S. Hrg. 113–408 

CATERPILLAR’S OFFSHORE TAX STRATEGY 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

APRIL 1, 2014 

Available via the World Wide Web: http://www.fdsys.gov 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
CATERPILLAR’S OFFSHORE TAX STRATEGY 
U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

89–523 PDF 2014

S. Hrg. 113–408 

CATERPILLAR’S OFFSHORE TAX STRATEGY 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

APRIL 1, 2014 

Available via the World Wide Web: http://www.fdsys.gov 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

THOMAS R. CARPER, Delaware, Chairman 

CARL LEVIN, Michigan 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

TAMMY BALDWIN, Wisconsin 

HEIDI HEITKAMP, North Dakota 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

MICHAEL B. ENZI, Wyoming 

KELLY AYOTTE, New Hampshire 

RICARD J. KESSLER, Staff Director 

KEITH B. ASHDOWN, Minority Staff Director 

LAURA W. KILBRIDE, Chief Clerk 

LAUREN M. CORCORAN, Hearing Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

TAMMY BALDWIN, Wisconsin 

HEIDI HEITKAMP, North Dakota 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

KELLY AYOTTE, New Hampshire 

ELISE J. BEAN, Staff Director and Chief Counsel 

DAVID H. KATZ, Senior Counsel 

DANIEL J. GOSHORN, Counsel 

HENRY J. KERNER, Minority Staff Director and Chief Counsel 

JACK THORLIN, Counsel to the Minority 

BRAD M. PATOUT, Senior Advisor to the Minority 

SCOTT D. WITTMAN, Research Assistant to the Minority 

MARY D. ROBERTSON, Chief Clerk 
(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator McCain ................................................................................................ 7 

Senator Johnson ............................................................................................... 17 

Senator Paul ..................................................................................................... 33 

Senator Portman .............................................................................................. 34 

Prepared statements: 

Senator Levin .................................................................................................... 93 

Senator McCain ................................................................................................ 98 

WITNESSES 

TUESDAY, APRIL 1, 2014 

Bret Wells, Esq., Assistant Professor of Law, University of Houston Law 

Center, Houston, Texas ....................................................................................... 8 

Reuven S. Avi-Yonah, Esq., Irwin I. Cohn Professor of Law, The University 

of Michigan School of Law, Ann Arbor, Michigan ............................................. 10 

Thomas F. Quinn, Tax Partner, PricewaterhouseCoopers LLP, Chicago, Illinois; accompanied by James G. Bowers, Tax Partner, PricewaterhouseCoopers LLP, Dallas, Texas and Steven R. Williams, Managing Director, 

PricewaterhouseCoopers, LLP, McLean, Virginia ............................................. 25 

Julie A. Lagacy, Vice President, Finance Services Division, Caterpillar Inc., 

Peoria, Illinois; accompanied by Robin D. Beran, Director, Global Tax and 

Trade, and Rodney Perkins, Former International Tax Manager, Caterpillar 

Inc., Peoria, Illinois .............................................................................................. 58 

ALPHABETICAL LIST OF WITNESSES

Avi-Yonah, Reuven S. Esq.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 106 

Beran, Robin D.: 

Testimony .......................................................................................................... 58 

Prepared statement .......................................................................................... 129 

Bowers, James G.: 

Testimony .......................................................................................................... 25 

Prepared statement .......................................................................................... 116 

Lagacy, Julie A.: 

Testimony .......................................................................................................... 58 

Prepared statement .......................................................................................... 129 

Perkins, Rodney: 

Testimony .......................................................................................................... 58 

Prepared statement .......................................................................................... 129 

Quinn, Thomas F.: 

Testimony .......................................................................................................... 25 

Prepared statement .......................................................................................... 116 

Wells, Bret, Esq.: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 99 

Williams, Steven R.: 

Testimony .......................................................................................................... 25 

Prepared statement .......................................................................................... 116 
Page

IV 

APPENDIX 

Report of the Permanent Subcommittee on Investigations’ Majority Staff entitled ‘‘Caterpillar’s Offshore Tax Strategy,’’ April 1, 2014 .................................. 160 

EXHIBIT LIST 

1. a. Caterpillar Ownership of CSARL, chart prepared by the Permanent 

Subcommittee on Investigations. ................................................................ 276 

b. CSARL Legal Structuring, chart prepared by PricewaterhouseCoopers. 277 

c. Profit Split: CSARL’s Parts Profit versus Caterpillar’s Royalty Fee from 

CSARL, chart prepared by the Permanent Subcommittee on Investigations. ............................................................................................................... 278 

d. CSARL Offshore Replacement Parts Sales, chart prepared by the Permanent Subcommittee on Investigations. .................................................. 279 

e. The Caterpillar 797, chart prepared by the Permanent Subcommittee 

on Investigations. .......................................................................................... 280 

f. Caterpillar Replacement Parts, chart prepared by the Permanent Subcommittee on Investigations. ........................................................................ 281 

g. Caterpillar Organizations, Performing Key Functions Related to Parts, 

chart prepared by the Permanent Subcommittee on Investigations. ....... 282 

h. Corporate Income Tax as a Percent of Total Revenue, chart prepared 

by the Permanent Subcommittee on Investigations. ................................. 283 

