Caterpillar uses offshore haven to avoid billions in taxes, senator says

Report suggests the manufacturing giant has avoided paying $2.4B in taxes since 2000 by shifting profits to an affiliate in Switzerland.

March 31, 2014   by The Canadian Press

WASHINGTON — Manufacturing giant Caterpillar Inc. has used an aggressive tax strategy to shift profits overseas in order to avoid paying billions in US taxes, according to a new investigative report by a key Senate Democrat.

Caterpillar has avoided paying $2.4 billion in US taxes since 2000 by shifting profits to a wholly-controlled affiliate in Switzerland, according to the report released March 31 by Sen. Carl Levin of Michigan. Levin chairs the Senate Permanent Subcommittee on Investigations.

The committee’s Democratic staff compiled the report as part of a nine-month investigation into Caterpillar’s taxes. The report raises questions about the validity of the tax strategy but does not 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.”


Levin’s subcommittee is holding a hearing on report Tuesday. Representatives from Caterpillar and accounting firm PwC LLP are scheduled to testify. The Senate report says Caterpillar paid PwC $55 million to develop its tax strategy.

Julie Lagacy, a Caterpillar vice-president, said in a statement that the company complies with all tax laws. She said Caterpillar pays an effective income tax rate of 29%, among the highest for multinational manufacturers.

“Caterpillar takes very seriously its obligation to follow tax law and pay what it owes,” Lagacy said. “Caterpillar’s philosophy is that our business structure drives our tax structure.”

Levin’s subcommittee has examined the tax practices of various US-based corporations, including Apple, Microsoft and Hewlett-Packard. Levin said he chose to examine Caterpillar because it was a clear example of tax avoidance.

Levin has introduced legislation to restrict the ability of US-based corporations to shift profits overseas to avoid U.S. taxes. But the bill has stalled in the Senate.

Sen. John McCain of Arizona, the top Republican on the subcommittee, did not sign off on Monday’s report.

Caterpillar is the world’s leading manufacturer of construction and mining equipment, with sales and revenues last year of nearly $56 billion. The company says it has increased US employment by 13,000 jobs since 1999, growing to nearly 52,000 workers last year.

The company says it has 118,000 employees in 21 countries. In the US, it has 69 manufacturing and logistics facilities in 23 states, and dealers from coast to coast.

Levin’s investigation focused on the company’s lucrative international parts distribution business.

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

Before the 1999 arrangement, 85% of the profits from the parts business were taxed in the US, the report said. Afterward, only 15% of the profits were taxed in the US. The rest was taxed at the special rate in Switzerland, the report said.

The report says Caterpillar has 4,900 U.S. employees working in parts distribution, while CSARL has only 65 parts workers in Switzerland.

Lagacy said 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.”

“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,” Lagacy said.

© 2014 The Canadian Press

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