Executives from manufacturing giant Caterpillar Inc. are heading to Washington, D.C., to explain what one senator calls an aggressive strategy to avoid paying billions of dollars in U.S. taxes.
Caterpillar has avoided paying $2.4 billion US in U.S. taxes since 2000 by shifting profits to a wholly controlled affiliate in Switzerland, according to a report released by Sen. Carl Levin, a Michigan Democrat.
'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 per cent or more of the parts profits to Geneva. Well, I'm not buying it' - Sen. Carl Levin
Levin chairs the Senate investigations subcommittee. His subcommittee is holding a hearing on the report Tuesday. Representatives from Caterpillar and accounting firm PricewaterhouseCoopers LLP are scheduled to testify.
The report says Caterpillar paid PricewaterhouseCoopers $55 million to develop its tax strategy.
The committee's Democratic staff compiled the report as part of a nine-month investigation into Caterpillar's taxes. It was released Monday.
Tax strategy under scrutiny
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."
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 per cent, 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. We comply with the tax laws enacted by Congress, by the states and by all of the many jurisdictions in which we conduct business."
Levin's subcommittee has examined the tax practices of various U.S.-based corporations, including Apple, Microsoft and Hewlett-Packard. Levin said he chose to examine Caterpillar because it was a clear example of tax avoidance.
Law proposed to block transfer of profits overseas
Levin has introduced legislation to restrict the ability of U.S.-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 U.S. 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 U.S., 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 to 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.
Profits taxed at special rate in Switzerland
Before the 1999 arrangement, 85 per cent of the profits from the parts business were taxed in the U.S., the report said. Afterward, only 15 per cent of the profits were taxed in the U.S. 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.
"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 per cent or more of the parts profits to Geneva," Levin said. "Well, I'm not buying it."
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.