Documents Related to Caterpillar Transfer Pricing: 

2. PricewaterhouseCoopers tax consulting and audit fees. [PSI-PWC-22- 

000001-003] ....................................................................................................... 284 

3. History of Significant Changes in International Operations (Not Inclusive 

of Financing Arrangements) 1997-2002. [PSI-TWLF-02-000422-436] .......... 287 

4. a. Excerpts from Caterpillar Inc. Evaluation of Arm’s Length Pricing for 

Intercompany Transactions, Year Ended December 31, 1994, Prepared 

by Price Waterhouse LLP, FINAL REPORT, April 28, 1996. (P&SS 

sells the requisite replacement parts to the marketing company, which 

then sells to dealers, who in turn sell to the customer. *** Cat Inc. 

has the largest role with regard to market and dealer development, 

. . . *** The dealer network and parts distribution are the two keys 

to after-sales service. . . . Cat Inc., as the designer of the system and 

owner of the Morton parts center, has the greatest strategic role. *** 

All companies with marketing responsibilities are actively involved in 

dealer administration. These include Cat Inc. and the three principal 

marketing companies.). [PwClPSIlCATl00008634, 672-674, 684- 

687, 698-699] ................................................................................................. 302 

b. Excerpts from Caterpillar Inc. Evaluation of Arm’s Length Pricing for 

Intercompany Transactions, Year Ended December 31, 1995, Prepared 

by Price Waterhouse LLP, Final Report, December 19, 1996 (Cat Inc. 

has the largest role with regard to market and dealer development 

. . . *** The dealer network and parts distribution are the two keys 

to after-sales service. . . . Cat Inc., as the designer of the system and 

owner of the Morton parts center, has the greatest strategic role. *** 

All companies with marketing responsibilities are actively involved in 

dealer administration. These include Cat Inc. and the three principal 

marketing companies. *** Prime Product Profit Centers Motivate to 

create machine populations with high degree of proprietary components 

which have high parts margins ***; P&SS Motivate to: Drive overall 

parts profit). [PwClPSIlCATl00008881, 929-932, 958-959, 963] ....... 312 

c. Excerpts from Caterpillar Inc. Evaluation of Arm’s Length Pricing for 

Intercompany Transactions, Year Ended December 31, 1996, Final 

Draft Report, Prepared by Price Waterhouse LLP, January 26, 1998 

(Cat Inc. has the largest role with regard to market and dealer development, . . . *** The dealer network and parts distribution are two keys 

to after-sales service. The marketing companies have responsibility for 

the dealer network, while P&SS performs the primary management 

activity for the parts distribution network. Cat Inc., as the designer 

of the system and owner of the Morton parts center, has the greatest 

strategic role.). [PwClPSIlCATl00009105, 155-156] ............................ 320 
Page

V 

d. Excerpts from Caterpillar Inc. 1997 Documentation Report, Final Report, September 15, 1998, Prepared by PricewaterhouseCoopers LLP 

(Cat Inc. has the largest role with regard to market and dealer development, . . . *** The dealer network and parts distribution are the two 

keys to after sales service. . . . Cat Inc., as the designer of the system 

and owner of the Morton parts center, has the greatest strategic role. 

*** All companies with marketing responsibilities are actively involved 

in dealer administration. These include Cat Inc. and the three principal 

marketing companies. ). [PwClPSIlCATl00009339, 392-394] ............ 323 

5. Excerpts from Caterpillar Fiscal Year 2000 U.S. Transfer Pricing Documentation Report, September 17, 2001. (Cat Inc. is the parent company 

and is the most complex entity. Cat Inc. operates as an entrepreneur, 

a marketer and an intangible owner. Cat Inc. is the parent company 

of the global enterprise. Since Cat Inc. is the most complex Cat entity 

it was not selected as a tested party in this report. *** Although Cat 

SARL is a complex entity, it is a simpler entity than Cat Inc. . . . 

we will test Cat SARL’s results against the results of a set of independent 

European manufacturers.). [PwClPSIlCATl00004975, 5008-009, 027- 

033] .................................................................................................................... 327 

6. Excerpts from Caterpillar Inc. Global Tax Optimization Case for Action, 

September 1998 (Negative Tax Rate Drivers: U.S. ‘centric’ profile . . . 

