"How A Machinery Company Dodged $2.4 Billion In Taxes, Without Breaking The Law"
Heavy machinery manufacturer Caterpillar has ducked $2.4 billion in U.S. taxes since the year 2000 by using offshore tax strategies common among tech companies like Apple and Microsoft, according to a report from the Senate Permanent Subcommittee on Investigations.
Beginning in 1999, the investigators say, Caterpillar stockpiled almost all of the profits from its replacement parts business in a shell company called CSARL based in Switzerland. For the next 13 years, CSARL paid tax rates below 6 percent in Switzerland under an agreement Caterpillar struck with the Swiss government. About $8 billion in profit passed through CSARL in that time, and it sent just 15 percent of its profits back to Caterpillar’s American corporate structures to be taxed by the Internal Revenue Service (IRS).
The whole thing is legal because CSARL’s payments are technically counted as royalties to Caterpillar for the right to conduct replacement parts business on Caterpillar’s product line and patents. “We comply with the tax laws enacted by Congress, by the states, and by all of the many jurisdictions in which we conduct business,” a Caterpillar financial services executive said in a statement.
Caterpillar paid PricewaterhouseCoopers $55 million to design the scheme in the late 1990s. A spokeswoman for the firm told the Washington Post that “we stand by the work we did for them.” Caterpillar’s investment has paid back nearly 44-fold, saving the company more than $2.4 billion since it was implemented.
While the arrangement obeys the letter of international tax law, longtime investigative committee head Sen. Carl Levin (D-MI) said it violates the spirit of that system. “When Caterpillar and its tax advisers launched this tax avoidance scheme, almost nothing changed in the real world,” Levin said in a press release. “The manufacturing workers who make world-class parts, the managers who operate its parts operations, the warehouses where they are stored – none of that changed. But in the fantasy land that is international tax law, tax lawyers waved a magic wand to make millions of dollars in U.S. taxes disappear.”
Levin’s committee has uncovered similar schemes to stash profits outside of the IRS’ reach by Apple, Hewlett Packard, and Microsoft. The Apple investigation forced CEO Tim Cook to come testify before the investigative committee and created a hubbub of stories about politicians in various countries seeking to fix tax laws to prevent companies from avoiding their tax obligations to the countries that made their success possible. But that brief furor of reform has not produced meaningful change. In Ireland, which is central to Apple’s version of the scheme that Caterpillar employs in Switzerland, lawmakers made a minor cosmetic shift in tax laws that experts say will do nothing significant to alter the country’s tax haven status. Other european officials have discusses similarly ineffectual changes, and American lawmakers have batted similar marginal reform ideas around without making progress on legislation.
Amid all that bluster and inaction, companies have continued racking up massive piles of untaxed cash. Total profits held offshore by America’s largest companies now stand at two trillion dollars.