Caterpillar executives are on Capitol Hill answering questions about the company's tax returns. Caterpillar is accused of shifting money abroad to avoid billions in taxes. Company officials say Caterpillar has followed the law.
MELISSA BLOCK, HOST:
Now to American companies that shift profit overseas to avoid taxes. That practice was the focus of a Senate hearing today. The key example: Caterpillar. The company is an American success story. It exports construction equipment all over the world. But to Michigan Sen. Carl Levin, it's also a member of what he calls the corporate profit shifting club. He says Caterpillar has sidestepped more than $2 billion in taxes.
Here's NPR's Jim Zarroli.
JIM ZARROLI, BYLINE: Caterpillar may sell its big, earth-moving machines all over the world, but much of its real profit comes from selling replacement parts for the equipment. Levin, who chairs the Senate Subcommittee on Investigations, told a hearing today that in 2000, Caterpillar began using a new tax strategy designed by PricewaterhouseCoopers. Levin said the strategy enabled Caterpillar to shift the profits on those replacement parts to a wholly controlled affiliate based in Switzerland, where it had negotiated a much lower tax rate.
SEN. CARL LEVIN: Most of Caterpillar's parts executives are here. Most of its parts employees are here. Most of its parts are designed here. Most of its parts are built here. Most of its parts are stored here. Most of its orders are filled here. And most of its parts are shipped from here. Yet most of its international parts profits go to Switzerland.
ZARROLI: Levin said between 2000 and 2012, Caterpillar shifted $8 billion in profits to Switzerland and by doing so, saved almost $2.5 billion in taxes. Caterpillar was the focus of the hearing as part of an ongoing effort by the subcommittee to highlight different methods of tax avoidance by companies. The subcommittee didn't accuse the company of doing anything illegal or even all that unusual.
Caterpillar officials insist they are obligated to their shareholders to pursue all legal methods of saving money. Julie Lagacy is the company's vice president of financial services.
JULIE LAGACY: Americans pay the taxes they owe, but not more. And as an American company, we pay the taxes we owe - not more.
ZARROLI: Lagacy said Caterpillar makes an increasing amount of money overseas, so it made sense to route business through Switzerland, cutting out the corporate middleman in the U.S. She also pointed out that even with its Swiss strategy, the company has an effective federal tax rate of 29 percent, which is actually higher than average.
Several Republican committee members insisted that the real culprit is the U.S. tax code. Sen. Rob Portman said the corporate tax rate is too high, and it's putting U.S. companies at a competitive disadvantage.
SEN. ROB PORTMAN: I'm very concerned about it. In my home state of Ohio, we have companies that have left our state to be domiciled somewhere else because of the tax laws.
ZARROLI: Portman said the U.S. corporate tax rate is the highest in the industrialized world. But many companies are able to tap into a range of credits and deductions that lower their tax bill. And as the Caterpillar example shows, companies can sometimes employ accounting strategies that enable them to reduce their effective rate even further.
Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.