Saturday, November 11, 2017

Caterpillar: Tax Me if You Can (2017)

US Government Seeks $2.4 Billion in Unpaid Corporate Taxes

Caterpillar, Inc is a multi-national corporation that is publicly traded with the stock symbol, CAT. The company can trace its roots all the way back to 1925 with the merger of Holt Manufacturing Company and the C.L. Best Tractor Company. Caterpillar is the world’s largest construction equipment manufacturer. The company has spent the better part of the past one hundred years building the infrastructure, hopes, and dreams of the good old red, white and blue. Some might even use the old saying, “They’re as American as apple pie”.  Back in 2009 when then President Obama was making his rounds drumming up bipartisan support for the stimulus package, he went so far as to say this; “In many ways, Caterpillar’s fortunes are directly tied not only to the Obama stimulus package … [as plans are made] to start building bridges, highways and other public works to help create jobs.” (Helen Cooper) So when it came to light through a corporate whistle-blower, Daniel Schlicksup, from within the accounting department of Caterpillar, it had significantly reduced its tax bill to the tune of $2.4 billion dollars through a Swiss “Shell Company”, the country was shocked. This was a serious accusation that has been hurled to the forefront of the business conversation within many circles, from Main Street to Wall Street, corporate tax reform is a political sound bite. According to Kimberly Clausing, Reed College of Economics, Multinational corporations cost the US government and economy upwards of $111 billion a year in lost corporate tax revenue. Conversely, the Congressional Joint Committee on Taxation projected that the impending tax revenue the Treasury would stand to lose to tax inversions over the next decade could amount to roughly $20 billion dollars. Although tax havens have become business as usual for most Multinational corporations, over the past few year’s federal investigators have been poring over Caterpillar’s overseas complex tax maneuvers involving billions of dollars associated with its Swiss subsidiary, Caterpillar SARL. 

With CEO Jim Umpleby at the helm, Caterpillar’s overseas tax arrangement has recently put the company in hot water with the IRS, FBI, Department of Commerce, the Federal Department Insurance Corporation (FDIC) and the Department of Justice (DOJ). On March 2nd of 2017, agents raided three facilities in East Peoria IL, the company headquarters, Morton’s parts warehouse, and the Data Center ( Here’s the rub, over the past few year’s federal investigators have been poring over the company’s overseas complex tax maneuvers involving billions of dollars associated with its Swiss subsidiary, Caterpillar SARL. Prior to 2006 Caterpillar in the U.S. would purchase parts from 3rd party suppliers and resell them to Geneva for distribution overseas. After the change, CSARL bought parts directly from suppliers, but that was only on paper. U.S. facilities still continued to manage the bulk of the inventory, suppliers, and manufacturing. By doing so, Caterpillar was able to swap the parts profit allocation to the new Swiss entity. Now the bulk of revenue, about 85%, would be subject to a much lower tax rate in Geneva, about 24% less than the U.S corporate tax rate. The genesis of the problem is that the U.S. tax law requires a corporate structure to have clear “economic substance”. A tax paying entity must prove that any restructuring would have a substantial impact on the entity’s assets or pretax profits, separate from the tax burden. Allegedly, the company has evaded $1 billion in corporate taxes. And with taxes and fees, the IRS is seeking a total payment north of $2 billion dollars. Although the Senate Finance Committee has investigated Apple, HP, and Microsoft for similar tax avoidance, Caterpillar was the only one that was found to have potentially broken the law. According to a company spokesperson, Corrie Heck Scott, “Caterpillar believes its tax position is right. We are in the process of responding to the government's concerns and hope to be in the position to bring this matter to resolution within a reasonable timeframe” (Geoffrey Nathan). In a House Committee report provided by Leslie Robinson at the Tuck School of Business at Dartmouth College, noted that Caterpillar allegedly did not fully comply with U.S. tax laws and U.S. financial reporting rules. Robinson also noted that the actions taken by Caterpillar senior executives were intentional and mostly done with the intent of keeping the stock price elevated.