U.S. ownership of intangibles . . . Conformity of tax and management 

books. *** Migrate income from the U.S. to lower-tax jurisdictions; Obtain/maintain U.S. tax deferral *** Description of Idea: Remove Caterpillar Inc. from the chain of title passage for purchased finished parts 

(from U.S. or foreign sources) sold to foreign markets. The foreign marketers would then buy from and sell to unrelated parties. Benefits/Costs: 

Eliminates Subpart F character of foreign marketers profits on purchased 

finished parts sales. Relatively simple re-invoicing requirements.) 

[PwClPSIlCATl00004632, 636, 640, 646, 674, 675] ................................ 337 

7. Excerpts from Caterpillar GTOP Summary of Ideas - PricewaterhouseCoopers, 1998 (Cat Inc. Out of Chain, Recharacterize Marketing Company 

Income to Achieve U.S. Tax Deferral Description of Idea: Remove Caterpillar Inc. from the chain of title passage for purchased finished parts 

(from U.S. or foreign sources) sold to foreign marketers. The foreign marketers would then buy from and sell to unrelated parties. Benefits/Costs: 

Eliminates subpart F character of foreign marketers profits on purchased 

finished parts sales. Relatively simple re-invoicing requirements.). 

[PwClPSIlCATl00004566, 618-619] ......................................................... 343 

8. COSA as Entrepreneur: European Sold Parts, High-Level Target Design, 

charts excerpted from Caterpillar Inc. Operational Feasibility Analysis, 

High Level Target Designs: Migration/Deferral (This will cause the accumulation of parts profit in COSA that was previously accumulated in 

CAT Inc. ... In addition, the parts profit retained in COSA will be enhanced to better reflect the contributions of the functions, risks and dealer 

network intangibles controlled by COSA. *** Invoicing from suppliers 

will be changed from CAT HE and Morton HE to COSA ‘‘HE.’’ Supply 

contracts will be changed to COSA.). [PwClPSIlCATl00004548, 550- 

552] .................................................................................................................... 346 

9. Caterpillar Inc. Global Tax Optimization Risk Adjusted Benefit Analysis, 

Working Papers - Draft 1, December 1998 (Purpose: Increase shareholder 

value through tax optimization *** Solution Benefits and Costs: Migrate 

profits from Cat Inc to low-tax marketing companies . . . Risk: change 

from current intercompany pricing method and documentation. *** We 

are effectively more than doubling the profit of parts.). 

[PwClPSIlCATl00001336, 338, 341-342, 344-346, 348, 362, 386, 408- 

409, 411-415] ..................................................................................................... 350 

10. Economic Analysis of Royalty Rates and Transfer Prices, charts excerpted 

from Caterpillar Inc. Global Value Enhancement Project, Economic Analysis of SARL, Intercompany Transactions with Cat Inc. in the COSA 

Territory, Draft October 5, 1999. [PwClPSIlCATl00004483, 508-509] .. 367 

11. Parts: COSA - Cost Benefit Analysis, chart excerpted from Caterpillar 

Inc. - Global Value Enhancement - Develop Phase Status Report, May 

28, 1999. [PwClPSIlCATl00004349, 365] ................................................ 370 
Page

VI 

Documents Related to Marketing Intangibles: 

12. Caterpillar email, dated July 2007, re: Caterpillar: value of marketing 

intangibles (The point is that CSARL (or its predecessor COSA, or CFEL, 

or CACO) has spent decades building up the dealer network around 

the world. And has spent decades building the brand name through advertising. Caveat is that in 2001, we said in another transaction that there 

is no significant marketing intangibles other than workforce in place). 

[PwClPSIlCATl00122483-484] .................................................................. 372 

13. Excerpts from Caterpillar Inc. Economic Analysis of Intangible Assets 

Transferred by Caterpillar Americas CO. to Caterpillar Americas SARL 

(Based on our analysis of the Intangible Assets Transferred we conclude 

that they are routine and common to most distribution and marketing 

companies. These assets have only limited economic life, and could be 

effectively reproduced by a new start-up company with sufficient investment of time and resources.). [PwClPSIlCATl00142353-367] ................ 374 

14. Excerpt from Caterpillar Inc. Summary Meeting Notes, Geneva, March 

7-9, 2005. CSARL Profitability and Royalty (Should we expand profit 

split analysis – additional income to CSARL for parts responsibility, 

dealers/marketing intangible (but consider agreements in LAD restructuring stating that dealer IP is not very valuable)?). 

