Caterpillar Defends Offshore Tax Strategy

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WASHINGTON, DC - APRIL 1: Julie A. Legacy (C), vice president of financial services division for Caterpillar, listens during a hearing of the Senate Committee on Homeland Security and Governmental Affairs on the offshore tax strategy of U.S.-based company Caterpillar, on Capitol Hill in Washington, D.C., April 1, 2014. Caterpillar reportedly avoided $2.4 billion in U.S. taxes. (Photo by Allison Shelley/Getty Images)
National Journal
Billy House
April 1, 2014, 11:14 a.m.

Ex­ec­ut­ives of Cater­pil­lar, a Mid­w­est maker of heavy equip­ment ranked as one of the na­tion’s “most ad­mired com­pan­ies” by For­tune magazine, staunchly de­fen­ded the com­pany dur­ing a Sen­ate hear­ing Tues­day against al­leg­a­tions it has avoided $2.4 bil­lion in U.S. taxes by shift­ing $8 bil­lion in profits to a Swiss af­fil­i­ate.

“Cater­pil­lar is a great Amer­ic­an com­pany, and our repu­ta­tion is one of our greatest as­sets,” said Ju­lie Lagacy, vice pres­id­ent of Cater­pil­lar’s Fin­ance Ser­vices Di­vi­sion, in testi­mony be­fore the Sen­ate Home­land Se­cur­ity and Gov­ern­ment­al Af­fairs Per­man­ent Sub­com­mit­tee on In­vest­ig­a­tions.

Lagacy said the com­pany’s av­er­age ef­fect­ive tax rate of 29 per­cent is still “one of the highest for a mul­tina­tion­al man­u­fac­tur­ing com­pany, and 3 per­cent­age points high­er than the av­er­age ef­fect­ive in­come-tax rate for U.S. cor­por­a­tions.”

The sub­com­mit­tee, led by Demo­crat Carl Lev­in of Michigan, is­sued a re­port that Cater­pil­lar took ad­vant­age of a spe­cial cor­por­ate tax rate it ne­go­ti­ated with the Swiss gov­ern­ment after hir­ing Price­wa­ter­house­Coopers in 1999 to de­vel­op a strategy en­abling the com­pany to re­dir­ect to Switzer­land tax­able profits from sales of Cater­pil­lar-branded re­place­ment parts.

“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 U.S. taxes,” Lev­in said.

“Cater­pil­lar paid over $55 mil­lion for a Swiss tax strategy that has so far en­abled it to avoid pay­ing $2.4 bil­lion in U.S. taxes,” he said. “That tax strategy de­pends on the com­pany mak­ing the case that its parts busi­ness is run out of Switzer­land in­stead of the U.S. so it can jus­ti­fy send­ing 85 per­cent or more of the parts profits to Geneva. Well, I’m not buy­ing that story.”

The hear­ing fo­cus­ing on Cater­pil­lar and the re­port largely be­came a back-and-forth on the na­tion’s tax code, with Re­pub­lic­ans on the sub­com­mit­tee ar­guing that it demon­strates the need for an over­haul.

Rank­ing mem­ber John Mc­Cain noted that the U.S. has “the highest cor­por­ate tax rate of any coun­try in the world,” and that pre­vi­ous hear­ings have shown that to be a factor in com­pan­ies “mov­ing op­er­a­tions over­seas” and “park­ing those profits over­seas rather than bring­ing them back to be sub­jec­ted to a 35 per­cent cor­por­ate tax rate.”

Pre­vi­ous sub­com­mit­tee hear­ings ex­amined off­shore tax avoid­ance by Apple, Mi­crosoft, and Hew­lett-Pack­ard, among oth­ers.

“This makes a com­pel­ling ar­gu­ment for broad­er tax re­form to en­sure our tax code is fair, com­pet­it­ive, and a vehicle for eco­nom­ic growth,” Mc­Cain said.

“Of course this com­pany is a ter­rif­ic com­pany — of course it pays taxes,” Lev­in said at one point dur­ing the hear­ing. “We’re very happy it pays $600 mil­lion a year in taxes. But should it pay $900 mil­lion? That’s the is­sue.”

Cater­pil­lar, based in Pe­or­ia, Ill., was not ac­cused of vi­ol­at­ing any laws in the sub­com­mit­tee’s re­port.

Lagacy said that the 1999 re­struc­tur­ing has helped the com­pany re­main com­pet­it­ive, and that “Cater­pil­lar com­plies with its leg­al ob­lig­a­tions with re­spect to the pay­ment of taxes. We are proud of what we do.”

But, as Lev­in said after the open­ing of Tues­day’s hear­ing, ques­tions have been raised about wheth­er Cater­pil­lar’s off­shore strategy should be con­sidered “ac­cept­able” un­der the cur­rent U.S. tax code.

The re­port as­serts that Cater­pil­lar’s use of a Swiss af­fil­i­ate to shift profits was geared to take ad­vant­age of a 4 per­cent to 6 per­cent cor­por­ate tax rate it ne­go­ti­ated with the Swiss gov­ern­ment. Be­fore the re­struc­tur­ing, it said, Cater­pil­lar had logged 85 per­cent or more of its non-U.S. parts profits in the United States, where most of those parts are in fact made and ware­housed.

The re­port con­tends that Cater­pil­lar es­sen­tially re­dir­ec­ted its profits to the Swiss af­fil­i­ate on its in­voices — al­though few com­pany per­son­nel or busi­ness activ­it­ies were ac­tu­ally moved from the United States to Switzer­land, and most of the parts busi­ness re­mained here.

Thomas Quinn, a Chica­go-based Price­wa­ter­house­Coopers part­ner, was pressed by Lev­in dir­ectly: “To this day, do you be­lieve there is no vi­ol­a­tion of the tax code as it was writ­ten then or now?” Lev­in asked.

“Yes, that is my be­lief. That is my firmest be­lief,” Quinn answered.

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