WASHINGTON — Sen. Carl Levin, saying it was “long past time” to ensure that multinational U.S. corporations pay taxes on their overseas profits, took Caterpillar Inc. to task for an offshore strategy that helped the company avoid $2.4 billion in income taxes.
The Michigan Democrat, during a five-hour committee hearing Tuesday, said Caterpillar has been routing most of the profits from its foreign replacement-parts business to a Swiss affiliate since 2000.
“Tax avoidance through the use of dubious tax loopholes costs the U.S. Treasury tens of billions each year,” Levin said at the start of a hearing before the Senate Permanent Subcommittee on Investigations he chairs.
“Caterpillar is an American success story that produces iconic industrial machines,” he noted. “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.”
Several Republicans came to Caterpillar’s defense.
Sen. Rand Paul (R-Ky.), who often criticizes the Internal Revenue Service, said Caterpillar should be given an award rather than be put through an “inquisition.”
“The tax code needs to be on trial here,” Paul said.
Executives from Caterpillar, one of the country’s largest exporters, sought to refute Levin’s case.
“I want to emphasize, Caterpillar complies with the U.S. tax laws and we pay everything we owe,” said Julie Lagacy, vice president of Caterpillar’s finance services division.
She said the company has an average effective tax rate of 29%. She estimated the firm incurred about $700 million in income, property, sales and use taxes last year under federal, state and local laws in the U.S.
Levin, whose committee has been investigating corporate offshore tax strategies, has argued that such tax avoidance makes it harder for the U.S. to invest in education, infrastructure and national defense. It also increases the tax burden “on families and businesses who cannot employ an army of tax lawyers,” he noted.
Apple Inc., Microsoft Corp. and Hewlett-Packard Co. previously have come under fire for their tax-avoidance strategies.
The focus of Tuesday’s hearing was Caterpillar’s move in 1999 to shift the booking of most profits to Switzerland for sales of Caterpillar-branded parts to non-U.S. customers. None of the parts are made in or shipped from Switzerland, a subcommittee report noted.
Levin was emphatic that Caterpillar, on advice from its auditor and tax consultant, PricewaterhouseCoopers, was exploiting a loophole because it reduced its tax burden by adopting a new tax strategy rather than making concrete changes to its non-U.S. replacement-parts business.
The firm had negotiated a special effective tax rate in Switzerland varying from 4% to 6%, below the Swiss statutory tax rate of 8.5%, he said.
The firm’s revenues exceeded $120 billion over the last two years, Levin noted. He said from 2000 to 2012, the tax strategy shifted $8 billion in profits from Caterpillar U.S. to its Swiss affiliate, thereby cutting the firm’s U.S. tax bill by $2.4 billion in that period.