[PwClPSIlCATl00150469] ......................................................................... 389 

Documents Related to Swiss Tax Rate: 

15. Charts from: 

— Presentation to Caterpillar Inc. Audit Committee, June 2004: 

— Purchased Finished Parts Distribution - Prior to Establishing 

CSARL; 

— Purchased Finished Parts Distribution - Post CSARL; 

— Tax Exposures Reserved at end of 2003; 

— ETR - Causes of ‘‘Low-Taxed’’ Non-U.S. Earnings (Switzerland provides favorable tax rulings that many U.S. companies utilize.); 

— Background - Pre-2001 (Before Caterpillar S.A.R.L.); and 

— Background - 2002-2004 (Effect of Caterpillar S.A.R.L.). (The CAT 

S.A.R.L. initiative deferred the U.S. taxation of Purchased Finished 

Replacement Parts sales outside the U.S., but only if the earnings 

are not repatriated.). [CAT-001899, 905, 906, 912, 920, 934, 935] 390 

16. Excerpts from Delivering Vision 2020, Value Transformation: An Aftertax View (The single largest factor driving Caterpillar’s effective tax rate 

below the U.S. statutory rate is the ability to maintain deferral of earnings 

outside the U.S. Most of these deferred earnings are located within the 

Caterpillar S.A.R.L. (‘‘CSARL’’) organization. The two primary operational 

drivers of the CSARL deferral are (1) purchases of replacement parts 

from supplies directly by CSARL for marketing regions outside the US 

and (2) product management benefits for assemblies at the Grenoble and 

Gosselies facilities (i.e., toll manufacturing). [PwClPSIlCATl00058419, 

429, 449-452] ..................................................................................................... 397 

17. Excerpt from Caterpillar Global Finance and Strategic Support, Global 

Tax & Trade Update, Audit Committee, April 13, 2010 (Effective Tax 

Rate has dropped to lowest in the Dow 30 *** 2009 Effective Tax Rate 

- Drivers: Losses in high-tax rate countries, Profits in low). 

[PwClPSIlCATl00205974-979, 984-985] .................................................. 403 

Documents Related to Parts Business: 

18. Caterpillar Board of Directors Minutes Excerpts. (2/8/12: Mr. Gosselin 

began by explaining that the ‘‘seed, grow, harvest’’ business model ingrained in the organization was a catalyst to aftermarket parts sales 

and services, creating an annuity continuing long after original equipment 

sales and generating customer loyalty, PINS and profits. *** 4/7/09: 

Mr. Larson then noted that the key points regarding the Logistics Division 

are that it is driving transformational change in the Transportation, 

Manufacturing Logistics and the Cat parts business that will deliver 

significant value . . . ). [CAT-001855-858, 860, 863-864] ............................. 411 

19. Caterpillar email, dated August 2007, re: Caterpillar parts history (This 

showed that more than 50% of parts sales were for parts originally placed 

in service more than 10 years prior. And to capture 80% of parts sales, 

you had to go back 20 years. (ie, in a given year, Cat still sold 20% 

of replacement parts that were first placed in service more than 20 years 

prior....). [PwClPSIlCATl00024439-440] .................................................. 418 
Page

VII 

20. Cat Parts Desired State, excerpt from Caterpillar February 2012 Board 

of Directors Meeting, [CAT-001885-889, 891-898] .......................................... 420 

21. Caterpillar dealer push may drive some out, Levenick says, Reuters, 

March 6, 2014. .................................................................................................. 433 

Documents Related to Tax Risk Guardrails: 

22. Caterpillar Audit Committee Presentation, December 13, 2005, Global 

Tax Management (Audit Committee Risk Guard Rails). [PSI-TWLF-16- 

000167-180] ....................................................................................................... 435 

23. Caterpillar email, dated February 2006, re: Tax Risk Guardrails - audex 

(Dave, I have a solid draft of the guard rails done. I have not polished 

it into a presentation because it was not included on the agenda. I feel 

comfortable that if Gene demanded to see something today and you came 

and got me, I could present the draft and get the Aud Comm comfortable 

that we are meeting our commitments.). [PSI-TWLF-04-000078] ................. 449 

24. Caterpillar email, dated February 2006, re: A/C meeting (We had a 

two day offsite last week to finalize the guardrails. We have two more 

days next week to plot the tax positions on the guardrails. This will 

be done in April if the agenda changes.) [PSI-TWLF-04-000089] ................. 450 

25. a. Tax Risk Guardrails, 03/21/06. [PSI-TWLF-04-000382] ............................ 451 

b. Tax Risk Guardrails, 10/15/07. [PSI-TWLF-04-000383] ........................... 452 

1Ac. Tax Risk Guardrails, 03/18/08. [PSI-TWLF-04-000384] ....................... 453 

d. Tax Risk Guardrails Criteria (draft), 02/08/06. [PSI-TWLF-04-000381] . 454 

26. Caterpillar Income Tax Update, June 13, 2006 (Audit Committee - Risk 

Guard Rails . . . Escalation Triggers - Risk positions clearly outside 

the guardrails trigger communication to the Audit Committee for guidance 

and possible remediation). [CAT-001949-952, 954, 956-965] ........................ 455 

