WASHINGTON (AP) — 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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