Caterpillar's Offshore Tax Strategy 2014 | Tax Haven

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Caterpillar's Offshore Tax Strategy 2014
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  United States Senate    PERMANENT SUBCOMMITTEE ON INVESTIGATIONS  Committee on Homeland Security and Governmental Affairs   Carl Levin, Chairman CATERPILLAR’S OFFSHORETAX STRATEGY MAJORITY STAFF REPORT PERMANENT SUBCOMMITTEEON INVESTIGATIONSUNITED STATES SENATE RELEASED IN CONJUNCTION WITH THEPERMANENT SUBCOMMITTEE ON INVESTIGATIONSAPRIL 1, 2014 HEARING  SENATOR CARL LEVINChairmanPERMANENT SUBCOMMITTEE ON INVESTIGATIONS ELISE J. BEAN Staff Director and Chief Counsel DAVID H. KATZ Senior Counsel DANIEL J. GOSHORN Counsel ADAM HENDERSON Professional Staff Member  HEIDI KELLER  Congressional Fellow ANGELA MESSENGER  Detailee SAMIRA AHMED Law Clerk  HARRY BAUMGARTEN Law Clerk  TOM McDONALD Law Clerk  MARY D. ROBERTSON Chief Clerk  8/28/14 Final  Permanent Subcommittee on Investigations 199 Russell Senate Office Building – Washington, D.C. 20510 202/224-9505Web Address: http://www.hsgac.senate.gov/subcommittees/investigations  CATERPILLAR’S OFFSHORE TAX STRATEGYTABLE OF CONTENTS I.EXECUTIVE SUMMARY ................................................. 1 A.Subcommittee Investigation . . . ........................................... 3 B.Investigation Overview . . ................................................ 4 C.Findings and R  ecommendations .......................................... 5 Findings: (1)Operating a U.S. Centric Business. ..................................... 5(2)Reversing U.S.-Swiss Allocation of Parts Profits.. . ........................ 5(3)Generating $2.4 Billion in Tax Benefits................................. 6(4)Using Contradictory Valuations....................................... 6(5)Employing a Tax-Motivated “Virtual Inventory”.......................... 6(6)Creating a Potential Conflict of Interest................................. 6 Recommendations: (1)Clarify IRS Enforcement. . . .......................................... 6(2)Rationalize Profit Splitting........................................... 6(3)Participate in OECD Multinational Corporate Tax Effort................... 7(4)Eliminate Auditing and Tax Consulting Conflicts of Interest................ 7 II. BACKGROUND ......................................................... 8 A.Taxation and Deferral .................................................. 9 B.Shifting Income to Offshore Subsidiaries .................................. 10 C.Anti-Deferral Provisions and Subpart F ................................... 12 D.Foreign Base Company Sales Income – Manufacturing Exception ............. 13 E.Economic Substance ................................................... 15 F.Export Exception ...................................................... 17 III.CATERPILLAR CASE STUDY ............................................ 18 A.Caterpillar In General .................................................. 18 B.Caterpillar’s Dealer Network  ............................................ 21 C.Caterpillar’s Replacement Parts Business .................................. 24(1)Parts Business In General............................................ 25(2)Role of the United States in Caterpillar’s Parts Business.................... 29 D.Caterpillar in Switzerland ............................................... 37 IV.EMPLOYING A SWISS TAX STRATEGY TO AVOID U.S. TAXES ............. 41 A.Adopting the Swiss Tax Strategy ......................................... 41 B.Shifting Profits from United States to Switzerland .......................... 46(1)Altering the Legal Title Chain for Finished Parts.......................... 48(2)Licensing Intangible Rights In Exchange for Royalties..................... 52i  (3)Constructing a Virtual Parts Inventory.................................. 56(4)Making Paper, Not Operational, Changes............................... 59(5)Managing the Offshore Cash Buildup.................................. 61 C.Identifying the Swiss Tax Strategy as High Risk  ............................ 63 D.Swiss Tax Strategy Policy Concerns ...................................... 69(1)Economic Substance Concerns........................................ 69(2)Arm’s Length Transaction Concerns................................... 80(3)Assignment of Income Concerns...................................... 82(4)Virtual Inventory System Concerns.................................... 84(5)Intangible Valuation Concerns........................................ 87(6)Conflicting Profit Allocation Concerns................................. 92(7)Transfer Pricing Concerns........................................... 94        ii
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