27. Caterpillar email, dated July 2006, re: fyi only - Update to Legal 6S 

team on regulatory compliance (Provided overview of Tax Risk Guard 

Rails yesterday to a 6S team from legal working specifically on a deep 

dive into regulatory compliance risks. . . . They encouraged us to continue 

with the process and explain our current tax risk profile to the audit 

committee to get their approval. *** Good work, Dan. . . . Can discuss 

further, but current chart puts one area at high. Assuming guidance 

is to stay below high in all areas, how could we utilize?) [PSI-TWLF04-000368] ......................................................................................................... 470 

28. Caterpillar email, dated August 2006, re: Tax Risk Guard Rails (FYI, 

Tax Council will be meeting in near future to update TRGRs. The pressure/question I am getting is focused on reducing the risk shown on 

the guard rails. ... I need to understand where you want to go with 

the TRGRs. Are we going to stop where we are at which is just informing 

the board about the process we went through to create the guard rails, 

or are we going to show the board the results and have a meaningful 

discussion explaining our risk profile and to determine the board’s comfort 

with it?). [PSI-TWLF-04-000127] ..................................................................... 471 

29. Caterpillar Global Finance and Strategic Support, Global Tax Update, 

April 8, 2008 (High risk areas are actively managed.; Higher Risk Areas; 

CSARL - Product Management - Operational; CSARL - Parts Distribution 

- Management & Reputation). [CAT-002087, 090-098, 102] .......................... 472 

Documents Related to Economic Substance: 

30. P&SS Availability & Inventory Management (85% of worldwide parts 

inventory is managed from Morton-moving toward 100% *** Morton 

knows if Grimbergen sold a part, received part, scrapped a part-information goes into Morton global parts forecast calc) [PwClPSIlCATl00179037-038] ................................................................................................... 483 

31. Purchasing Transportation and Technical Support (P&SS has developed 

(over 12 years) network of suppliers for non current that is independent 

of current production suppliers). [PwClPSIlCATl00179035-036] ........... 485 

32. Excerpt from The Deposition of Sally A. Stiles, February 24, 2011 (Q: 

Is it fair to say that the driving force behind Glove or CSARL was 

the tax department and not any business unit? A: Yes.) [PSI-TWLF-11- 

000008, 113-114] ............................................................................................... 487 

33. Excerpt from The Deposition of Robin Beran, March 15, 2011, (Q: Well, 

other than paper issues that were caused by the entities that became 

involved, were there any other changes to the physical flow of purchased 

finished replacement parts? A: Physical flow, probably not substantially.) 

[PSI-TWLF-12-000008, 177-178] ..................................................................... 490 
Page

VIII 

34. Excerpt from The Deposition of Rodney Perkins, March 10, 2011, (Q: 

Was there any business advantage to Caterpillar, Inc., to have this arrangement put in place other than the avoidance or deferral of income 

taxation at higher rates? A: No, there was not.) [PSI-TWLF-10-000004, 

113-115] ............................................................................................................. 493 

35. Excerpt from The Deposition of Janie Copeland, May 5, 2011, (Do you 

know if the accounting for purposes of the consolidated books and records 

of Caterpillar, Inc., is done the same way with respect to Swiss operations 

now as it was before CSARL? . . . Q: So would operating profit still 

be the same? A: Yes. Q: But earnings after taxes would be differently? 

A: Right.) [PSI-TWLF-15-000007, 017, 018] ................................................... 497 

36. Caterpillar email, dated June 2005, re: Authorization to proceed with 

planning and ABP cost adjustment (Due to the successful planning from 

prior years, significant low taxed earnings (over $1.5 billion) have accumulated in CSarl. This cash is now increasing at about $70 million 

per month at tax rates of about 10%. This is resulting in offshore cash 

balances that can no longer be managed through intercompany loans 

and purchases without triggering significant additional tax costs, and 

an increase in CAT’s effective tax rate.) [PSI-TWLF-12-000315-316] ........... 500 

37. Caterpillar Sarl - Pop Quiz, chart excerpted from Caterpillar Sarl Overview, July 30, 2008. [PwClPSIlCATl00065585, 589] .............................. 502 

38. Caterpillar Memorandum, dated May 2004, re: Tax Concerns Raised by 

an Unnamed Source (Caterpillar’s transfer pricing policy is the result 

of detailed analysis of the functional activities of the various entities 

in strict accordance with required Treasury Regulations. *** The basic 

operations of Caterpillar SARL are no different than any other valid 

and legal partnership operating anywhere in the world. *** I do not 

believe Caterpillar’s transfer pricing practices (past and present) meet 

the IRS’ tests. The Officers and Board of Directors need to examine the 

transfer pricing issue before Caterpillar ends up in court and in the 

press.) [PSI-TWLF-02-001393-396] .................................................................. 504 

