U.S. Agents Raid Caterpillar Over Offshore Tax Practices

March 03, 2017

Federal agents raided three Caterpillar buildings near its Illinois headquarters on Thursday, company and law enforcement officials said, in an escalation of an inquiry into the heavy equipment manufacturer’s offshore tax practices.

[| March 2, 2017 |New York Times]

Caterpillar has been dogged by accusations that it slashed its domestic tax bill by shifting corporate profits from the United States to a subsidiary in Switzerland. A 2014 congressional investigation concluded that a scheme to move cash between the company’s American and foreign subsidiaries cut its tax bill in the United States by $2.4 billion over 13 years.

The United States attorney’s office for the Central District of Illinois, the Internal Revenue Service criminal investigation division, and two other agencies led the search of Caterpillar buildings near Peoria, Ill., where Caterpillar is based, said Sharon Paul, a spokeswoman for the United States attorney.

Corrie Heck Scott, a Caterpillar spokeswoman, confirmed that the raids were occurring. “Law enforcement is present in various Peoria-area Caterpillar facilities executing a search warrant,” she said in a statement. “Caterpillar is cooperating.”

The company later said that it believed the warrant was related to the investigation into its tax practices. Its stock dropped 4.2 percent on the day.

The report of the 2014 investigation said that Caterpillar, which makes heavy construction and mining equipment, worked with the accounting firm PricewaterhouseCoopers, now PwC, to use sham transactions to transfer $8 billion in profits to a Swiss subsidiary from 1999 to 2012.

The transfers were not legitimate business transactions, but were made solely to take advantage of a lower tax rate Caterpillar had negotiated with Switzerland, Senator Carl M. Levin, Democrat of Michigan, said at the time. Caterpillar has said its effective United States tax rate was 29 percent. In Switzerland, the company negotiated a tax rate of 4 to 6 percent.

In 2010, Caterpillar’s finance department calculated that working through Switzerland had helped the company reduce its effective tax rate to the “lowest in the Dow 30.”

The inquiry drew no conclusions about whether Caterpillar had broken the law, but it appears to have piqued the interest of federal investigators. In January 2015, Caterpillar received a grand jury subpoena for documents related to the movement of cash between its American and overseas businesses, according to its latest annual filing with the Securities Exchange Commission.

Caterpillar has defended its tax strategy, calling the arrangements prudent, lawful and typical among large United States companies.

A spokeswoman for PwC declined to comment. The accounting firm said in 2014 that it believed it had provided Caterpillar with sound advice.

The scrutiny of Caterpillar’s offshore tax practices occurred after a series of Senate hearings sought to showcase how large companies — mostly technology businesses like Microsoft, Hewlett-Packard and Apple — had used complex maneuvers to avoid paying United States taxes.

The Trump administration has signaled that it would try to address the use of offshore tax havens as part of wider corporate tax reforms, rather than focus on going after individual companies.

At a meeting a week ago with manufacturing executives, including Douglas R. Oberhelman, Caterpillar’s departing executive chairman, President Trump expressed admiration for the company, showing off his knowledge of various bulldozer models that he implied were part of some of his business projects.

“I love those D10s,” he told Mr. Oberhelman, referring to a huge track-type tractor made by Caterpillar.

“There’s nothing like what you do,” Mr. Trump added. “The Caterpillars are the best.”

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  • William Ryan
    This is really a sad day when one of our largest manufacturers must attempt to find a way to avoid corporate taxes to be able to stay competitive in the world market place. This tax rate of 29% is outrageous and should be repealed by the Trump administration as soon as possible. We should not be forcing our corporations to do off shore corporate tax inversions to be able to compete. This is total nonsense to give foreign competition an unfair competitive advantage.