The Tax Times: Caterpillar Faces Criminal Probe In Addition to IRS Penalties Related to its Offshore Tax Strategy

We had previously posted Caterpillar Saved Billions in US Tax By Shifting Profits to a Swiss Subsidiary where we discussed that Caterpillar Inc., an American manufacturing icon, used a wholly owned Swiss affiliate to shift $8 billion in profits from the United States to Switzerland to take advantage of a special 4 to 6 percent corporate tax rate it negotiated with the Swiss government and defer or avoid paying $2.4 billion in U.S. taxes to date, a new report from Sen. Carl Levin, the chairman of the U.S. Senate Permanent Subcommittee on Investigations shows.

The report by the U.S. Senate Permanent Subcommittee on Investigations said the company used a tax strategy built around redirecting to Switzerland taxable profits from sales of Caterpillar-branded replacement parts manufactured by third parties under contract with the company. Sen. Carl Levin (D-Mich.) senateinquiry found that Caterpillar saved as much as $2.4 billion in taxes over 13 years from what , then chairman of the committee, said was a “paper change.”

In exchange for a small royalty, Caterpillar transferred rights to profits from its international parts distribution business to Caterpillar SARL, or CSARL, the report said. In effect, Caterpillar redirected the profits by simply replacing its name with CSARL on its invoices, according to the report

Prior to issuing its license with CSARL, Caterpillar booked 85 percent or more of its non-U.S. parts profits in the U.S., where 70 percent of those parts are made and warehoused and where its global parts operation was created and is managed. But the license allowed CSARL to sell the parts to Caterpillar’s non-U.S. dealers and pay Caterpillar a royalty equal to only about 15 percent of the parts profits, while keeping the remaining 85 percent on its books in Switzerland, the Senate investigators found.

Now this federal probe into Caterpillar Inc.’s elaborate tax avoidance strategy highlighted in a Senate hearing last year has pivoted in a criminal direction with the global manufacturer of construction and mining equipment acknowledging a grand jury investigation by the U.S. attorney for the Central District of Illinois.

Caterpillar disclosed, in its most recent 10-Q filed with the Securities and Exchange Commission, that it is responding to a grand jury subpoena received Jan. 8, 2015 In the same 10-Q, dated May 1, 2015, Caterpillar acknowledged responding to separate investigative demands placed by the SEC and the IRS.

Caterpillar indicated that the IRS has “proposed” tax increases and penalties of about $1 billion after examining its U.S. returns for 2007-09, including a loss carryback to 2005.

The Internal Revenue Service has proposed taxing U.S. profits the company earned from certain parts transactions by its Caterpillar SARL unit based in Switzerland, Caterpillar. The IRS is also disallowing about $125 million of foreign tax credits from financing unrelated to the Swiss entity. The company received the IRS revenue agent’s report on Jan. 30, 2015.

Caroline Nolan, a spokeswoman for PricewaterhouseCoopers LLP, which helped create the transactions, had no immediate comment on the matter.

In August, the Indiana Supreme Court ruled that Caterpillar can't use foreign-dividend deductions to increase its state operating losses, overriding a tax court decision to let the company claim tax refunds by literally drawing new blanks on its state tax forms.
The state high court ruled that using foreign dividend deductions violates state law, overturning a 2008 tax court ruling allowing the company to count foreign-source dividend income in its 2000-03 calculations of its net operating losses in Indiana and carry the losses into other tax years. The construction and mining giant is incorporated in Delaware and has its headquarters in Illinois but has hundreds of subsidiaries.

It looks like Caterpillar may need several of its earth movers, to dig its way out of its Tax Problems!

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