U.S. authorities raid Caterpillar's
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[March 03, 2017]
By Timothy Mclaughlin
CHICAGO (Reuters) - Federal law enforcement
officials conducting a criminal probe of heavy machinery manufacturer
Caterpillar Inc searched three of its facilities on Thursday, prompting
a sharp sell-off in the company's stock.
A spokeswoman for the U.S. Attorney Office for the Central District of
Illinois, Sharon Paul, confirmed that federal law enforcement officials
conducted searches at locations in Peoria, East Peoria and Morton,
Illinois, but did not say why agents raided the three facilities.
Caterpillar, in a statement issued on Thursday afternoon, said it
believed the search was part of an Internal Revenue Service
investigation related to profits earned by a Swiss parts subsidiary,
Caterpillar SARL, or CSARL.
It said that "while the warrant is broadly drafted, we believe the
execution of this search warrant is regarding, among other things,
export filings that relate to the CSARL matter first disclosed in
Caterpillar's Form 10-K filed on February 17, 2015, and updated in
Caterpillar's most recent Form 10-K filed with the SEC on February 15,
Agencies involved in the search included the IRS' Criminal Investigation
Division, the U.S. Department of Commerce's Bureau of Industry and
Security's Office of Export Enforcement, and the Federal Deposit
Insurance Corp.'s Office of Inspector General, Paul said.
Officials at the agencies could not be reached for comment.
Caterpillar shares fell 4.3 percent to close at $94.36 on the New York
Stock Exchange after trading as low as $92.84.
IRS SEEKS $2 BLN; CATERPILLAR CONTESTS
The apparent escalation of the government's tax dispute with Caterpillar
comes as the Trump administration and leaders in Congress have said they
want to launch a broad overhaul of the corporate tax code, lowering
rates and designing the system to encourage companies to keep jobs and
profits within the United States.
Caterpillar has also had a prominent place in the Trump administration's
effort to promote U.S. manufacturing. The company's outgoing chief
executive, Douglas Oberhelman, met with President Donald Trump at the
White House last week.
Caterpillar is fighting an Internal Revenue Service demand that the
company pay $2 billion in taxes and penalties for profits assigned to
its Swiss parts distribution subsidiary, according to filings with the
Securities and Exchange Commission. That subsidiary was also the subject
of a 2014 Senate committee report that concluded Caterpillar shifted
billions in profits abroad and had $2.4 billion in taxes deferred or
avoided from 2012.
"As a result of those licensing and servicing agreements,
over the next thirteen years from 2000 to 2012, Caterpillar shifted to
CSARL in Switzerland taxable income from its non-U.S. parts sales
totaling more than $8 billion, and deferred or
avoided paying U.S. taxes totaling about $2.4 billion," the report said.
It said the arrangement resulted in Caterpillar paying an effective tax
rate of only 4 percent to 6 percent.
Caterpillar, in its 2016 annual report, said it is "vigorously
contesting" the IRS demand. "We believe that the relevant transactions
complied with applicable tax laws and did not violate judicial
doctrines," it stated.
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The corporate headquarters of Caterpillar Inc. the world's largest
manufacturer of construction and mining equipment, diesel and
natural gas engines, and industrial gas turbines, based in Peoria, Illinois August
5, 2009. REUTERS/Jeff Haynes
The Senate committee report also criticized Caterpillar's
accountants, PwC, saying that the firm's roles as auditor and tax
consultant represented a conflict of interest. PwC on Thursday said
it had no comment.
In testimony before the Senate in 2014, PwC partner Thomas Quinn
said the firm believed that its "tax advice and Caterpillar’s tax
positions were correct under applicable tax laws. In sum, PwC’s
provision of tax services to Caterpillar as our audit client was
Caterpillar also disclosed in its annual report that it had received
grand jury subpoenas from the U.S. District Court for the Central
District of Illinois seeking documents and information related to
the movement of cash among U.S. and non-U.S. subsidiaries, and the
purchase and resale of replacement parts by Caterpillar Inc. and
non-U.S. Caterpillar subsidiaries, including Caterpillar SARL.
Caterpillar said it is cooperating with the investigation and did
not believe it would have a material impact on its finances.
PARTS BUSINESS; TAXES
The facility in Morton, according to the company’s website, is
responsible for receiving and shipping replacement parts to parts
facilities and Caterpillar dealers worldwide.
Caterpillar reported sales fell 18 percent in 2016 to $38.5 billion
and since late 2015 it has shrunk its workforce by more than 16,000
employees and consolidated or closed 30 facilities. Caterpillar cut
12,300 jobs in 2016, including 7,700 in the United States.
It said it was considering closing two more major production
facilities, including one in Aurora, Illinois, and also announced it
was moving its corporate headquarters from Peoria to Chicago this
Last week in Missouri, U.S. Vice President Mike Pence toured Fabick
CAT, a family-owned company that is one of the largest U.S.
distributors of Caterpillar equipment. "You are the strength in the
American economy, and you're going to lead an American comeback," he
told workers there.
Pence said the Trump administration wants to simplify the U.S. tax
code. "I'll guarantee there isn't anyone here who can make sense of
America's tax code, including me. There's an old joke that says the
tax code is about 10 times the size of the Bible but with none of
the good news," he said.
"Our country's tax system these days penalizes success. It makes it
far too hard for hardworking people and small businesses to achieve
the American Dream."
(Reporting by Timothy Mclaughlin, PJ Huffstutter and Tracy Rucinski
in Chicago, David Shepardson in Washington and Joe White in Detroit,
writing by Daniel Grebler; editing by Diane Craft)
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