IRS threatens to penalise Caterpillar over profits earned from Swiss subsidiary
After investigating Caterpillar’s US tax returns, the Internal Revenue Service (IRS) is threatening to tax profits the company earned from its Swiss based subsidiary (Caterpillar SARL). Caterpillar claims nothing untoward took place and plans to challenge the IRS through the appeals process.
The IRS has proposed to tax profits generated from transactions of mechanical parts by Caterpillar SARL after investigating Caterpillar’s US tax returns for 2007 and 2009. The tax increases and additional penalties are expected to amount to around $1 billion.
Caterpillar SARL is located in Geneva and has been selling machines, engines and replacement parts to non-US dealers for more than 50 years. According to spokeswoman, Rachel Potts, the subsidiary employs several hundred employees in Switzerland and other countries to deal with non-US markets.
Caterpillar plans to contest the IRS’s proposed penalties. The company said it was confident it had complied with tax laws applicable to the parts transactions and did not foresee “a significant increase or decrease” to its tax benefits in the next year.
In a previous TPWeek article, chief tax officer and director for global tax and trade at Caterpillar, Robin Beran, voiced concerns, not over allegations of profit shifting, but over whether the company would get caught up in the reporting of its transactions because of what governments are expecting.
It appears Beran was right to be concerned.
This is not the first time Caterpillar has been questioned over its tax policy and overseas profits. In April 2014, a Senate panel held a hearing focusing on Caterpillar’s decision in 1999 to run its global parts business from Switzerland with tax rates as low as four percent.
The IRS is also disallowing $125 million of foreign tax credits from financings unrelated to the Swiss subsidiary.
Caterpillar is one of several multinational companies whose overseas profits and taxes are being questioned by the IRS.
This comes as no surprise in the global tax climate at present. Governments are eager to demonstrate they are actively tackling profit shifting as the OECD’s base erosion and profit shifting (BEPS) deadline draws near.