New York Times: Switching Names to Save on Taxes, by Floyd Norris:
Call it the banality of tax avoidance.
What was most impressive about this week’s Senate hearing into the way Caterpillar ducked billions of dollars in United States income taxes was the simple strategy involved. There was no subsidiary that somehow qualified to be taxed nowhere, as at Apple. There was no “Double Irish With a Dutch Sandwich,” a strategy made famous by Google in its quest to avoid taxes.
Instead, back in 1999, Caterpillar, helped by its audit firm, PricewaterhouseCoopers, decided that to sharply reduce the American tax on profits from the sale of parts sent from the United States to customers around the world, it had to do little more than take the name of the American parent off the invoices and put in the name of a Swiss subsidiary.
So even though the parts might have never come within a thousand miles of Switzerland, the profits accrued to the Swiss subsidiary. And Caterpillar negotiated a deal to tax those profits well below Switzerland’s norm. Senator Carl Levin, the Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations, put the rate at 4 to 6 percent.
That cut the Caterpillar tax bill by $300 million a year.
Was that legal? Opinions differ. Professors called by the subcommittee said it was not. A professor retained by Caterpillar said it was, and company officials told the subcommittee they had complied with the law. Documents released by the subcommittee showed, however, that some at Caterpillar had been worried about the strategy and that the company took steps to reduce slightly the amount of profit being diverted, hoping that would make the strategy more likely to pass muster.
In any case, the Internal Revenue Service does not seem ever to have challenged it, even after a former Caterpillar tax official filed a whistle-blower lawsuit. That suit was settled on undisclosed terms.
What was most notable about the Caterpillar strategy was its sheer lack of creativeness. “This is boring as an intellectual matter,” said Edward D. Kleinbard, a tax law professor at the University of Southern California and a former chief of staff at the congressional Joint Tax Committee. If this strategy is vulnerable to legal challenge, he said, it would largely be because Caterpillar changed its corporate structure to save taxes. Had it had the foresight to adopt the structure decades earlier, the company would be on much safer ground. Apple, he told me, set up an Irish subsidiary “as soon as it moved out of the garage.” He conceded that was an exaggeration, but not, he said, a large one.