There were many stakeholders impacted by Caterpillar’s questionable accounting practices. Stakeholders include the community, the business entity, peer companies, employees, dealers, stockholders, partners, legal counsel, accounting firms, customers, and C-Suite upper management. The tangled web of stakeholders spans the globe. On the surface, it would appear that there were only a few stakeholders negatively affected by this complex tax strategy.  Those stakeholders would be the community, i.e. the U.S. taxpayer and the U.S. government and Caterpillar’s peers in the industry. The stakeholder most affected by this negative press would be Daniel Schlicksup, he put his career and upended his entire life shed light on Caterpillar’s corporate tax evasion. Initially he attempted to notify senior level executives like y Robin Beran, but his cries fell on deaf ears. He finally faced the courage of his convictions and alerted the authorities. The executives such as, Jim Umpleby and Douglas Oberhelman, would have faced the embarrassing task of explaining why the U.S. government seems to think that Caterpillar broke U.S. tax code but other corporations like Apple, Inc, did not.  But I’m sure their outrageous bonuses for increased profits more than made up for such a small price to pay.  Even though Caterpillar initially laid-off 22,000 employees after the stock market crash of 2008.  One can only speculate that since then, the employees benefited from the corporate tax evasion due to the rising stock price and with better cash flow into the corporate coffers less layoffs would occur. The parts dealers that Caterpillar SARL purchased the parts from would have benefited due to the continued sales they received. Lastly, the shareholders of Caterpillar stock were initially effected by a two percent drop in the stock price in early March of 2017 after the initial press release of the corporate tax evasion. But since then they seemed to have only benefited by the dramatic increase in revenue and the stock is currently trading at an all-time 52-week high on the NY Stock Exchange.


According to Friedman’s theory of Individualism, the company acted ethically. The company’s main objective is to maximize overall profit for the shareholders, employees, and members of the board. Many executives believe that corporate taxes (i.e. U.S.) are excessive and that taking advantage of ambiguities to reduce payments is appropriate and an overwhelming majority would also argue that it’s the company’s fiduciary responsibility to maximize shareholder interests being of the utmost importance. And that taking advantage of provisions and loopholes is permitted and morally defensible. The lynchpin in this ethical stance would be to “maximize profits – within the confines of the law”.  Prior to the breaking news that the Federal Government had raided the company offices in Peoria IL the stock had seen little positive movement. It would appear that any negative publicity spawned from the corporate tax evasion scandal appears to be in the rear view mirror as Caterpillar’s stock has beat the Dow Jones Industrial Average by more than 50%. Wall Street has spoken, if a Multinational Company is smart enough to by-pass more than two billion in taxes in order to keep the share price up, they will buy the stock in hopes the executive management team will take addition countermeasures whenever possible to elevate the stock at all costs. Not too many folks would deny that Caterpillar made the changes to their accounting procedures in order to maximize profits. Since Caterpillar acted outside of the law, an individualist would view this case as unethical. Using the viewpoint of an individualist I would recommend that Caterpillar use the old inversion trick of purchasing a smaller company that is based in a tax haven, which will allow it to relocate its corporate headquarters to the lower-tax country. Which is perfectly within the letter of the law. Although, Caterpillar attempted to pull off this elaborate tax maneuver by the forming the CSARL Company. CSARL was not a company that was purchased but instead “created” with the help of the Swiss government for the sole purpose of evading taxes. In the end, the best course of action for the company to remain profitable while staying within the letter of the law would be to use their economy of scale to apply pressure to their global supply chain and find creative ways to lower the cost of raw materials needed to manufacture their products. In addition, the Caterpillar Company could also continue their legacy of engineering innovation and produce game-changing technologies ahead of their competition and create additional revenue from a niche product. All of these actions are within the letter of the law and would have added similar profits to the bottom line, which would have increased the stock price.

Examples of corporate welfare.

John Stuart Mills, an early supporter of the utilitarianism theory, states that happiness and pleasure are the only things of inherent value. And people should bring about these feelings since it is something all people are capable of experiencing. To better understand utilitarianism, let’s weigh the pros and cons of each of the main stakeholders. First the Caterpillar Company and its employees. The upside benefit to the Caterpillar Corporations tax evasion was too tempting not to pursue. When a multinational company is seeking to increase its revenue or cash flow, the fastest way to do so is to cut costs. And every American company knows the cost of their annual tax bill. Therefore, it seemed to be a logical step for Caterpillar executives to set up a shell company in a tax haven like Switzerland. Thus, allowing the company to amass a large sum of cash in its offshore ledger in order to show significantly larger profits, which boosted the stock price significantly. The return on investment for performing this evasive tax maneuver was actualized shortly after implementation. It is common among most multinational companies to perform such tax maneuvers. 

