Caterpillar, the world’s largest maker of heavy machinery, used a Swiss affiliate to shift 85 per cent of its parts profits to defer or avoid paying $2.4bn in US taxes

Last updated: March 31, 2014 11:04 pm

Caterpillar accused of ‘shifting’ profits

By Gina Chon in Washington

Caterpillar, the world’s largest maker of heavy machinery, used a Swiss affiliate to shift 85 per cent of its parts profits to defer or avoid paying $2.4bn in US taxes, according to a report by Carl Levin, a Democratic US senator.

The company moved $8bn in profits from the US to Switzerland to take advantage of a special 4 per cent to 6 per cent corporate tax rate it negotiated with the Swiss government, according to the report from Mr Levin, chairman of the Senate Permanent Subcommittee on Investigations.

Caterpillar’s tax strategy will be the subject of a subcommittee hearing on Tuesday. Julie Lagacy, Caterpillar’s vice-president of finance services, and Robin Beran, the company’s chief tax officer, are among the witnesses for the hearing, along with representatives of PwC, its tax consultant and auditor.

The company is the latest target of Senate inquiries into US companies accused of using overseas affiliates to avoid billions in US taxes. Past hearings focused on Apple and Hewlett-Packard, but Mr Levin said Caterpillar’s moves showed that tax avoidance was not just a strategy used by tech companies.

“Caterpillar is an American success story that produces phenomenal industrial machines, but it is also a member of the corporate profit-shifting club that has shifted billions of dollars in profits offshore to avoid paying US taxes,” Mr Levin said. The report cited Caterpillar officials praising the decrease in its US tax burden.

However, Senator John McCain, the top Republican on the subcommittee, has not signed off on the report, reflecting differences over the findings. Mr McCain, who has supported past tax-related investigations, will discuss his disagreements at the hearing. But Mr Levin said the report was a bipartisan effort and his staff had worked closely with Mr McCain’s staff on the investigation.

Caterpillar had paid PwC more than $55m since 1999 to develop a tax strategy aimed at redirecting profits to Switzerland, the report said. In exchange for a small royalty, Caterpillar transferred rights to the profits from an international parts distribution business to a wholly controlled Swiss affiliate, CSARL.

As a result, Caterpillar’s overall tax rate has fallen over the past 14 years. At the same time, its offshore earnings have continued to rise, jumping to $17bn in 2013, from $11bn in 2010.

Two Caterpillar tax officials had warned the strategy had no business purpose other than to avoid taxes and raised these concerns through an anonymous letter to top company officials in 2004, according to the report.

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 US taxes

– Carl Levin, Democratic US senator

In her testimony, Ms Lagacy plans to say that Caterpillar pays a 29 per cent effective tax rate, which is higher than the average 26 per cent US corporate rate. For the past three years, the company paid $1.8bn in federal income taxes.

She will emphasise that the Senate focus is on the sale and purchase of replacement parts by Caterpillar’s non-US affiliates, which by law are not subject to US taxes or in other cases subject to deferred US taxes.

“This is a standard multinational business structure entirely consistent with the letter and spirit of US tax law,” Ms Lagacy said in her written testimony, adding that the company stands by its structure.

The Senate report emphasised that no personnel or business activities were moved from the US to Switzerland and most of the parts business remained in the US after the tax strategy shifted in 1999.

Caterpillar will argue in its testimony that CSARL is not a shell and that it is a major operating company that employs hundreds of workers in Geneva, who make decisions on pricing and discounting, in addition to monitoring dealer and customer service performance.

PwC said on Monday: “Our advice was founded on years of extensive work overseas and in the US and included detailed analyses of Caterpillar’s global operations and the impact of various potential business reorganisations on Caterpillar’s tax position.” PwC said it stood by its work.

The Senate decided to look at Caterpillar after a 2009 federal lawsuit in which a former employee accused the company of shifting profits overseas to avoid US taxes. The company denied the allegations and in 2012 settled the suit.