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Caterpillar Defends Offshore Tax Strategy Caterpillar Defends Offshore Tax Strategy

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Congress

Caterpillar Defends Offshore Tax Strategy

Caterpillar's Julie Lagacy at Senate hearing.(Allison Shelley/Getty Images)

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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