Caterpillar Investigated for Corporate Tax Fraud; Offices Raided

You know it’s a bad day when you get an unannounced visit from the IRS criminal investigation unit, the U.S. Department of Commerce Office of Export Enforcement, and the FDIC's Office of Inspector General.

That’s just what happened on March 2 to Caterpillar Inc. The reason for this gathering? The U.S. government accuses the construction equipment giant of tax fraud by improperly shifting billions of dollars of sales on replacement parts from the U.S. to its Swiss subsidiary CSARL.

By paying a Swiss corporate tax rate of 4% to 6% rather than the U.S. rate of 35%, the company cut its U.S. tax bill by $2.4 billion over more than a decade. The U.S. government maintains that Caterpillar did not have a business purpose other than tax avoidance and is seeking $2 billion in back taxes and penalties.

A government-sponsored report found that Caterpillar had no “substance” in Switzerland, such as manufacturing or warehouse facilities. Furthermore, more than 40% of revenues and profits came from the Swiss subsidiary, despite CSARL employing less than 1% of Caterpillar’s 100,000-plus workforce.

Even Caterpillar’s global tax strategy manager had questioned the validity of properly taking advantage of the significantly lower Swiss tax rate. The issue finally came to light through an employee whistle blower suit in 2009. Shareholders ultimately filed lawsuits against the company for inflating stock prices and lack of governance.

In addition to improper accounting practices, there is word that the government is looking into Caterpillar’s possible violations of the Foreign Corrupt Practices Act, inaccurate export valuations, and doing business with companies under U.S. sanctions including Syria, Sudan and Cuba.

With annual revenues of nearly $39 billion, Caterpillar could stand to benefit from the new administration’s interest in a $1 trillion infrastructure package. However, the aforementioned charges could lead to a possible restriction on bidding on federal contracts.

These events also come at a time when tax reform and discussions about a corporate tax repatriation holiday are gaining momentum. It was reported that Caterpillar still has $16 billion in undistributed profits and $5 billion in cash in its overseas subsidiaries.

Caterpillar says it is cooperating with the authorities and vigorously contesting the IRS’ decision to seek substantial back taxes and penalties.