, and only 65 workers doing the same in Switzerland, according to the report.
Caterpillar officials said that the investigation looked at only one aspect of its global operations, presenting a limited picture of the company’s tax contribution in the United States. Caterpillar has paid about $600 million a year in federal taxes during the past three years, the company said.
“Caterpillar’s effective income tax rate averages about 29 percent, which is one of the highest for a U.S. multinational manufacturing company,” Julie Lagacy, vice president of the financial services division at Caterpillar, said in a statement. “We comply with the tax laws enacted by Congress, by the states and by all of the many jurisdictions in which we conduct business.”
Lagacy said Caterpillar’s business structure drives its tax structure. But the subcommittee contends that maximizing profits at the expense of U.S. taxpayers has played a much greater role.
It wasn’t always like this. PricewaterhouseCoopers, hired by Caterpillar as a tax consultant and auditor, devised the tax strategy in 1999, when 85 percent of the manufacturer’s profits were booked in the United States, according to investigators. The accounting giant was paid more than $55 million to find ways to lower the tax bill, the report said.
“When Caterpillar and its tax advisers launched this tax-
avoidance scheme, almost nothing changed in the real world,” Levin said. “But in the fantasyland that is international tax law, tax lawyers waved a magic wand to make millions of dollars in U.S. taxes disappear.”
The subcommittee also questioned the ethics of PricewaterhouseCoopers acting as Caterpillar’s accountant at the same time it was auditing the company.
Caroline Nolan, a spokeswoman for PricewaterhouseCoopers, dismissed the accusation of impropriety, saying that the company has maintained independence at all times. She said the firm was compensated for six years of extensive work to help Caterpillar improve its operations.
“We stand by the work we did for them,” Nolan said in an e-mail. “Our advice . . . helped Caterpillar evaluate how best to organize its expanding global operations, aligning the economics of such global operations with carefully considered U.S. tax policies.”
In February, Caterpillar revealed in a Securities and Exchange Commission filing that the Internal Revenue Service notified the company that it owes additional federal taxes from “certain non-U.S. operations and foreign tax credits.”
Subcommittee staff began looking into practices at Caterpillar after a former employee, Daniel Schlicksup, sued the company in 2009. Schlicksup, who served as global tax strategy manager at Caterpillar, said he questioned the company about the risks of its Swiss tax strategy and was forced to transfer elsewhere in the firm out of retaliation. Caterpillar denied the allegation in the case, which was settled in 2012.
Executives from Caterpillar and PricewaterhouseCoopers are scheduled to testify Tuesday at a subcommittee hearing on the report. Although Levin said the report was a bipartisan effort, the subcommittee’s ranking Republican, Sen. John McCain (Ariz.), did not endorse the findings. McCain declined to comment, but his office said he would address the issue at the hearing.