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Apr
2014
2

Sen. Rand Paul Says Caterpillar “Deserves an Award” for Dodging $2.4B in Taxes

Caterpillar

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Testifying before the Senate Permanent Subcommittee on Investigations, representatives of Caterpillar, Inc. answered questions pertaining to a report that suggests the industrial giant has dodged $2.4 billion in taxes over the past decade.  Amazingly, the investigation’s discoveries split the subcommittee along partisan lines. Democrats disapproved of the exploitation of tax havens while Republicans applauded the company for its diligence.  

Caterpillar’s tax strategy may be controversial but remains legal under the current tax code. The company has invested a great deal in ensuring it pays the lowest amount of taxes possible:

Caterpillar paid PricewaterhouseCoopers LLP $55 million to develop the tax strategy. Under the strategy, Caterpillar transferred the rights to profits from its parts business to a wholly-controlled Swiss affiliate called CSARL, even though no employees or business activities were moved to Switzerland, the report said.

In exchange, CSARL paid a small royalty, and the income was taxed at a special rate of 4 percent to 6 percent that Caterpillar negotiated with the Swiss government, the report said.

Subcommittee Chairman Sen. Carl Levin took representatives of Caterpillar to task for their tax avoidance strategies, noting their role in a much larger scheme of American companies avoiding American taxes by shifting profits to foreign subsidiaries that are often nothing more than an address.

“Caterpillar is an American success story that produces iconic industrial machines,” Levin said. “But it is also a member of the corporate profit-shifting club that has transferred billions of dollars offshore to avoid paying U.S. taxes.”

Kentucky Sen. Rand Paul said that Caterpillar “deserves an award” for their tax dodging:

“I think rather than having an inquisition, we should probably bring Caterpillar here and give them an award,” Paul said. “You know, they’ve been in business for over 100 years. It’s not easy to stay in business.”

Paul said Caterpillar and its accountants have an obligation to shareholders to minimize their taxes.

“It is a requirement that you try to minimize your costs. So rather than chastising Caterpillar we should be complimenting them,” Paul said.

Caterpillar Vice President of Finance Services Julie Lagacy defended her company’s record of paying taxes:

“Caterpillar takes very seriously its obligation to follow tax law and pay what it owes.  

In fact, Caterpillar’s effective income tax rate averages about 29 percent, which is one of the highest for a U.S. multinational manufacturing company. 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.”

The sheer size of the company is overwhelming, with over $56 billion in sales revenues last year.  Representatives say the company has 118,000 employees in 21 countries.  In the US, the company has 69 manufacturing and logistics facilities scattered across 23 states.  Yet, much of the investigation has focused on the company’s foreign sales and Caterpillar SARL (or CSARL).  This is the Swiss-owned subsidiary to which Caterpillar transfers its profits to avoid paying American taxes.  As Lagacy said in her Monday comments:

“CSARL is a major operating company with thousands of people around the world who perform strategically critical work to support our customers in non-U.S. markets,” Lagacy is expected to testify. ‘We grow and build near our customers worldwide, not only because it’s what they demand, but because remaining globally competitive helps create jobs in the United States.”

Much of the partisan divide on the subcommittee comes from the perceived necessity and function of CSARL.  While Democrats believe it is just a tool for tax avoidance, Republicans argue that it is a necessary piece of the company.  Among the CSARL defenders is Sen. John McCain who did not endorse the findings of the subcommittee’s report:

“In this case, an important factor in Caterpillar’s overseas sales seems to be its independent dealer network, which is overseen and managed by Caterpillar’s subsidiary in Switzerland,” McCain said.

Sen. Carl Levin has introduced legislation to change the tax code to end the tax avoidance tactics similar to those in the Caterpillar inquiry. This legislation, however, has stalled in the Senate.  

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