Executives from Caterpillar and its accountants PricewaterhouseCoopers were called to Washington yesterday to explain Caterpillar's offshore tax strategy to a Senate hearing. A congressional report said the mining equipment giant avoided $2.4bn (£1.4bn) in US taxes by moving profits to Switzerland.
The 99-page report says Caterpillar paid PwC, who are also its auditors, $55m to develop a tax strategy from 1999, redirecting to Switzerland profits from sales of Caterpillar branded replacement parts manufactured by contracted third parties.
Between 2000 and 2012, the report says, the group used a wholly owned Swiss affiliate to shift $8bn in profits from the US to Switzerland to take advantage of a special 4 to 6 per cent corporate tax rate it negotiated with the Swiss government, and to defer or avoid paying $2.4bn in US taxes.
"Caterpillar is an American success story that produces phenomenal industrial machines, but it is also a member of the corporate profit-shifting club that has shifted billions of dollars in profits offshore to avoid paying US taxes," Carl Levin, the chairman of the US Senate permanent subcommittee on investigations said yesterday, as he opened the hearing.
"Caterpillar paid over $55m for a Swiss tax strategy that has so far enabled it to avoid paying $2.4bn in US taxes.
"That tax strategy depends on the company making the case that its parts business is run out of Switzerland instead of the US, so it can justify sending 85 per cent or more of the parts' profits to Geneva. Well, I'm not buying that story," Mr Levin said.
Caterpillar stood by its strategy, telling the subcommittee that sending a big share of the parts' profits to Switzerland is justified, because its Swiss affiliate performs "valuable intangible services".
Under the strategy, in exchange for a small royalty of about 15 per cent, Caterpillar transferred rights to the profits from its profitable international parts distribution business to a wholly controlled Swiss affiliate called CSARL, according to the subcommittee.
The subcommittee said Caterpillar sent the vast majority of its profits to Switzerland, even though only about 65 of the 8,300 Caterpillar employees who handle parts actually work in Switzerland. None of the manufacturing, warehousing, or distribution activities of the parts business exists in Switzerland, the report said.