Executives from Caterpillar Inc. and PricewaterhouseCoopers are expected to testify today before a U.S. Senate subcommittee on allegations that, acting on the advice of PwC, the heavy equipment manufacturer used a Swiss subsidiary to avoid paying US$2.4 billion in U.S. taxes.
A majority staff report of the Senate’s Permanent Subcommittee on Investigations “shows how an iconic American corporation, Caterpillar Inc., a U.S. manufacturer of construction equipment, power generators and sophisticated engines, 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%-6%.”
The result, the report claims, allowed Caterpillar to shift 85% or more of its profits to Switzerland “without making any real changes in its business operations.”
“Caterpillar also executed that profit shift despite the fact that its U.S. operations continued to play a far larger role in the parts sold to non-U.S. customers than its Swiss operations,” the report said. “Caterpillar’s worldwide headquarters has long been in Peoria, Illinois, and all of its most senior executives are located there. Of its 118,500 employees worldwide, about 52,000, or nearly half work in the United States, while only 400 employees, less than one-half of one percent, work in Switzerland.”
“Of its 125 manufacturing facilities worldwide, 54 are in the United States, while none are located in Switzerland,” the document observed. In 2012 80% of Caterpillar’s R&D was spent in the United States.
Of the nearly 8,300 Caterpillar employees specializing in parts, about 4,900 work in the United States including almost all of the senior parts executives. Switzerland has 65 CAT parts employees, said the report.
The subcommittee investigation contends that Caterpillar paid more than $55 million to PricewaterhouseCoopers, CAT’s longtime auditor, “to develop and implement the Swiss tax strategy, which was designed explicitly to reduce the company’s taxes.”
“Caterpillar used a series of complex transactions to designate a new Swiss affiliate called CSARL as its ‘global parts purchaser,’ and license CSARL to sell Caterpillar third party manufactured parts to Caterpillars; non-U.S. dealers,” said the report.
As a result of licensing and serving agreements, “over the next 13 years from 2000-2012, Caterpillar shifted to CSARL in Switzerland taxable income from its non-U.S. parts sales totaling more than $8 billion, and deferred or avoided paying U.S. taxes totaling about $2.4 billion,” the report asserts.
In a news release issued late Monday afternoon, Caterpillar said the company’s Vice President with responsibilities for the Finance Services Division, Julie Lagacy, will testify during the subcommittee hearing Tuesday to discuss “Caterpillar’s prudent and lawful business planning that is common among U.S. multinational corporations.
“Caterpillar takes very seriously its obligation to follow tax law and pay what it owes,” said Lagacy in a news release. “In fact, Caterpillar’s effective income tax rate averages about 29%, which is one of the higher for a U.S. multinational manufacturing company. …We comply with the tax laws enacted by Congress, by the states and by all of the many jurisdictions in which we conduct business.”
However, Senate subcommittee chairman Sen. Carl Levin, D-Michigan, said, “When Caterpillar and its tax advisers launched this tax avoidance scheme, almost nothing changed in the real world. The manufacturing workers who make world-class parts, the managers who operate parts operations, the warehouses where they are stores—none of that changed. But in the fantasy land that is international tax law, tax lawyers waved a magic want to make millions of dollars in U.S. taxes disappear.”
“Caterpillar gave its Swiss sub $1 of profits in exchange for 15 cents, a deal no reasonable business would offer,” Levin observed. “It didn’t even ask to be compensated for turning over a profitable parts business that Caterpillar took decades to develop.”
“It wasn’t a real business transaction,” Levin declared, “it was a tax deal pure and simple to shift profits between related parties.”
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