39. Caterpillar email, dated January 2007, re: 7th Cir. Cases (To my knowledge there is no one in CSARL managing the parts business or managing 

the sub-contracting of all the activity to Inc.) [PSI-TWLF-02-000349-352] .. 508 

40. Caterpillar email, dated April 2008, re: Pls review again before we sent 

in AM (With all due respect, the business substance issue related to 

CSARL Parts Distribution is the pink elephant issue worth a Billion 

dollars on the balance sheet.) [PSI-TWLF-07-000022] ................................... 512 

Documents Related to Substance Added: 

41. Caterpillar slides entitled Product Management Alignment - Recommendation; Product Management Alignment - CSARL Benefits - Based 

on 2008 Results; Product Management Alignment - Enhance & Optimize 

(While technically appropriate, creates optics concerns - Taxation in 

CSARL with minimal business substance); Product Management Alignment - CSARL Benefits - Based on 2009 ATS). 

[PwClPSIlCATl000063338-341] ................................................................ 513 

42. Caterpillar email, dated November 2008, re: Exec Office Slides - Business 

Alignment attaching slides entitled Caterpillar Inc. Machine Business 

Alignment: Update Briefing, November 11, 2008, Purpose: Leverage business realignment to preserve and enhance CSARL benefits. (Risks & Challenges: Failure to take action weakens current CSARL structure). 

[PwClPSIlCATl00033241-252] .................................................................. 517 

43. Caterpillar Inc CSARL 2009 activities, Report to Audit team, January 

2010. (During 2009: . . . ‘‘Worldwide Parts Manager’’: establish group 

in CSARL Geneva with worldwide parts responsibilities Benefit: $300m 

(‘‘Preserve’’)). [PwClPSIlCATl00003830-832, 847-848, 855, 871] ........... 529 

44. Caterpillar email, dated May 2010, re: WW Parts Manager. 

[PwClPSIlCATl00213059-064] .................................................................. 536 

45. Worldwide Parts Management Group Key Responsibilities, excerpt from 

Caterpillar Inc. Worldwide Parts Management, Final Closing Book, Draft 

Version as of March 15, 2010. [PwClPSIlCATl00003876, 906-907] ...... 542 
Page

IX 

46. Caterpillar email, dated November 2008, re: is tomorrow really the only 

shot with DBB? (PMs in US will put some pressure on the parts profit 

model. These guys are really bought into the PM is king concept. We 

are going to have to create a story that will put some distance between 

them and parts (eg. all the parts that are noncurrent) to retain the benefit. 

Get ready to do some dancing. *** What the heck. We’ll all be retired 

when this comes up on audit. Bodnam and chris Dunn will have to 

solve it. Baby boomers have their fun, and leave it to the kids to pay 

for it.) [PwClPSIlCATl00033157-159] ...................................................... 545 

Other Miscellaneous Documents: 

47. Summary of Caterpillar Operations and Restructuring of Caterpillar Sarl. 

[PSI-Caterpillar-04-000002-009] ...................................................................... 548 

48. CSARL Legal Structuring, CSARL 2009 activities, PricewaterhouseCoopers. [PwClPSIlCATl00003411] .......................................................... 556 

49. Introduction of Caterpillar North America S.A.R.L. (CNAmSARL was 

created and implemented with the understanding that there be no impact 

on Caterpillar’s accountable profit center reporting systems. While significant changes were made to our legal entity reporting systems, the objective 

of zero accountable impact was met. [PSI-TWLF-10-000172-174] ................ 557 

50. a. Excerpts from November 26, 2013 responses received from Caterpillar 

Inc. to questions posed by the Permanent Subcommittee on Investigations. [CAT-000267-269] ............................................................................... 560 

b. Excerpts from December 3, 2013 responses received from Caterpillar 

Inc. to questions posed by the Permanent Subcommittee on Investigations. [CAT-000276-277, 279-280, 295-298] ............................................... 563 

c. Excerpts from January 14, 2014 responses received from Caterpillar 

Inc. to questions posed by the Permanent Subcommittee on Investigations. [CAT-000300-302] .............................................................................. 571 

d. Excerpt from March 7, 2014 responses received from Caterpillar Inc. 

to questions posed by the Permanent Subcommittee on Investigations. 

[CAT-001866] ............................................................................................... 574 

e. Excerpts from March 13, 2014 response received from Caterpillar Inc. 

to questions posed by the Permanent Subcommittee on Investigations. 

