(Updates to add that probe is criminal; Adds Swiss tax rate,
paragraph 13; Senate criticism of Caterpillar's accountants,
By Timothy Mclaughlin
CHICAGO, March 2 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
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, 2017."
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,
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
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
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.
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 entirely appropriate."
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
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 year.
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