Caterpillar has become an example of the IRS focus on international business and the aggressive tax planning strategies employed by multinationals in an attempt to shield income from US taxation. Just last week, the President loudly proclaimed “I love Caterpillar!” This week, their headquarters were raided by federal agents looking for unspecified information. Caterpillar said it believed the search was part of an Internal Revenue Service investigation of profits earned by Swiss parts subsidiary Caterpillar SARL, or CSARL. The primary focus of the action is to make an obvious example of Caterpillar while cracking down on international business, multinational entities and those who import and export. Transfer pricing has been another principal area of focus in this ongoing and evidently expanding activity.
This week’s activities are a shot across the bow of any US company with international business: The IRS is scrutinizing your entities searching for evidence of transactions and corporate structuring designed to shield US income from taxation. The Caterpillar subsidiary in question (CSARL) was the target of a 2014 Senate Committee inquiry that accused Caterpillar of shifting billions in profits overseas (to Swiss entities) avoiding some $2.4 Billion in US taxes from the tax year of 2012 alone. The IRS has simply assessed taxes and penalties to the subsidiary for the tax period of 2007 to 2012, which Caterpillar has contested.
The gloves came off this week, and in a moment of high drama (and purposeful press exposure) federal agents served search warrants on Caterpillar’s headquarters. Embarassed Caterpillar executives issued an apology. CEO Jim Umpleby released a statement to employees expressing a failure to fully understand the federal agent’s intent. “This morning, a number of our colleagues in the Peoria area were surprised when federal authorities arrived to execute a search warrant,” the Thursday statement said. “I’m sorry that we had to experience this today.”
The sudden and bombastic escalation of the government’s tax disputes with a multinational corporation like Caterpillar adds considerable weight to the administration’s promise to reform corporate taxes and design a tax system that incentivizes US corporations to keep jobs and associated profits in the United States.
Allen Barron continues to monitor these developments and work with our multinational and international business clients to assess their strategies and analyze the impact of suggested changes. How will your company respond to the IRS focus on international business as sovereign nations and tax authorities around the world close legal loopholes and enforces a greater degree of financial transparency? We invite you to contact us for a free consultation at 866-631-3470.