Senate and Caterpillar Prepare to Face Off Over Tax Avoidance Strategy

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Source: Thinkstock

Source: Thinkstock

The Senate’s Permanent Subcommittee on Investigations is scheduled to release its report on Caterpillar’s (NYSE:CAT) tax practices on Monday ahead of its April 1 hearing on the construction and mining equipment manufacturer’s strategies to mitigate its tax burden.

This investigation into Caterpillar dates back to 2009 when Daniel Schlicksup — a Caterpillar employee who worked on tax strategy — testified in federal court that the company used what is known as a “Swiss structure” to shift profits to offshore companies, thereby avoiding more than $2 billion in United States taxes. He further alleged that Caterpillar employed a “Bermuda structure,” which allows shell companies to return profits to the U.S. without paying required taxes. According to Schlicksup complaint, obtained by Bloomberg, the Swiss structure involved “many shell corporations with no business operations,” in which the management of profitable businesses was technically shifted to Switzerland even though it actually remained in the U.S. Specifically, he called the company’s strategy a “tax dodge.”

Schlicksup’s lawsuit was eventually settled in 2012, with Caterpillar denying allegations that company executives had retailed against him. He claimed that his superiors limited his career opportunities because he complained that the “Swiss structure” ran afoul of U.S. tax rules.

But the Senate’s examination of the company’s tax strategies is by no means an isolated inquiry. Broadly, the Senate subcommittee — which is headed by Democrat Carl Levin of Michigan — has been investigating tax avoidance by multinational companies like Microsoft (NASDAQ:MSFT), Hewlett-Packard (NYSE:HPQ), and Apple (NASDAQ:AAPL), which have been the subjects of previous congressional hearings.

Senate lawmakers discovered in 2013 that Apple owned a subsidiary that had earned $30 million over four years and had no home for tax purposes, while in 2012, Microsoft was found to have transferred nearly half of its net revenue from U.S. retail sales to a Puerto Rican subsidiary between 2009 and 2011, saving the company $4.5 billion in U.S. taxes. In essence, these companies have been case study for congressional lawmakers who want to show that even though multinational corporations may be taking advantage of legal loopholes in the tax code, as these loopholes are hurting the United States economy.

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