Caterpillar to defend tax strategy before U.S. Senate today, will likely receive support from John McCain

Updated Apr 1, 2014

caterpillar logoCaterpillar has confirmed an earlier report by saying it is scheduled to testify in a U.S. Senate hearing on whether the company illegally shifted profits overseas to avoid paying federal taxes.

According to a report from Reuters, the Senate’s Permanent Subcommittee on Investigations headed by Michigan Democrat Sen. Carl Levin, prepared a report that focuses on Caterpillar corporate restructurings beginning in 1999 and 2005.

The report was released Monday afternoon, according to The Hill, and concludes that while Caterpillar did nothing illegal, it has avoided paying $2.4 billion in federal taxes. The report criticizes the company for avoiding those taxes and calls upon the Internal Revenue Service to more closely monitor these types of strategies.

“This is a prime example of a tax avoidance strategy that has cost the U.S. Treasury billions of dollars,” Levin said Monday.

Caterpillar is scheduled to testify before the panel—the same that investigated Microsoft, Hewlett-Packard and Apple for avoiding taxes—on Tuesday.

The investigation stems from allegations made in a 2009 lawsuit in federal court by a former Cat employee who worked on tax strategy. The employee, Daniel Schlicksup, alleged Cat used both a “Swiss structure” and “Bermuda structure” to avoid $2 billion in U.S. taxes by moving profits to offshore companies.

Schlicksup’s lawsuit was settled in 2012 but Caterpillar denied the allegations about its tax strategy being illegal.

Citing court documents from the lawsuit examined by the Internal Revenue Service, in 1999 Cat moved a replacement parts division to Switzerland with executives saying the purpose was to reduce taxes.

Then, in 2005, the company moved other units to Bermuda and Luxembourg where corporate taxes are low. According to memo from 2006, Cat chief tax officer Robin Beran said, â€śTwo internal reorganizations were completed, leveraging the Bermuda/Lux structure, allowing repatriation of nearly $1.5 billion cash to the U.S. without incremental U.S. tax.”

Beran is one of the Cat executives scheduled to testify Tuesday.

According to a report from the Wall Street Journal, the restructuring came on the advice of accounting firm PricewaterhouseCoopers LLP. The firm will send witnesses of its own to testify at the hearing as well.

According to the Senate report, Caterpillar paid $55 million to develop the strategy. The report says that the strategy is still in place and that Caterpillar generates roughly $300 million savings from it.

In light of the Senate investigation, Caterpillar told the Journal that despite the tax strategy, its “effective income-tax rate is relatively high at about 29 percent despite those strategies.”

The good news for Caterpillar is that it reportedly has a supporter in former Republican Presidential candidate and current Arizona senator John McCain, according to MarketWatch.

Despite typically working well with Levin, McCain is the ranking minority member on the subcommittee and a spokesman for McCain told MarketWatch that “they disagree on this one,” and that McCain “is expected to dissent from at least some of Sen. Levin’s criticism.”

The practice of shifting profits overseas is not uncommon for large companies in the U.S. since the corporate tax rate here is 35 percent—the world’s highest. And while U.S. companies can defer taxes on foreign income, they must pay up when they bring those profits home.