Although Caterpillar was fairly close to maximizing happiness for a majority of the stakeholders by preventing job losses, increasing revenue, profits and the stock price. Which of course would directly or indirectly benefit anyone who had ties to the company, thus creating happiness through the proliferation of wealth. If I were the CEO of Caterpillar I would need to assess the costs and benefits of such a bold move as to set up a shell company in Switzerland. An immediate an impending cost would be that the IRS and FDIC find out and press charges, which they have. This move could have easily sent the stock price falling but instead has experienced a gain of ~20% percentage points. As a stockholder my only concern would be to accumulate higher profits as I continued to hold onto the stock. The negative press could have easily sent the stock tumbling down. The biggest loser in this corporate tax scheme is the American taxpayer. As Multi-National companies continue to send profits to tax shelters without paying hardly any taxes our countries infrastructure will continue to crumble and the national debt will continue to balloon to unprecedented heights. The effects are far-reaching. But in order for “everyone” to have been “happy” in the long run, Caterpillar’s actions would have had to have been within the letter of the U.S. tax law, which they failed to do. As a matter of fact, Caterpillar executives went to great lengths to conceal their intended actions. With the encouragement of Price Waterhouse Cooper (PwC) and the law firm McDermott Will & Emery, LLP a tax manager at corporate headquarters reorganized the Geneva operation as CSARL. In order to accomplish this momentous tax maneuver involved more than 70 transactions and touched dozens of shell companies in more than a dozen countries. When considering the gargantuan effort Caterpillar went to conceal the true purpose of their Swiss subsidiary, their actions should have provided a smoking gun for most novice corporate auditors. In sum, a Utilitarian would deem the company’s actions as unethical.


Kantianism states that (a person) or action of a person or company should be motivated at its core by the “right” reasons, and all the people should be considered for their worth as a human being, and not just as a means to an end. A person’s dignity should always be respected and through business interactions, one should aid in rational decisions of the people (customers and employees) and the company. Kantian theory, “The Formula of Humanity”, practically coined the phrase, “the end does not justify the means”. A major litmus test of the theory is to act rationally with consistent actions and above all, not consider oneself as an exception to the law. As this story unfolds one can perfectly see that Caterpillar considered itself “above the law”. Up until 1999 when Caterpillar SARL was formed the Caterpillar Company had been consistently transparent in their tax ledger.

Virtue Theory

Virtue Theory states that one should act with good character, which brings to bear the virtues of courage, honesty, temperance, and justice. There are those within the narrative of this storyline who have in fact showed tremendous courage. Such as, Daniel Schlicksup, who defied corporate culture and provided documentation to the federal government via the IRS that allegedly proved that Caterpillar, a company that he had come to know and love, had employed an “abusive” tax strategy. Other players, such as Robin Beran, CTO, did not show the courage necessary to be considered a strong leader. Instead of competing in the global marketplace on creative new machine designs or innovative technology to beat out the competition, like Komatsu, Caterpillar executives decided to skirt the US tax code and funnel billions through an off-shore subsidiaries in Bermuda and Geneva Switzerland in order to avoid more than $2 billion in US taxes from 2000-2012, otherwise boosting its earnings through a “tax and financial statement fraud”. When considering the virtues of honesty and trust, although it might be legal to set up off-shore shell companies for the sole purpose of evading US tax code, it is not ethical. President Obama has once stated, that tax-evading companies “are essentially renouncing their American citizenship so they can ship their profits overseas to avoid paying taxes – even as they benefit from all the advantages of being [located] here in America” (Kevin Liptak). 

