WASHINGTON - A Caterpillar Inc. executive defended her company’s tax maneuvers Tuesday, telling a Senate panel that moving profits from its parts business to Switzerland from the U.S. was a legal and appropriate way to eliminate unnecessary expenses.
Julie Lagacy, who oversees Caterpillar’s tax operations, said the company engaged in standard, prudent business transactions.
“We cannot remain competitive, we cannot create jobs and we cannot increase exports by incurring unnecessary expenses,” she said at a hearing of a U.S. Senate investigative subcommittee. “Americans pay the taxes they owe, but not more. And as an American company, we pay the taxes we owe, not more.”
The subcommittee’s chairman, Sen. Carl Levin, D-Mich., released a report Monday showing that the company’s moves saved it $2.4 billion in U.S. taxes. That, Levin said, was a “paper change” that caused the subsidiary’s profits to be subject to a Swiss tax rate as low as 4 percent.
“Caterpillar is an American success story that produces iconic industrial machines,” Levin said Tuesday. “But it is also a member of the corporate profit-shifting club that has transferred billions of dollars offshore to avoid paying U.S. taxes.”
The report makes the case that offshore profit-shifting by U.S. corporations goes beyond the intellectual property maneuvers of technology companies such as Apple Inc. and Microsoft Corp. that have been the focus of previous hearings by Levin and scrutiny from governments in Europe.
According to the report, Caterpillar was able to take a profitable U.S.-based business, change little if anything about its operations and locate it in Switzerland for tax purposes.
“The Swiss affiliate is performing nothing but a routine function,” Bret Wells, a University of Houston law professor, said at Tuesday’s hearing. “When the strategy comes from a tax department and it is divorced from the business itself, then that is a significant fact that a judge is going to look at.”
The tax structure saves Caterpillar, which is based in Peoria, Ill., about $300 million a year, or 7.9 percent of 2013 net income. The moves routed Caterpillar’s foreign sales through Switzerland instead of the U.S., and the company and Levin disagree over whether the income should be considered domestic or foreign.
Caterpillar executives, including Chief Tax Officer Robin Beran, testified at the hearing of the Senate’s Permanent Subcommittee on Investigations.
Thomas Quinn, a partner at Pricewaterhouse Coopers LLP, spoke at the hearing and defended the global reorganization that his firm designed for the world’s largest maker of construction and mining equipment.
Sen. John McCain of Arizona, the top Republican on the subcommittee, isn’t signing on to Levin’s report. He said last week that Caterpillar’s actions weren’t “on the level” of Apple’s and that he and Levin “have a disagreement about the degree of the violations.”
Other Republican senators, including Ron Johnson of Wisconsin and Rand Paul of Kentucky, defended the company and blamed the U.S. tax system.
“Rather than having an inquisition, we should probably bring Caterpillar here and give them an award,” Paul said. “Money is said to go where it’s welcome, so money is going overseas.”
Under U.S. tax law, companies pay a 35 percent corporate income tax on profits they earn around the world. They receive tax credits for payments to foreign governments and don’t have to pay U.S. taxes on profits they earn outside the country until they return the money to the U.S.
That system gives companies an incentive to book profits outside the U.S. and leave them there, often using tax havens to minimize foreign taxes.
The largest U.S. companies have accumulated $1.95 trillion in profits outside the country that haven’t been taxed by the U.S., according to data compiled by Bloomberg News. Caterpillar has $17 billion, up from $11 billion three years earlier, according to company securities filings.
Levin’s investigation began focusing on Caterpillar after a lawsuit filed by former employee Daniel Schlicksup, who alleged that company executives retaliated against him when he raised concerns about the international tax strategies.
That case was settled in 2012.
The parts business is significant for Caterpillar because it provides a steady stream of income at high profit margins as customers replace parts of equipment, according to the report.
Caterpillar tries to ensure that specialized parts are available around the world when needed.
Levin’s report focuses on a 1999 decision by Caterpillar to restructure its international parts business, acting on advice for which it paid Pricewaterhouse Coopers more than $55 million.
Caterpillar and its Swiss subsidiary entered into an agreement that let the Swiss company purchase parts from third- party suppliers and sell them to dealers outside the U.S., removing Caterpillar from the “legal title chain” of the transactions.
That move didn’t change any of the “operational details” of how Caterpillar ran its parts business.
“Instead,” the report said, “it focused on changing the legal entity that served as the paper owner of Caterpillar’s replacement parts and the recipient of the non-U.S. parts profits.”
As a result, profits could be booked in Switzerland, where Caterpillar negotiated a tax rate as low as 4 percent.
Business, Pages 27 on 04/02/2014