Caterpillar, Inc. (CAT, Financial), the heavy equipment maker is now under scrutiny as the IRS now demands $1 billion in taxes and penalties. This should come as no shock after the company faced Senate scrutiny in 2014 over its tax plans.
Tax Woes
The company deals in the designing, manufacturing and marketing of financial products, insurance, engines, machinery, etc. Caterpillar is reportedly the world's leading manufacturer in industrial gas turbines, construction and mining equipment, diesel and natural gas engines and diesel-electric locomotives. According to the company statement released on January 27, the revenue for 2014 was $55.18 billion. This was a slight drop as the revenue of 2013 was $55.66 billion. However, profit per share increased from $5.75 in 2013 to $5.88 to 2014. If restructured costs were excluded, the profit per share in 2014 was $6.38. Doug Oberhelman, Chairman and CEO of Caterpillar said that the company has taken efforts to improve their cost-structure, quality and market position. This in turn will ensure better results when main industries and the world economy improves.
Caterpillar, which is partially shuffled to Switzerland has to deal with the IRS. IRS is demanding $1 billion in penalties and taxes accountable for the year 2007-2009. Most of the adjustments that have been proposed relate to the Swiss entity and foreign tax credits. Although the company said that they were trying their best to fight the IRS, it faces legal processes from other places as well. A grand jury was subpoenaed asking information about cash movements among the US and Non-US units.
The charges did not stop here. It was reported that the company tried to avoid around $2.4 billion in US taxes by shifting their profits to Switzerland over a period of thirteen years. This issue brought the company under Senate scrutiny back in 2014. Senator Carl Levin (D-MI) in the hearing, “Caterpillar’s Offshore Tax Strategy” grilled Caterpillar over its offshore move of around 85% of part sales. Witnesses included Caterpillar executives as well as PricewaterhouseCoopers LLP and tax experts. Out of 8000 total employees, only 35 employees were based in Switzerland, the Senator claimed. He said that nothing has changed in the operation. However the Vice president, Julie Lagacy fought back by saying that the deal was a legitimate one. It was not a "tax deal pure and simple" as put by Levin. What surprised quite a many during the hearing was the fact that PricewaterhouseCoopers LLP. Sen. Rand Paul, R-Ky., claimed that the company did not deserve an inquisition, they deserved an award.
Other Companies tackling the same issue
Established companies like Apple (AAPL, Financial), Google (GOOG, Financial) , Facebook (FB, Financial), Twitter (TWTR, Financial) have always favored tax havens like Ireland. According to investigations by the Senate Permanent Subcommittee, Apple avoided around $9 billion in U.S taxes for 2012 alone. This was on offshore units with no tax home. CEO Tim Cook reverted back saying that there was no illegal issues. Levin said that the giant tech company saved billions of dollars by claiming companies registered in Ireland are not actually tax resident in any other country.
According to another report, Facebook tried to evade tax. As a part of their “Double Irish” tax reduction strategy, the company flipped $700 million to Cayman Islands. Google was smart enough to use the Dutch sandwich and Double Irish as a part of their tax-reduction strategy. IRS even objected to Starbucks (SBUX, Financial) and Hewlett-Packard Company (HPQ, Financial) putting income in foreign hands. Not only the IRS, even the G20 countries and OECD have deemed the same to be tax manipulation.
Conclusion
It may baffle quite a many to understand how these giant companies plop profits offshore. The Swiss scandals proved one point. Everything is income worldwide. Forget MNC's. There is a possibility of "stateless" income. It looks like Caterpillar's bad days are on. Many fresh issues may now pop up.Ă‚
