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May
2014
15

Senate Panel Finds Caterpillar Has Avoided $2.4B in Taxes by Offshoring Profits

Caterpillar

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A newly released report from the Senate Permanent Subcommittee on Investigations shows that machinery giant and anti-union stalwart Caterpillar, Inc. avoided paying $2.4 billion in taxes by reorganizing its company to house the most profitable parts of its business in Switzerland.  The move is legal under current tax law but puts the company in prime position to be used as an example of how big American businesses are harming the American economy by offshoring profits.  
Sen. Carl Levin, head of the investigatory panel, addressed this problem:

“Caterpillar is an American success story that produces tremendous industrial machines,” Sen. Carl Levin (D-Mich.), but it’s also a member of the corporate profit-shifting club that has shifted billions of dollars in profits offshore to avoid paying U.S. taxes,” Levin said. “This is a prime example of a tax avoidance strategy that has cost the U.S.

The report also shows that in 1999 Caterpillar paid $55 million to PricewaterhouseCoopers to create the tax avoidance strategy which allows it to report report most of its sales of equipment parts through its Swiss subsidiary.  While a majority of the research, manufacturing, and distribution of its equipment parts sector take place on U.S. soil, 85 percent of the profits from this part of the business flow through Europe.  This allows the company to avoid paying nearly $300 million in U.S. taxes annually.  

Perhpas its no surprise the company’s stock is skyrocketing.

More from The Hill:

The report emphasized how little parts work was actually done by Caterpillar in Switzerland, even though the lion’s share of profits were reported in that country.

For example, of the 8,300 company employees working on parts, 4,900 are based in the United States. Just 65 parts employees work in Switzerland, and less than 0.5 percent of the company’s workforce is based there.

The U.S. is also home to 54 manufacturing facilities and 10 warehouses for parts. Switzerland does not have any.

The company was able to report the bulk of its parts profits in Switzerland thanks to the 1999 restructuring. Under the new arrangement, Caterpillar agreed to transfer the rights to most of its parts profit to the Swiss subsidiary. The Swiss subsidiary would handle the sales of parts to Caterpillar’s non-U.S. dealers, and pay Caterpillar a royalty equal to 15 percent of the profits as part of the arrangement.

In the process, the company agreed to continue to perform the “core business functions” of that parts division in the U.S. in exchange for a small service fee.

In the panel report, Levin notes that Caterpillar’s restructuring did very little to change the day-to-day operations of the company.

“Did anything change in the real world?,” Levin asked sardonically. “Did anything change in its operations? The answer is no.”

Caterpillar officials responded to the report without remorse, reminding critics that what they are doing is merely exploiting lax tax law to the fullest.  Julie Lagacy, Vice President of Financial Services for Caterpillar, said in a statement:

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

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