Posted on 03/31/2014 4:18:22 PM PDT by jazusamo
Caterpillar avoided $2.4 billion in taxes thanks to a reorganization that housed its most profitable business in Switzerland, according to a Senate report.
While the report, from the Senate Permanent subcommittee on Investigations, said Caterpillar had done nothing illegal, it criticized the manufacturing giant for trying to avoid paying U.S. taxes.
“Caterpillar is an American success story that produces tremendous industrial machines,” Sen. Carl Levin (D-Mich.), the head of the investigatory panel, said Monday. “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. Treasury billions of dollars.”
In response to the report, Caterpillar said it was just one part of the company’s business, and that it is not trying to skirt U.S. tax laws. The company noted that its effective income tax rate averages about 29 percent, one of the highest for a U.S. multinational manufacturing company.
“Caterpillar takes very seriously its obligations to follow tax law and pay what it owes,” said Julie Lagacy, the company’s vice president overseeing the financial services division. “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.”
The report found that in 1999, Caterpillar paid $55 million to develop a tax strategy that allowed it to report most of its profits for the sale of equipment parts under a wholly owned Swiss subsidiary, where it would be hit by just a 4 to 6 percent tax rate.
The vast bulk of the company’s work researching, manufacturing and storing parts continued to happen on U.S. soil, but 85 percent of the profits from that work were found in Switzerland.
The arrangement remains in place, according to the Senate report, and the company reaps roughly $300 million in tax savings a year from it.
Before the 1999 restructuring, the company reported at least 85 percent of its parts profits in the United States.
Monday’s report marks the latest in a long-running campaign by Levin to place heat on large corporations looking to minimize their tax bill, and the financial institutions that make it possible.
Levin has previously dissected the offshore tax maneuverings of Apple and Microsoft, and has pressured a number of large Swiss banks that entice companies with secrecy and lower tax bills.
Levin billed the latest report as evidence of how widespread the practice is.
Arizona Sen. John McCain, the top Republican on Levin’s panel, has co-signed on to many of Levin’s past findings, but he did not endorse the Caterpillar report.
Levin said the two senators differed on its conclusions.
Levin said staff for both members worked on the investigation; a McCain spokesman declined to detail the senator’s specific concerns with the document.
Top executives for Caterpillar and PricewaterhouseCoopers, which structured the tax arrangement, are slated to testifyTuesday before Levin’s panel, the latest in a series of corporate grillings.
McCain will attend Tuesday’s hearing.
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 essence, Levin’s report argues that Caterpillar’s restructuring did almost nothing to alter the company’s operations, except for the fact that its most profitable division would now see those profits taxed at a much lower rate.
“Did anything change in the real world? Did anything change in its operations?” he asked. “The answer is no.”
The report called on the IRS to cast a closer look on such arrangements, and to question whether there is actual economic substance to the moves beyond lowering a tax bill — as required by law. Levin was critical of the IRS’s handling of this, and the ongoing arrangement could still be audited by the tax agency.
“In general, I’d say they’ve not been effective,” he said.
— This story was updated at 5:37 p.m. with a response from Caterpillar.
But they certainly will not be when they face a 40% tax.
BTW my boss met a millionaire Swiss businessman recently: his total tax burden (without any special breaks) is 18%.
You’re absolutely right...Until the idiots in Washington realize that our industries will keep moving out of the country.
Are they within the law? If so, pee up a rope, Carl.
Well done Caterpillar. The company does not exist for the benefit of the Government, it’s owned and exists for the benefit of its shareholders. Typical B.S. from the party whose leader believes “you didn’t build that”
Follow the money.
Tax avoidance is good stewardship and not illegal.
What is the term for threatening congressional action but withdrawing support after a sizeable donation?
Carl Levin is a disgrace. He wrote letters to IRS to deny tax exempt status telling IRS to to target Tea Party organizations. Now he is parading Caterpillar in front of Committee on Homeland Security and Governmental Affairs accusing Caterpillar of avoiding billions in taxes yet he has the gall to say that Caterpillar is not breaking any laws. Dear Carl, if Caterpillar is not breaking any laws then they are not avoiding taxes. If you want to change the law, then change it! Quit singling out and slandering individual taxpayes, like Apple and Caterpillar.
“The report raises questions about the validity of the tax strategy but doesn’t accuse the Peoria, Ill.-based manufacturer of breaking the law.
“We don’t reach those kinds of judgments,” Levin said. “The question is, ‘Is it tolerable?’ And I don’t think it is.”
http://www.dailyfinance.com/2014/04/01/caterpillar-avoided-billions-taxes-senator-carl-levin-says/
Levin doesn't think it's tolerable. Well whoop de doo, like most democrats it's all about how they feel, not what the law is. He is one sorry excuse for a US Senator.
Thanks for the link to the other piece.
How many millions in taxes do their pals in Hollywood avoid?
You’ll never hear a Democrat talk about that.
Exactly, because the Dems know they’ll get their percentage in generous campaign support.
Why didn’t Carl fire a letter over to IRS? I guess he figured IRS would lose in court if IRS challenged Caterpillar. Of course with Tea Party applications IRS just put the applications on ice avoiding a court resolution.
So what does he expect to accomplish? Did anything other than nothing come out of his Apple charade? Did congress institute any changes? I must be naive because he said Caterpillar hasn’t run afoul over any law when I thought congress should be concerned only about the laws congress passes?
Then what are his motives? Is Caterpillar a non union company? Well is it? Maybe Caterpillar donates to too many Republican candidates? Do you think it’s possible the Democrat’s Party could be a Culture of Corruption?
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