There are indeed two sides to this coin. One could indeed make an argument that points to the fact that if Caterpillar’s leadership didn’t take the aggressive tax maneuvers in Geneva the company would have missed an opportunity to stay competitive in the marketplace. And ultimately lost their status in the marketplace as the number one construction equipment manufacturer in the world. Unfortunately, U.S. corporations suffer a standard tax rate of 38.9% before deductions. For most corporations, with a savvy accounting firm the effective tax rate can be reduced to 12-18%. But those numbers were not lucrative enough for Caterpillar corporate executives. Taking advantage of the 4-6% tax burden of Geneva Switzerland made the most business sense to the shrewd leadership at Caterpillar.  Conversely, Caterpillar executives could have taken the high road and lobbied the U.S. government to find creative ways within the tax law to lower the overall tax burden. In effect, providing the company with similar positive net revenue. The bottom line is that in planning docs, PwC said, “We are effectively more than doubling the profit on parts” by swapping the parts profit allocation to the Swiss entity. The evidence is clearly pointing to the fact that CSARL was in fact created for the sole purpose of providing a tax haven, which is illegal under the U.S. tax code. In the end, the Senate Panel concluded that Caterpillar’s elaborate tax scheme lacked “economic substance” and the executive’s testimony to be false and misleading. Which leads us to the conclusion that the company’s actions where indeed unethical according to the Virtue Theory because of the extent of the deceit by keeping two sets of ledgers.

The Corporate Tax Burden Has Shrunk Significantly Since 1952
Upon reviewing the core ethical theories, it is apparent that the Caterpillar Company and its executive staff from 1999 until present day, have shown little ethical or moral character. Arguments for both sides could be made. Caterpillar seems to have dodged a bullet so far. None of the executives have been formally charged with any wrong doing and its stock is currently enjoying a 52-week high. The goal of maximizing profits has been accomplished with little legal or public backlash. Other than the American Government, and Caterpillars competition, which is mostly foreign anyway. All of the other stake holders seem to have enjoyed full potential happiness and ultimately benefited thus far. 
Finally, Robin Beran and his executive staff were dishonest to their shareholders and their government, by not providing transparent financial accounting. These subsequent decisions did not exhibit qualities that would be hailed within a company that holds itself to a higher moral standing.

These facts and analyses are based on an original research paper by Josh Sullivan, “Caterpillar: Tax Me if You Can" (2017) 

 Works Cited

1.      Helen Cooper, Obama Takes His Lobbying for Stimulus to Illinois, Feb. 12th 2009,

2.      Mary Williams Walsh, March 31, 2014,

3.      Jeffrey A. Newman, Accountant Whistleblower Revealed Caterpillar Tax Issues Could Get $600 Million Largest Reward Ever, June 2, 2017,

4.      Casey Wilson, “5 Crazy Corporate Scandals So Far in 2017” Morning Money,, May 15, 2017,

5.      Antoine Gara and Nathan Vardi, “Caterpillar’s Headquarters Raided by Federal Authorities Including the DOJ and IRS”, March 2, 2017,

6.      Akin Oyedele, “Caterpillar slides following a report that accused it of tax and accounting fraud” , March 8, 2017,

7.      Permanent Subcommittee on Investigations, 199 Russell Senate Office Building – Washington, D.C. 20510 202/224-9505 Web Address:

8.      Danielle Kurtzleben, “Fact Check: Does the U.S. Have the Highest Corporate Tax Rate in the World?” Aug. 7, 2017

9.      Matt Krantz, USA Today, 27 Giant Profitable Companies Paid No Taxes, March 7, 2016

10.   Geoffrey Nathan, Caterpillar Accused of Billions in Corporate Tax Fraud, March 8, 2017,

11.   The White House Office of the Press SecretaryRemarks by the President on the Economy, April 05, 2016.

12.   Kevin Liptak, Obama: Tax Avoidance Akin to Renouncing Citizenship, July 24, 2014,

13.   Helen Cooper, Obama Takes His Lobbying for Stimulus to Illinois, Feb. 12th 2009,

14.   Clausing, Kimberly A., Reed College of Economics, June 17, 2016, The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond (June 17, 2016). Available at SSRN: or



17.   Jesse Drucker, Titans Vow Overseas Tax Fight, April 22, 2009,

19.   American Recovery and Reinvestment Act of 2009, January 26, 2009,

20.   The White House Office of the Press Secretary: Remarks by the President on the Economy, April 05, 2016.




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