The Peoria, Ill.-based company eased the tax bite through an agreement that transferred its international parts-distribution division to the subsidiary, the report by the staff of the Democratic majority of the Senate Permanent Subcommittee on Investigations showed.
Despite $8 billion profit shift, no Caterpillar personnel or business activities moved from the U.S. to Switzerland, and most of the firm's parts business remains in the U.S., said the report, issued as Americans prepare for the annual April 15 tax-filing deadline.
"Caterpillar is an American success story that produces phenomenal industrial machines, but it's also a member of the corporate profit-shifting club that has shifted billions of dollars of profits offshore to avoid paying U.S. taxes," said Sen. Carl Levin, D-Mich. who chairs the panel.
The subcommittee's reports typically are issued by the panel's top Democratic and Republican members. But in a sign of disagreement by Sen. John McCain, R-Ariz., the panel's ranking GOP member, the findings were issued as a report by staffers for the Democratic majority. McCain was scheduled to address the issue at a Tuesday hearing on Caterpillar's tax strategy.
Executives from Caterpillar and PricewaterhouseCoopers, the accounting giant that audits the manufacturer and was also paid approximately $55 million for working on the tax strategy, are scheduled to testify at the hearing.
In prepared written testimony, Julie Lagacy, a Caterpillar vice president, said the manufacturer "takes very seriously its obligation to comply with the tax laws enacted by the Congress, by the states" and other jurisdictions.
"Caterpillar's effective income tax rate averages about 29%," relatively high among U.S. firms, said Lagacy. The company has added ab! out 13,000 U.S. jobs in the last 15 years and "is proud to pay its fair share of taxes right here in the United States," said Lagacy.
PwC said its advice "helped Caterpillar evaluate how best to organize its expanding global operations" and align them "with carefully considered U.S. tax policies." The firm said it "maintained our independence with respect to Caterpillar at all times" and complied with all oversight rules.
The report is the latest in which the panel spotlighted strategies that Apple, Microsoft, Hewlett-Packard and other well-known U.S. corporations used sophisticated strategies to transform what would otherwise be substantial tax bills into major savings.
Many members of Congress have argued that such tax issues arise more from problems with the U.S. tax code than from corporate America. Tax laws allow U.S.-based companies to defer taxes on reported foreign income until they bring the profits home. As a result, domestic corporations collectively holds trillions of dollars overseas.
The subcommittee began examining Caterpillar after learning of a 2009 federal lawsuit by Daniel Schlicksup, an attorney who had worked on the firm's tax strategy. He charged that Caterpillar used a "Swiss Tax Structure" to shift profits overseas and a "Bermuda Tax Structure" to bring them back to the U.S. After Schickslup raised questions, Caterpillar retaliated by forcing him into an unwanted transfer, the lawsuit charged.
Caterpillar denied all allegations in the case, which was settled in 2012.
Reaching some of the same conclusions as the lawsuit, the subcommittee report said Caterpillar negotiated an effective tax rate of 4% to 6% with Switzerland, and then created created a Swiss subsidiary called CSARL. New licensing deals enabled the subsidiary to sell Caterpillar's third-party manufactured replacement parts to non-U.S. dealers and customers without showing the proceeds as U.S. income, the report concluded.
"Caterpillar is shifting its parts profits to Switzerl! and, even! though most of its parts operations and work is done right here in the United States," said Levin, who argued the subsidiary deals might not represent arms-length transactions.
"Nothing changed in the real world," he said, "except Caterpillar's tax bill."
Separately, the manufacturer's annual report filed in February with the Securities and Exchange Commission disclosed that the IRS has issued preliminary notices that Caterpillar owes additional federal taxes involving "certain non-U.S. operations and foreign tax credits."
"We disagree with these proposed adjustments" and will "vigorously contest" them if the IRS finalizes the preliminary assessment, Caterpillar said.
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