How A Swiss Affiliate Led To Thursday’s Federal Raid Of Caterpillar’s Headquarters

Forbes – by Nathan Vardi

In April 2014, a Senate committee put out a report that said Caterpillar had crafted a tax-reducing strategy that shifted billions of dollars of profits away from the U.S. to Switzerland, where the company had negotiated a low tax rate, even though Caterpillar had not made “any real changes in its business operations.”

Nearly three years later, on Thursday, federal prosecutors in Illinois together with agents of the Federal Deposit Insurance Corporation office of inspector general, the Internal Revenue Service’s criminal investigation division and the Department of Commerce office of export enforcement, descended unannounced on Caterpillar’s headquarters. The feds also entered two other Caterpillar facilities in and around Peoria, Ill., executing a search and seizure warrant to collect documents and electronic information.  

A worker watches as a Caterpillar Inc. excavator dumps earth into a truck during the construction of the Belo Monte hydroelectric dam on the Xingu river in Para, Brazil. Photographer: Dado Galdieri/Bloomberg

While Caterpillar said on Thursday it was cooperating with law enforcement, it is extremely rare for federal agents to conduct a raid of an enormous American company that is part of the Dow Jones Industrial Average. Caterpillar had previously disclosed to investors that it had received a federal grand jury subpoena from the U.S. District Court of Central Illinois requesting documents pertaining to its movement of cash between its U.S. and foreign subsidiaries. The company initially said in its securities filings that the investigation by federal prosecutors also related to the purchase and resale of replacement parts and payments made between foreign subsidiaries, particularly Caterpillar SARL.

While on Thursday Caterpillar said the search warrant was broadly drafted, the company, which is the world’s largest manufacturer of earthmoving and construction equipment, said the search warrant targets export filings relating to CSARL.

Based in Switzerland, CSARL was created in 1999 by Caterpillar. It only got on Washington’s radar screen because the company’s former global tax strategy manager filed a lawsuit that claimed Caterpillar had sold and shipped replacement parts for its machines from an Illinois warehouse, but improperly attributed billions of dollars of profits from those sales to CSARL in Switzerland.

The lawsuit by the former Caterpillar employee claimed that CSARL had become the global purchaser of replacement parts instead of the U.S. parent company, resulting in lowering the company’s U.S. tax bill because the profits were attributed to Switzerland instead of the U.S. PricewaterhouseCoopers, Caterpillar’s auditor, helped the company put the tax-lowering scheme together in return for a $55 million fee.

The permanent subcommittee on investigations of the U.S. Senate homeland security and government affairs committee put out a 99-page report in 2014 saying Caterpillar entered into licensing deals with CSARL to let it sell replacement parts to Caterpillar’s non-U.S. dealers and customers without showing the parts profits as U.S. income.

“Caterpillar had previously purchased those parts directly from 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 Senate report said. “After the Swiss tax strategy was implemented, Caterpillar was removed from the legal title chain for the non-U.S. parts.”

But the Senate committee claimed that in practice nothing had changed and over 70% of the third party manufactured parts sold outside the U.S. were made and shipped from America. The Senate committee claimed the Swiss tax strategy allocated more than $8 billion in non-U.S. parts profits to CSARL over 13 years, deferring $2.4 billion in U.S. taxes on the profits.

“Most of Caterpillar’s parts executives are here, most of its parts employees are here, most of its parts are designed here, most of its parts are built here, most of its parts are stored here, most of its orders are filled here, and most of its parts are shipped from here,” said Carl Levin, then a U.S. Senator representing Michigan, in 2014. “Yet most of its international parts profits go to Switzerland.”

Last year the IRS called for Caterpillar to pay $2 billion in back taxes and penalties, arguing Caterpillar’s transactions among its subsidiaries were no good, and also disallowed about $125 million of foreign tax credits related to deals between the subsidiaries. Caterpillar has contested the IRS findings.

3 thoughts on “How A Swiss Affiliate Led To Thursday’s Federal Raid Of Caterpillar’s Headquarters

  1. How many times is money taxed? The parts were made here and workers hired. Those workers paid income tax and purchased in this country. Time for a tax revolution. Today I have to file to the corrupt America Inc.

    1. I have no sympathy for Caterpillar, as I know they took tax payer money in the form of stimulus to build a plant in China and are just another parasite with an off-shore account.
      If you are going to file, I would suggest Cracking the Code and not pay them anything as you do not owe them anything.
      Have a nice day.

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