WASHINGTON - Caterpillar Inc., a U.S. manufacturer of construction equipment, has avoided paying $2.4 billion in taxes by shifting billions of dollars in profits to a wholly owned Swiss affiliate, a new report from Sen. Carl Levin, chairman of the U.S. Senate Permanent Subcommittee on Investigation, says.
The report, which was compiled by the subcommittee's majority staff, concluded that Caterpillar shifted $8 billion in profits from its parts manufacturing division in the U.S. to Switzerland. Caterpillar negotiated a tax rate of 4 percent to 6 percent with Switzerland, whose federal statutory tax rate is typically 8.5 percent.
"In the fantasyland of international tax, Caterpillar waved a magic wand to make billions of dollars in U.S. taxes disappear," Levin said today. "This is a prime example of a tax avoided strategy that cost the U.S. Treasury billions of dollars."
Caterpillar shifted 85 percent of its profits from its replacement parts division to a related Swiss affiliate, while 15 percent of the profits remained in the United States, where 70 percent of the company's third party manufactured parts that are sold abroad are manufactured, stored and shipped.
According to the report, Caterpillar paid PricewaterhouseCoopers $55 million to develop and implement the offshore tax strategy in Switzerland starting in 1999.
"Caterpillar replaced its leading Swiss affiliate with a new Swiss affiliate, CSARL, and then used a series of licensing transactions with CSARL to enable it to sell Caterpillar's third party manufactured replacement parts to its non-U.S. dealers and customers without showing the parts profits as U.S. income," the report said.
"Caterpillar had previously purchased those parts directly, primarily from its U.S. third party suppliers, and sold the parts to its Swiss affiliate which, in turn, had sold the parts to Caterpillar's non-U.S. dealers in Europe, Africa, and the Middle East," the report said. "After the Swiss tax strategy was implemented, Caterpillar was removed from the legal title chain for the non-U.S. parts. Instead, its U.S. third party suppliers typically sold Caterpillar brand parts directly to CSARL which then sold them either to Caterpillar or Caterpillar's non-U.S. dealers."
The investigation, which was conducted over a period of nine months, arose from a civil lawsuit filed by a former Caterpillar employee, who accused the company of "improperly attributing billions of dollars of profits" from manufacturing sales in the U.S. to a Swiss affiliate.
Levin said the subcommittee does not have the authority to conclude whether Caterpillar broke any tax laws.
Sen. John McCain, the Republican ranking member of the subcommittee, did not sign onto the report.
In a statement sent to ABC News Monday, Caterpillar said it has complied with tax laws.
"Caterpillar takes very seriously its obligation to follow tax law and pay what it owes," Julie Lagacy, vice president with responsibility for the Finance Services Division, said in a statement. "In fact, Caterpillar's effective income tax rate averages about 29 percent, which is one of the highest for a U.S. multinational manufacturing company."
PricewaterhouseCoopers said in a statement sent to ABC News that "We stand by the work we did for them."
"Our advice to Caterpillar and its external counsel helped Caterpillar evaluate how best to organize its expanding global operations, aligning the economics of such global operations with carefully considered U.S. tax policies," the statement said. "Our advice was founded on years of extensive work overseas and in the United States and included detailed analyses of Caterpillar's global operations and the impact of various potential business reorganizations on Caterpillar's tax position. Caterpillar compensated PwC for the six years of extensive work we undertook to understand the company's complex global operations, the tax effects of the realignment and for our expertise. We stand by the work we did for them."
Executives from the two companies are scheduled to testify before the Senate Permanent Subcommittee on Investigation at a hearing on Caterpillar's offshore tax strategies on Tuesday morning.
Caterpillar released a portion of the expected testimony from Lagacy in which she defended the company's practices.
"In sum, the fact that CSARL now directly purchases its parts inventory reflects nothing more than the standard business operations and tax planning that any prudent multinational enterprise would employ in conducting its operations and complying with applicable tax laws around the world. The entity in question has considerable business substance and is fully entrepreneurial as a matter of both functional reality and contractual form," Lagacy will say Tuesday, according to prepared remarks of her testimony. "The structure complies with existing law and offends no U.S. tax policy. Caterpillar stands by this structure."
A taxation expert who was sought by counsel to Caterpillar is also expected to testify that the company's restructuring had sufficient economic substance.
"In my professional judgment, it is extremely unlikely that Caterpillar's supply chain restructuring and the countless ensuing sales conducted pursuant to the restructuring are vulnerable to attack for lack of economic substance," John Steines, Jr., a professor of Law at New York University, specializing in corporate taxation, will say, according to prepared testimony.