Caterpillar Tax Dodging – Part Of A Much Larger Problem

Dave Johnson

The company Caterpillar is in the news today as another example of corporate tax dodging. A Senate report looks into how the world’s largest maker of construction and mining equipment avoided paying $2.4 billion in taxes. That $2.4 billion could pay teachers, fix bridges and help hungry people.

The Senate Report On Caterpillar

The Senate Permanent subcommittee on Investigations, chaired by Sen. Carl Levin (D-Mich.), issued a report titled, “Caterpillar’s Offshore Tax Strategy.” According to the report. Caterpillar set up a subsidiary company based in Geneva, Switzerland with the acronym CSARL to make it appear as if profits came from that subsidiary instead of operations in the U.S. The subsidiary company has only 400 employees and no manufacturing facilities.

Basically, the report says the Swiss company “bought” parts and supplies from U.S. Caterpillar factories at a low price and resold the parts back to Caterpillar at a high price, making it appear that large profits were made by the subsidiary and not by the U.S.-based parent.

From the report, “As a result of those licensing and servicing agreements, over the next thirteen years from 2000 to 2012, Caterpillar shifted to CSARL in Switzerland taxable income from its non-U.S. parts sales totaling more than $8 billion, and deferred or avoided paying U.S. taxes totaling about $2.4 billion.”

Where Caterpillar once reported on its U.S. tax returns the vast majority of its worldwide profits from the sale of Caterpillar-branded replacement parts to non-U.S. customers – parts that were manufactured by third party suppliers located primarily in the United States – after the adoption of a Swiss tax strategy in 1999, it reported 15% or less of those profits in the United States and shifted 85% or more of the profits to Switzerland. Caterpillar accomplished that profit shift without making any real changes in its business operations. It continued to manage and lead the parts business from the United States.

Levin called Caterpillar “a member of the corporate profit-shifting club that has shifted billions of dollars in profits offshore to avoid paying U.S. taxes.”

“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,” he added. “But in the fantasy land that is international tax law, tax lawyers waved a magic wand to make millions of dollars in US taxes disappear.”

Caterpillar says this is just a “standard multinational business structure entirely consistent with the letter and spirit of U.S. tax law.” They might be right.

Not Just Caterpillar

While this report looked at Caterpillar, many U.S. companies are engaged in similar profit-shifting schemes to avoid paying the taxes they owe. Previously Levin’s subcommittee looked at Apple’s tax dodging, for example. Overall it is estimated that as much as $2 trillion of profits are being help outside of the country by companies that owe as much as $700 billion in taxes on these profits. That $700 billion could pay for teachers, food stamps, bridges, courts, and other vital services.

The Problem Is The “Deferral” Loophole And “Tax Holidays”

There is a huge loophole in our corporate tax laws. Companies that keep profits “made outside the country” don’t have to pay taxes on those profits until they “bring the money back.” The idea was that companies might need to use money made outside the country for investment to grow their business. This would help the company expand and bring our country even greater prosperity and tax revenue later, so it would be a win-win. But multinationals started inventing ways to make it appear as if they made their profits outside the country – as Caterpillar did -– and then just keep the profits out, away from use for investment and hiring here and even from their own shareholders. They do this solely to avoid paying taxes.

This isn’t about whether Caterpillar and companies like Caterpillar owe the taxes – they do – it’s about when they have to pay them. This is called “deferral.” Companies are lobbying for a “tax holiday” as part of “tax reform” so they never have to pay these taxes they owe. Congress already gave in and did this once during the Bush administration, which encouraged companies to accelerate the movement of jobs, factories, intellectual property, call centers, profit centers and everything else they could move out of the country while they wait for Congress to do it again.

Don’t let them get away with this. Tell your member of Congress that any “tax reform” should make companies pay all of the taxes they already owe, not let them off the hook.

If you want to learn more about this and similar issues check out Americans for Tax Fairness. This is a diverse coalition of national, state and local organizations working on making changes that help Americans instead of giving special – often secret – tax breaks to the largest corporations. Their Offshore Tax Loopholes page has more information on this issue.

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