WASHINGTON - Calling Caterpillar (CAT) a member of the "corporate profit-shifting club," Sen. Carl Levin accused the manufacturing giant Tuesday of employing an aggressive tax strategy to avoid paying billions of dollars in U.S. taxes.
Levin opened a Senate hearing on the Caterpillar's taxes by detailing a strategy in which the company avoided paying $2.4 billion in U.S. taxes since 2000 by shifting profits to a wholly-controlled affiliate in Switzerland.
Levin, a Democrat from Michigan, chairs the Senate investigations subcommittee. The subcommittee's Democratic staff spent nine months investigating Caterpillar's taxes, generating a report released Monday.
Caterpillar shares were largely unchanged in afternoon trading, at $99.53.
Caterpillar says it complies with all tax laws. Representatives from Caterpillar and accounting firm PricewaterhouseCoopers LLP were scheduled to testify at Tuesday's hearing. The report says Caterpillar paid PricewaterhouseCoopers $55 million to develop its tax strategy.
"Caterpillar is an American success story that produces iconic industrial machines," Levin said. "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."
Levin's report raises questions about the validity of the tax strategy but it does not accuse the Peoria, Ill.-based manufacturer of breaking the law.
Rather, the investigation "shows how an iconic American corporation, Caterpillar Inc., a U.S. manufacturer of construction equipment, power generators, and sophisticated engines, paid millions of dollars for a tax strategy that shifted billions of dollars in profits away from the United States and into Switzerland, where Caterpillar had negotiated an effective corporate tax rate of 4 percent to 6 percent," the report said.
Sen. John McCain of Arizona, the top Republican on the subcommittee, did not endorse the report. At the hearing, McCain said Caterpillar appears to manage important operations from Switzerland, which could justify the tax strategy.
"In this case, an important factor in Caterpillar's overseas sales seems to be its independent dealer network, which is overseen and managed by Caterpillar's subsidiary in Switzerland," McCain said.
McCain noted that the U.S. has the highest corporate income tax rate among industrialized countries, at 35 percent. McCain said the high rate encourages companies to look for ways to avoid paying U.S. taxes.
Julie Lagacy, a Caterpillar vice president, said in prepared testimony that the company complies with all tax laws. She said Caterpillar pays an effective income tax rate of 29 percent, among the highest for multinational manufacturers.
"Caterpillar takes very seriously its obligation to follow tax law and pay what it owes," Lagacy said. "Caterpillar's philosophy is that our business structure drives our tax structure. We comply with the tax laws enacted by Congress, by the states and by all of the many jurisdictions in which we conduct business."
Levin's subcommittee has examined the tax practices of various U.S.-based corporations, including Apple (AAPL), Microsoft (MSFT) and Hewlett-Packard (HPQ). In 2012, for example, the panel said Microsoft avoids taxes by shifting assets to units in Puerto Rico, Ireland and Singapore. That is said to have saved the software maker $4.5 billion in taxes from 2009 to 2011. The subcommittee last year also accused Apple of using a "complex web of offshore entities" to dodge billions of dollars in U.S. income taxes.
Levin said he chose to examine Caterpillar because it was a clear example of tax avoidance.
Levin has introduced legislation to restrict the ability of U.S.-based corporations to shift profits overseas to avoid U.S. taxes. But the bill has stalled in the Senate.
Levin's investigation focused on Caterpillar's lucrative international parts distribution business.
Under the tax strategy, Caterpillar transferred the rights to profits from its parts business to a wholly-controlled Swiss affiliate called CSARL, even though no employees or business activities were moved to Switzerland, the report said. In exchange, CSARL paid a small royalty, and the income was taxed at a special rate of 4 percent to 6 percent that Caterpillar negotiated with the Swiss government, the report said.
Before the 1999 arrangement, 85 percent of the profits from the parts business were taxed in the U.S., the report said. Afterward, only 15 percent of the profits were taxed in the U.S. The rest was taxed at the special rate in Switzerland, the report said.
The report says Caterpillar has 4,900 U.S. employees working in parts distribution, while CSARL has only 65 parts workers in Switzerland.
"That tax strategy depends on the company making the case that its parts business is run out of Switzerland instead of the U.S. so it can justify sending 85 percent or more of the parts profits to Geneva," Levin said. "Well, I'm not buying it."
Lagacy said CSARL is "a major operating company with thousands of people around the world who perform strategically critical work to support our customers in non-U.S. markets."
"We grow and build near our customers worldwide, not only because it's what they demand, but because remaining globally competitive helps create jobs in the United States," Lagacy said.