Caterpillar Shares Drop on News of Federal Tax Probe
For years, heavy-equipment giant Caterpillar has been under the watchful eye of the federal government for allegedly siphoning its profits to a Swiss subsidiary in what the government believes is illegal tax evasion. Now a new report commissioned by an unknown federal agency argues that Caterpillar failed to pay taxes on $7.9 billion in profits repatriated from Switzerland in the form of loans.
Caterpillar’s Swiss subsidiary is called CSARL, and in the company’s 2014 annual filings, it was revealed that the SEC was looking into CSARL and requested the preservation of records relevant to its investigation. Last year, Caterpillar commented on the issue in its annual report, saying that the CSARL profits were to remain offshore indefinitely.
Professor Leslie A. Robinson of Dartmouth University, the report’s author, argues that Caterpillar’s actions were “fraudulent” not “negligent.” Robinson had access to documents and files pertaining to an investigation being undertaken by the US Attorney’s office in Springfield, Illinois, and the Inspector General of the FDIC. As part of the investigation, FDIC and IRS agents recently raided Caterpillar’s headquarters in Peoria for evidence, with the company stating that it is participating fully with the federal investigation. A Caterpillar spokesperson denied to comment on the report following the raid, stating that the company yet review it.
According to Robinson’s report, the loans Caterpillar received from the Swiss subsidiary were supposed to have been declared as taxable distributions of cash. The company therefore failed to pay taxes on these earnings, which it was able to access in the U.S. The report only focuses on this illegal practice and does not mention legal forms of tax avoidance, such as receiving short-term loans from foreign subsidiaries.
So far charges have not been filed, and it remains to be seen whether the US Attorney will do so based on Robinson’s report. Caterpillar first came under scrutiny from federal agencies when a Senate investigation revealed that the firm has shaved $2.4 billion off its tax liability over the last 13 years using these strategies. As a result, the IRS is currently seeking $2 billion in back taxes and penalties.
The 2014 Senate investigation also named Hewlett Packard for similar tax strategies. In addition, investigation also pointed to accounting and consulting firm PwC (Price Waterhouse Cooper) as the architect of the tax avoidance plan despite the fact that PwC is Caterpillar’s auditing firm, which is a potential conflict of interest.
News of the report pushed Caterpillar stock price down 1.73 (2%) in March 7 afternoon trading, with the stock closing at $94.19. Caterpillar is one of the companies whose shares make up the Dow Jones Industrial Average.
Caterpillar says it will appeal the IRS’s decision vigorously. They added that the transactions singled out by the agency were fully compliant and that Caterpillar’s strategies did not violate any any laws.