Why tax authorities just raided Caterpillar

Federal agents swooped in on Caterpillar’s Illinois corporate headquarters and several other buildings owned by the company on Thursday, in connection with an investigation into the tax practices of the heavy-machinery producer.

The focus of the raid, led by the Commerce Department and IRS and including officials from two other agencies, largely concerned the company’s operations in Switzerland, according to warrants placed under seal but seen by reporters from Bloomberg. The government alleges that Caterpillar owes about $2 billion in taxes and penalties on parts shipments made by its Geneva-based subsidiary, Bloomberg reports, though the company said last month that it would “vigorously contest” the claim.

The news put a damper on surging share values of a company expected to reap big benefits from infrastructure projects expected under President Trump, who expressed admiration for Caterpillar and its bulldozers during a meeting with executives last week. 

It may also return attention to the corporate use of offshore tax havens, at a time when Congress is gearing up for a version of tax reform that would likely aim to encourage corporations to bring back overseas earnings by lowering taxes on those repatriated funds — what many conservatives see as a corporate-friendly response to a side of globalization that liberals have often decried.

As The Christian Science Monitor’s Mark Trumbull noted last April after the leak of the so-called "Panama papers,” offshore tax havens are in many ways a symbol of global inequality:

The questions go beyond whether the financial activities were legal or illegal. The news puts names and faces on the problems of political cronyism and tax evasion by the wealthy, and on the global scale of these problems. That’s politically volatile in its own right. But the news, arriving at a time income inequality is an issue of high worldwide concern, also suggests that global tolerance of tax havens is one of the important roots of the rich-poor gap.

“Financial secrecy enables inequality. Tax havens enable inequality,” says Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, a nonprofit research organization in Washington. 

Mr. Trump’s preferred tax plan would try to lure back a slice of the estimated $2-3 trillion in US corporate profits typically held in tax havens like Switzerland, Bermuda, the Cayman Islands, and the Bahamas, by levying a one-time tax of 10 percent upon their repatriation — much lower than the current 35 to 40 percent they would otherwise owe. It remains unclear if this would be part of a reform currently being hashed out by Republican leaders in the House. 

Caterpillar’s problems with tax authorities dates back to 2009, when a former executive filed a lawsuit claiming that the company improperly attributed to its Geneva subsidiary some $5.6 billion in profits made from shipments originating at its Illinois branch, allegedly allowing it to skirt about $2 billion in US taxes over a ten-year period, notes Bloomberg.

That case was later settled. But in 2014, its tax practices in Switzerland came under new scrutiny from a Congressional subcommittee that looked at how several multinational corporations were attempting to avoid US taxation. The subcommittee concluded that Caterpillar had negotiated a tax rate of 4 to 6 percent, compared to the 29 percent Caterpillar says it paid in the US, reported the New York Times. Those conclusions may have drawn the attention of federal investigators, who subpoenaed the company's records in January 2015 over the movement of cash between US headquarters and overseas subsidiaries.

Elise Bean, who led the subcommittee investigation in 2014, told Crain’s Chicago Business that the raid was a continuation of pre-Trump work by investigators, but that the administration’s reaction would be an important question.

"Is this administration going to ignore what happened with Caterpillar, pretend it didn't happen?" she said. "Are they going to pull back on their enforcement efforts? We just don't know."