Senators Revive Caterpillar Tax Probe Inquiry

Two Senate Democrats asked the head of the Justice Department to shed light on the Tax Division’s prior handling of a criminal investigation into a multinational heavy equipment manufacturer’s offshore tax strategy.

Senate Finance Committee Chair Ron Wyden (D-OR) and Senate Budget Committee Chair Sheldon Whitehouse (D-RI) expressed concern in a March 14 letter to Attorney General Merrick Garland over alleged interference by former AG Bill Barr to halt the DOJ’s probe into Caterpillar Inc.’s (CAT) usage of a Swiss-based subsidiary, CSARL, to avoid US taxes.

Barr previously represented CAT as a private consultant before his nomination in 2018.

“Mega-corporations and the ultra-wealthy have long exploited their access to the best lawyers money can buy to avoid criminal prosecution,” the senators wrote.

The well-documented CAT saga and the company’s entanglement with federal agencies traces back to the period 1998-2004, when CAT paid the accounting firm PricewaterhouseCoopers (PwC) $80 million in tax consulting fees, $55 million of which went towards developing a Swiss tax strategy to reduce CAT’s US liability. This was detailed at length in a 99-page report by the US Committee on Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations in 2014 that took a deep dive into how the company negotiated with Switzerland an effective corporate tax rate of 4% to 6% to shift billions in profits out of the US.

As part of CAT’s Swiss strategy, which it referred to as called the Global Value Enhancement or “GloVE” program, CSARL became the recipient of profits from finished parts purchases. “By 2008, approximately 45% of Caterpillar’s consolidated revenues and 43% of its profits had been shifted to CSARL, an entity with less than one half of one percent of CAT’s 118,500 employees,” read the now 10-year-old Senate report. “As a result, over the next thirteen years, from 2000 to 2012, Caterpillar shifted US taxable income of more than $8 billion offshore to Switzerland and deferred or avoided paying U.S. taxes totaling about $2.4 billion.”

Per the report, CAT “at the highest levels of the company,” was aware that the GloVE strategy may have lacked economic substance and risked running afoul of transfer pricing rules and arm’s-length principles.

CAT disclosed in 2015 that it received a grand jury subpoena from the US District Court for the Central District of Illinois following the report’s release. Two years later, over 60 federal agents from multiple agencies, including the IRS Criminal Investigation Division, obtained search and seizure warrants and raided three CAT facilities in Illinois.

In 2018, the IRS sent CAT a notice that it owed $2.3 billion in unpaid taxes and penalties. However, as Wyden and Whitehouse noted, CAT and the IRS in 2022 reached a settlement for only $740 million for the years 2007-2016, or “less than 35%” of the original amount sought.

Reuters previously reported in 2020 that less than a week after Barr was nominated for the AG post, DOJ leadership put a sudden stop to the investigation and take “no further action.” This prompted Wyden and Whitehouse to first start looking into the matter. Recent reporting by the New York Times providing new details of the investigation’s stoppage renewed the pair’s interest.

“The reports revealed that just days after Bill Barr was nominated to serve as Attorney General, Principal Deputy Assistant Attorney General Richard Zuckerman (PDAAG Zuckerman) personally ordered federal agents to cancel a long planned interview of a former CAT employee in the Netherlands,” they wrote. “Disturbingly, it appears that the order to cancel the interview by PDAAG Zuckerman was made just 16 hours before the interview was scheduled to take place.”

The letter asks Garland to provide answers to a series of 20 questions pertaining to the DOJ investigation, why it was put on ice. “Such blatant political mischief furthers the narrative that there is a two-tiered system of justice in the United States and undermines the American people’s faith in our institutions.”