Caterpillar Previews Tax Defense for Senate Offshore Hearing (1)

Caterpillar (CAT:US) Inc. began defending its international tax maneuvers as a U.S. Senate investigative panel set an April 1 hearing to examine the company’s “offshore tax strategy.”

Representatives from Caterpillar and PricewaterhouseCoopers LLP will testify, according to the hearing notice posted today by the Senate’s Permanent Subcommittee on Investigations.

The committee, led by Michigan Democrat Carl Levin, is continuing an inquiry into U.S.-based multinational corporations that has revealed details about how Apple Inc., Microsoft Corp. and Hewlett-Packard Co. use cross-border transactions to reduce the U.S. taxes they pay.

“We are a leading U.S. exporter and pay U.S. income tax on sales in the United States as well as on export sales,” Rachel Potts, a Caterpillar spokeswoman, said in a statement today that was the company’s first comment on the hearing. “Caterpillar’s effective tax rate averages about 29 percent, which is relatively high for a company with substantial earnings generated from business activities outside the United States.”

Potts declined to say which company executives will testify. The witness list will be posted March 28.

Bloomberg News on March 20 first reported on the committee’s inquiry.

Shifting Profits

In 2009, Daniel Schlicksup, an employee who had worked on Caterpillar’s tax strategy, alleged in a lawsuit in federal court that the company used a “Swiss structure” to shift profits to offshore companies and avoid more than $2 billion in U.S. taxes. He also alleged that Caterpillar used a “Bermuda structure” involving shell companies to return profits to the U.S. without paying required taxes.

According to Schlicksup’s complaint, the Swiss structure involved “many shell corporations with no business operations,” in which management of profitable businesses was technically shifted to Switzerland while actually remaining in the U.S.

Schlicksup’s lawsuit, which alleged that Caterpillar executives retaliated against him, was settled in 2012, according to court filings. The company denied the allegations.

‘Most Complex’

In a statement issued today, PricewaterhouseCoopers said it provided advice to Caterpillar and its lawyers in the late 1990s and early 2000s.

“The tax rules governing the taxation of international operations are among the most complex in the Internal Revenue Code,” according to the statement. “PwC and the law firm that retained us recommended a Caterpillar-specific, substantive reorganization that better aligned an American company’s global operations with economic realities and was fully compliant with U.S. international tax laws.”

U.S. companies must pay the full 35 percent corporate tax rate on income they earn around the world. They receive tax credits for payments to foreign governments and can defer U.S. taxes until they repatriate the money.

That system provides incentives for companies to report profits in tax havens outside the U.S. and leave them there. Profit shifting costs the U.S. government between $30 billion and $90 billion a year in forgone revenue, according to estimates cited by a 2013 Congressional Research Service report.

Outside U.S.

In 2013, Caterpillar, based in Peoria, Illinois, reported earning 62.2 percent of its pretax income outside the U.S. The company, which had $55.7 billion in revenue in 2013, is the largest maker of construction and mining equipment.

On its website, Caterpillar says it has customers in more than 180 countries.

Caterpillar said in a securities filing last month that it has received notices from the Internal Revenue Service saying that it owes more in federal taxes.

“We disagree with these proposed adjustments, and to the extent that adjustments are assessed upon completion of the field examination relating to these matters, we would vigorously contest the adjustments in appeals,” Caterpillar said in the filing.

Credit: Business Week