Caterpillar raided by Federal agents as part of tax probe

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The Financial Times  /  March 2, 2017

Caterpillar shares suffered their biggest one-day drop in eight months after law enforcement authorities searched the company’s headquarters and two other facilities in Illinois as part of a tax investigation.

Shares of the heavy machinery maker fell 4.3 per cent on Thursday after the company and law enforcement officials confirmed that agents of the Internal Revenue Service, the US Commerce Department Office of Export Enforcement and the Federal Deposit Insurance Corporation had conducted searches at three Caterpillar facilities.

Caterpillar said in a statement that a search and seizure warrant was executed, and documents and electronic information collected, apparently in connection with a long-running tax investigation into financial transactions involving CSARL, a Caterpillar subsidiary in Switzerland.

Caterpillar said it was “co-operating with law enforcement”.

Last month the company said in its 2016 10-K filing that it had received a grand jury subpoena from the US district court for the Central District of Illinois on January 8 2015.

“The subpoena requests documents and information from the company relating to, among other things, financial information concerning US and non-US Caterpillar subsidiaries (including undistributed profits of non-US subsidiaries and the movement of cash among US and non-US subsidiaries).

“The company is co-operating with this investigation,” Caterpillar said. “We currently believe that this matter will not have a material adverse effect on the company’s consolidated results of operations, financial position or liquidity.”

Caterpillar said the warrant executed on Thursday was broadly drafted but “we believe the execution of this search warrant is regarding, among other things, export filings that relate to the CSARL matter” first disclosed in a 10-K filing in 2015 and later updated in the most recent 10-K filing.

The US Senate permanent subcommittee on investigations said in a 2014 report that Caterpillar had adopted “a tax strategy that shifted billions of dollars in profits away from the United States and into Switzerland, where Caterpillar had negotiated an effective corporate tax rate of 4 to 6 per cent”.

According to the report, Caterpillar bought parts and resold them to dealers overseas, assigning the profits to the Swiss subsidiary and lowering its US taxes.

Caterpillar, hit by a prolonged slump in global demand caused by weak commodity prices that have hurt its customers, has been one of the companies singled out by industrial analysts as likely to benefit from any infrastructure spending boost from President Donald Trump.

Doug Oberhelman, Caterpillar’s departing chairman, met Mr Trump last week at the White House where the president joked about his fondness for Caterpillar bulldozers.

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Federal Agents Search Caterpillar Locations

The Wall Street Journal  /  March 2, 2017

Federal agents on Thursday searched three Caterpillar Inc. facilities near the construction- and mining-equipment giant's Illinois headquarters, according to the company and a law-enforcement official.

The search appeared to escalate an investigation into tax issues related to Caterpillar's parts business and financial transactions involving one of the company's subsidiaries in Switzerland, a person familiar with the situation said.

Caterpillar has previously said it received subpoenas from a federal grand jury seeking information related to the Swiss subsidiary, known as Caterpillar SARL. The company has said that it was cooperating with the investigation, which is being overseen by the U.S. attorney's office for the Central District of Illinois.

A spokeswoman for the attorney's office on Thursday said agents from the Internal Revenue Service, the Federal Deposit Insurance Corp. and the U.S. Department of Commerce searched facilities in Peoria, East Peoria and Morton. No arrests were made, the spokeswoman said. The search included Caterpillar's Peoria headquarters, according to people familiar with the matter.

"Law enforcement is present in various Peoria-area Caterpillar facilities executing a search warrant," a Caterpillar spokeswoman said. "Caterpillar is cooperating. She wouldn't comment further.

An IRS spokesman said agents "were on site on official business," but declined to comment further.

Caterpillar shares fell about 5% to $93.66 in midday trading.

The Securities and Exchange Commission also began investigating Caterpillar's Swiss subsidiary in 2014, after a U.S. Senate subcommittee described the unit as part of a strategy by Caterpillar to reduce its U.S. tax exposure on sales of replacement parts outside of the U.S.

Caterpillar said the SEC notified the company in late 2015 that it had concluded its investigation without recommending a penalty.

A report by the Senate Permanent Subcommittee on Investigations found that Caterpillar's U.S. operations had bought parts from suppliers and resold them to independent dealers overseas. Profits from the sales were assigned to the Caterpillar Swiss subsidiary, effectively eliminating Caterpillar's U.S. operations from the transactions and lowering the company's U.S. taxes, according to the report.

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U.S. authorities raid Caterpillar's Illinois facilities

Reuters  /  March 2, 2017

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 company's stock.

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, Paul said.

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 States.

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 report said.

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 United States.

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."

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Caterpillar sued by shareholder after federal raid

Reuters  /  March 3, 2017

Caterpillar Inc was sued on Friday for allegedly deceiving shareholders about its business, one day after federal law enforcers raided three of its buildings in connection with a probe into the heavy machinery manufacturer's offshore tax practices.

In a complaint filed in Chicago federal court, Jacob Newman accused Caterpillar of defrauding him and other shareholders in regulatory filings by touting its commitment to good ethics, while concealing how it "unlawfully used foreign subsidiaries" to avoid paying billions of dollars of U.S. taxes.

Shares of Caterpillar fell 4.3 percent on Thursday, wiping out more than $2.4 billion of the Peoria, Illinois-based company's market value.

The company said it believed the raid by officials from agencies including the Internal Revenue Service's criminal investigation division, the Department of Commerce and the Federal Deposit Insurance Corp was connected with an IRS probe related to a Swiss parts unit, Caterpillar SARL.

Caterpillar has been fighting an IRS demand that it pay $2 billion in taxes and penalties for shifting profit to the Swiss unit to lessen its U.S. tax bill.

Newman is seeking unspecified damages in his proposed class-action lawsuit on behalf of Caterpillar investors from Feb. 19, 2013 through March 1.

The lawsuit also names Caterpillar Chief Executive Jim Umpleby, Chairman Douglas Oberhelman and Chief Financial Officer Bradley Halverson as defendants. Oberhelman preceded Umpleby as chief executive.

The case is Newman v. Caterpillar Inc et al, U.S. District Court, Northern District of Illinois, No. 17-01713.