[CAT-0002265] .............................................................................................. 575 

51. License Agreement, as of January 1, 2011, between Caterpillar, Inc. and 

CSARL. [CAT-000306-318] .............................................................................. 576 

52. Fifth Amended and Restated Services Agreement, as of September, 1999, 

between Caterpillar Inc. and Caterpillar S.A.R.L. [CAT-000653-663] ......... 589 

53. PricewaterhouseCoopers document discussing intangible assets transferred by Cat Inc. to COSARL, undated but likely 1999 (Scanning the 

list, it appears that the following items are relevant to the replacement 

parts license: Patents, designs, trademarks, contracts, systems, procedures, 

know-how, methods, forecasts, estimates, and technical data.). 

[PwClPSIlCATl00199858-862] .................................................................. 600 

54. Responses to supplemental questions for the record from Steven Williams, 

PricewaterhouseCoopers LLP. ......................................................................... 605 

55. Responses to supplemental questions for the record from James Bowers, 

Caterpillar, Inc. ................................................................................................. 614 

56. a. Memorandum to File from the Permanent Subcommittee on Investigations’ Majority Staff, August 28, 2014, regarding Ownership of 

Caterpillar’s Non-U.S. Parts Warehouses ................................................... 628 

b. Memorandum to File from the Permanent Subcommittee on Investigations’ Majority Staff, August 28, 2014, regarding Testimony Related 

to CSARL’s Non-U.S. Parts Employees ...................................................... 631 

c. Memorandum to File from the Permanent Subcommittee on Investigations’ Majority Staff, September 11, 2014, regarding False Testimony 

Related to IRS’ Position on Caterpillar’s Tax Liability. ............................ 633 

57. Document Locator List and documents cited in footnotes to Caterpillar’s 

Offshore Tax Strategy, the Report released in conjunction with the Subcommittee hearing on April 1, 2014. The Document Locator List provides 

the bates numbers of the documents cited in the Report and the hearing 

record page number where the document can be located. Not included 

are documents related to Subcommittee interviews, which are not available to the public, and widely available public documents. .......................... 649 

(1) 

CATERPILLAR’S OFFSHORE TAX STRATEGY 

TUESDAY, APRIL 1, 2014 

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:31 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin, McCain, Johnson, Portman, and Paul. 

Staff present: Elise J. Bean, Staff Director and Chief Counsel; 

Mary D. Robertson, Chief Clerk; David H. Katz, Senior Counsel; 

Daniel J. Goshorn, Senior Counsel; Henry J. Kerner, Staff Director 

and Chief Counsel to the Minority; Jack Thorlin, Counsel to the 

Minority; Brad M. Patout, Senior Advisor to the Minority; Scott 

Wittmann, Research Assistant to the Minority; Adam Henderson, 

Professional Staff Member; Joel Churches, Detailee (IRS); Admad 

Sarsour, Detailee (FDIC); Heidi Keller, Congressional Fellow; 

Samira Ahmed, Law Clerk; Harry Baumgarten, Law Clerk; Jacob 

Rogers, Law Clerk; Tom McDonald, Law Clerk; Shannon Kellman 

and Michael Tash (Sen. Levin); Eamon Walsh (Sen. Heitkamp); 

Ritika Rodrigues (Sen. Johnson); and Brandon Brooker (Sen. Paul). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. The Subcommittee for 

many years has investigated how some of our most profitable corporations exploit loopholes in the U.S. tax code to shift income and 

profits to offshore tax havens, thereby denying tax revenue to 

Uncle Sam. Corporate income tax revenue accounts for a smaller 

and smaller share of Federal receipts and today is down to about 

10 percent of Federal revenue, despite the fact that corporate profits are at an all-time high. Tax avoidance through the use of dubious tax loopholes costs the treasury tens of billions of dollars each 

year, making it harder for us to invest in the education, innovation, 

and infrastructure that promote our prosperity, and to adequately 

fund our national security, while at the same time increasing the 

tax burden on families and businesses who cannot employ an army 

of tax lawyers. 

The subject of our report and the subject of today’s hearing is 

Caterpillar Inc. Caterpillar is an American success story that produces iconic industrial machines. But it is also a member of the 

corporate profit-shifting club that has transferred billions of dollars 

offshore to avoid paying U.S. taxes. We will examine Caterpillar’s 
2 

tax strategy at today’s hearing. But first I want to thank Caterpillar and its accounting firm, PricewaterhouseCoopers (PwC), for 

their cooperation with our Subcommittee. 

Headquartered in Peoria, Illinois, Caterpillar designs and builds 

a wide range of heavy construction equipment, power generators, 

and engines, assembling most of them here in the United States. 

On work sites around the world, its bright yellow machines are 

symbols of U.S. manufacturing excellence. Its revenues exceeded 

$120 billion over the last 2 years. 

