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Senator says Caterpillar avoided billions in taxes

By Stephen Ohlemacher

Associated Press

LAST UPDATED: 06:35 a.m. HST, Apr 01, 2014

WASHINGTON >> Executives from manufacturing giant Caterpillar Inc. are heading to Capitol Hill 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 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, D-Mich.

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.

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 percent, 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.

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 percent to 6 percent that Caterpillar negotiated with the Swiss government, the report said.

Before the 1999 arrangement, 85 percent of the profits from the parts business were taxed in the U.S., the report said. Afterward, only 15 percent 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 percent 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.

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username_required wrote:
Love how HSA autoplays the video below "in Other News." You can bet I'm closing browser tabs before even reading them, and spending less time on HSA. Great strategy!
on March 31,2014 | 08:42PM
DiverDave wrote:
Why would an international company repatriate their overseas earnings and pay 35% tax on them? Like DUH!
on March 31,2014 | 09:25PM
LMO wrote:
"We comply with the tax laws enacted by Congress..." Congress is to blame. Not the companies that take advatage of the laws Congress has made.
on April 1,2014 | 02:05AM
HanabataDays wrote:
And all the time, they're making bucks selling giant armored bulldozers to Israel so they can continue razing Palestinian homes, and any protestors who happen to be in their way at the time. Typical corporate welfare client, bereft of ethics and morality.
on April 1,2014 | 04:52AM
Winston wrote:
And the Palestinians in Hamas are perfect jewels of morality and rectitude.
on April 1,2014 | 08:21AM
whs1966 wrote:
"The question is, 'Is it tolerable?' And I don't think it is." That's the wrong question. The right questions are, "Is it legal?" and "What other corporate clients have been advised to utilize this strategy?"
on April 1,2014 | 05:50AM
Graham wrote:
GE, Microsoft, Apple, etc. are doing the same....
on April 1,2014 | 08:02AM
Upperkula wrote:
US Government is tax crazy, so companies hire Tax specialist (crooks) to find loop holes to hide the loot from the greedy US Government. I can't say that I blame them 2.4 Billion buck's ...How many pallets of $20 dollrs bill's is that anyway.
on April 1,2014 | 07:00AM
soundofreason wrote:
And companies are LEAVING us soil because of it. We see stories of rich individuals doing it and do we not stop to think that corps are doing it to? We SHOULD be making it ATTRACTIVE to produce in the US. Forget Corp Tax and MILLIONS of employee wages would be forthcoming via JOBS!
on April 1,2014 | 07:43AM
soundofreason wrote:
"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." >>> This Senator is right - so what they SHOULD do just ship those 5,000 jobs overseas too. THAT'S what would make this Senator happy I guess. Then the govt would also be out of the income tax receipts they WERE getting from 5,000 workers. Careful Senator, you might just get what you asked for.
on April 1,2014 | 07:39AM
noheawilli wrote:
Just another dishonest politician crying because a company followed the tax code as congress has produced it.
on April 1,2014 | 07:40AM
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