Trillion Dollar Tax

Issue with a Billion

Dollar Company:
A Caterpillar Case Study

By David Iskander
In an article published by the WSJ on the first of April 2014, Caterpillar (Cat) received major
attention from the Senates Permanent Subcommittee on Investigations about unlawful tax
practices (SPSI). The Subcommittees allegations against Caterpillar also are under heavy
examination of Apple Inc., Microsoft Corp., and Hewlett-Packard Co. Each of these companies
structures and practices are being analyzed due trillions of dollars of cash left overseas. Today,
profits held overseas and safeguarded from US tax law accumulate to $2.12 trillion dollars in
the Russell 1000 index. Up about $1 trillion from 5 years ago, this seems to be a behemoth
issue that the United States needs to address. Either way, the direct action today is to target
large U.S. firms that may be shielding profits from taxation, namely, Caterpillar.

Current Status
Caterpillar is one of the largest producers manufacturing business in the world. The current
CEO, Doug Oberhelman, has driven the company for about four years. With Net revenues in
2013 at just about $55 billion, 120,000 employees, and headquarters in Peoria, Illinois,
Caterpillar has gained the 42
nd
position in the Fortune 500 list and 136
th
position in the Global
500. A remarkable producer, Caterpillar manufactures trucks, construction, and farming
machinery. Profits in 2013 were recorded at $7 billion, roughly 13 percent of revenue. The
dividend yield was 2.4 percent and the company paid a 29 percent tax rate. Today, roughly 70
percent of Caterpillars sales are international. Cats business model is through manufacturing,
marketing, research and development and sales. Specifically, sales of replacement parts are a
large source of revenue for the manufacturing giant.

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Case Study
The United States tax law, according to the WSJ, requires U.S.
firms to pay corporate income tax on profits earned from any
international sale. This is quite contrary to foreign nations that only
tax domestic income. However, U.S. tax code allows companies to
defer tax payments on overseas income until the cash comes back
home. This tax law has initiated the Subcommittees investigations
and allegations against Caterpillar for evading the payment of over
$2.4 billion in U.S. income tax on $8 billion dollars in sales.
Caterpillar, in the late 1990s, reconstructed how it handled the
sale of parts to customers outside the U.S. PricewaterhouseCoopers (PwC), Caterpillars both
auditing and consulting accounting firm, was paid $55 million to consult Caterpillar on different
options to reconstruct their business operations. The final decision that is under investigation
by the Subcommittee questions the restructuring of the sales (of parts to customers outside the
U.S.) through a Swiss subsidiary. This change
deferred all tax payment on the sale of parts to
foreign buyers and has brought in over $8 billion
in revenue since. The majority in the
Subcommittee sees the Swiss subsidiary as a tax
haven, which is illegal under U.S. tax law.
Opinions vary about accusing Caterpillar with
tax evasion and if these tactics are beneficial.

The I nvesti gati on
The Subcommittee is made up of the majority
leader, Senator for Michigan Mr. Carl Levin and
the minority leader, senator of Arizona Mr. John
McCain. Levin is set to elicit U.S. giants like
Caterpillar, Apple, HP, Microsoft, and now Pfizer
with shoring profits overseas to avoid paying
corporate income tax. On the other hand,
McCain states their practices as egregious and
legal. The national Association of Manufacturers
(NAM) vice-president, whos current Chairmen is
Caterpillars CEO, states we are focused on the
wrong thing. Accusations against Caterpillar are
a palliative resolution. The antiquated tax code
as Ms. Coleman states, is out of sync with the
rest of the world.



The Big 4: The top
accounting firms today
are Ernest & Young,
PwC, KPMG, and
Deloitte. In all, with
$110 billion in revenue,
700,000 employees, and
offices all over the
world, these companies
audit and consult the
Global 500 companies.

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Next Steps
Under careful research and analysis, Caterpillar has four strategies to continue:
1. Informal Alliance: Without a direct meeting under Caterpillars operations, an informal
alliance with NAM would allow them to call these other companies and deal with the
issues presented to them collectively. This would be a front for the company.
2. Directly Responsible Individual (DRI): Coined by Apple Inc.s Steve Jobs, this phrase
would put someone in direct responsibility for each part of the business structure. In
this case, most likely the CFO, Bradley Halverson would be the DRI.
3. Optics: How the public, the government, and the world view the company. Potentially
arguing the benefits of a lower tax rate and giving sufficient reasoning could give the
optics of Caterpillar a better view rather than a company skimping on its tax
requirements.
4. K-Street: Lobbying for certain actions, especially with the size of Cat, could be a
meaningful initiative for the company. Certain objectives would be to: (1) Get Levin out
of office, (2) get a reduction in the tax rates for corporate taxable income, and (3) to
reinforce the current tax law.
These initiatives would help clear up Caterpillars name from any unjust accusations. In all,
the fight against these companies like Caterpillar, HP, Microsoft, Apple, and Pfizer all are a
palliative resolution. Tougher questions need to be asked that deal with the underlining cause
of not a $2.4 billion dollar tax issue from Caterpillar but a $2.1 trillion dollar issue with U.S.
companies.