Caterpillar Is Today's Corporate Criminal, With Help From PwC

Today's edition of corporate crime comes from Caterpillar, the heavy equipment manufacturer. The NY Times has a story on a report for federal investigators that claims Caterpillar evaded paying federal income taxes on billions of dollars in offshore earnings that it repatriated back to the US and accuses the company of tax and accounting fraud. According to the author of the report, "Caterpillar did not comply with either U.S. tax law or U.S. financial reporting rules. I believe that the company’s noncompliance with these rules was deliberate and primarily with the intention of maintaining a higher share price. These actions were fraudulent rather than negligent."

Caterpillar has been the focus of an investigation since 2014 when a Senate panel claimed it has evaded nearly $2.5 billion in taxes over a 13 year period. The company used its Swiss subsidiary to move earnings that originated in the US to Switzerland and avoid federal income taxes. Those earnings would then be taxed at the Swiss rate. If and when those profits were moved back into the US, the company would get a credit against their US tax bill for whatever Swiss taxes were paid. But Caterpillar went far beyond that strategy and, according to the report, repatriated nearly $8 billion without paying Swiss taxes and avoiding federal taxes because they were structured as loans. The company failed to report those loans, which should have been categorized as taxable distributions of cash, in tax and accounting documents. In addition, the Times also reports that the Senate panel uncovered warnings from inside Caterpillar's management that the scheme had no real business purpose and would and should be considered tax avoidance.

It's clear that federal investigators are closing in on Caterpillar. The IRS is asking for $2 billion in back taxes and penalties associated with the transactions with the Swiss subsidiary. Federal investigators, including agents from the FDIC, the IRS, and the Commerce Department, raided three Caterpillar offices last week. And, it should also be noted, Caterpillar's auditor and adviser on this tax evasion scheme is PriceWaterhouse Coopers, the accounting firm responsible for the Oscar's debacle, other tax avoidance schemes, and plenty of other scandals. I guess criminal minds think alike.

It will be interesting to see how aggressively the Trump administration pursues this investigation. Caterpillar is an enormous employer here in the US but it is tax evasion schemes like this that Trump railed against in his campaign. It pits his populism against his big business cronies. I know which side I'm betting on.

And one last comment. When you and I avoid paying our taxes it is called tax evasion. But when richer people or businesses use complicated structures to avoid paying taxes it is euphemistically known as "tax avoidance". Please tell me the difference.