In addition to manufacturing machines, Caterpillar operates a 

lucrative replacement parts business, selling Caterpillar-branded 

parts to customers around the world. It is this aspect of their business, specifically its foreign sales of replacement parts, on which 

this hearing will focus. 

Caterpillar machines are known for their durability and dependability; they last literally for decades, a testament to their quality. 

To ensure their machines keep running well, Caterpillar works to 

deliver needed parts anywhere in the world within 24 hours of an 

order. This commitment limits the amount of time a machine is out 

of service as well as extending its life. Its parts operation helps the 

company maintain its reputation for building equipment that keeps 

working—a reputation that is key to its success. 

The parts operation is also highly profitable. In many years, the 

parts business accounts for a majority of Caterpillar’s profits despite making up just a fraction of sales. Caterpillar maximizes its 

parts profits by designing machines that can be repaired and maintained only with Caterpillar parts, ensuring decades of parts sales 

and profits. 

Caterpillar-branded parts are manufactured primarily by independent companies in the United States and shipped by Caterpillar 

around the world. Until 1999, Caterpillar Inc.—or Caterpillar U.S., 

as we sometimes call it—was the initial buyer of these parts. When 

they were shipped to its foreign dealers, Caterpillar U.S. typically 

first passed title to marketing companies that it had created, including one in Switzerland called Caterpillar Overseas S.A.(COSA). 

Despite taking title, COSA never took physical delivery or even 

saw the parts that it marketed. 

COSA served as Caterpillar’s marketing company and parts distributor in Europe, Africa, and the Middle East (EAME), acting as 

a liaison between Caterpillar U.S. and the foreign dealers, helping 

those dealers with training, marketing campaigns, servicing issues, 

and parts inventory management. In exchange, COSA was allocated about 15 percent of the parts foreign sales profits. Until 

1999, the vast majority of the remaining profits from those offshore 

sales, usually 85 percent or more, were included in Caterpillar 

Inc.’s U.S. tax returns. 

But starting in 1999, its parts operation assumed a new and key 

role in Caterpillar’s tax strategy. That is when Caterpillar paid 

PwC to design and implement a Swiss tax strategy, at an eventual 

cost of more than $55 million. After Caterpillar put that strategy 

in place, it went from reporting about 85 percent or more of its foreign parts profits on its U.S. tax return to reporting 15 percent or 

less to Uncle Sam, and shifting the remaining profits offshore to its 

Swiss affiliate. In Switzerland, Caterpillar had negotiated a special 
3 

1See Exhibit No. 1f, which appears in the Appendix on page 281. 

effective Swiss tax rate varying from 4 percent to 6 percent, which 

was below the Swiss statutory rate of 8.5 percent. 

This strategy left the real-world operation of its parts business 

virtually unchanged; in fact, the only significant real-world impact 

of this arrangement was an instant major drop in Caterpillar’s U.S. 

tax bill. From 2000 to 2012, the Swiss tax strategy shifted $8 billion in profits from Caterpillar U.S. to its affiliate in Switzerland. 

This cut Caterpillar’s U.S. tax bill by $2.4 billion during that period. 

The law says that transfer pricing agreements between related 

parties must have an economic substance—meaning a business 

purpose other than lowering taxes. But when one of Caterpillar’s 

key tax managers responsible for implementing the Swiss tax strategy, Rodney Perkins, was asked, under oath, whether there was 

any business advantage to the Swiss transaction other than the deferral or avoidance of corporate income taxes, he stated: ‘‘No, there 

was not.’’ 

Though the lion’s share of Caterpillar’s international parts profits shifted to its Swiss affiliate, the heart and soul of Caterpillar’s 

parts business stayed right here in the United States. Only a shadow of the parts business took place in Switzerland. A few statistics 

showing the disparity are depicted on this chart.1

Of Caterpillar employees who handle parts, 4,900 work in the 

United States; less than 100 work in Switzerland. 

Of the company’s 125 manufacturing plants, 54 are in the United 

States; none are in Switzerland. 

Of the company’s 19 parts warehouses, 10 are in the United 

States; none are in Switzerland. 

Today there are 1.5 billion parts stored in Caterpillar’s U.S. 

warehouses; none are stored in Switzerland. 

Put another way, despite the fact that Caterpillar now allocates 

only a small percentage of its worldwide parts profits to the United 

States, from the moment a part is first designed to when that part 

reaches a customer, Caterpillar U.S. is the engine behind the company’s parts business: 

Parts design is centered here, with nearly 80 percent of the research and development dollars used to design Caterpillar machines and parts spent in the United States. 

Once designed, Caterpillar’s replacement parts are manufactured 

primarily by third-party suppliers in the United States, under the 

supervision of U.S. Caterpillar personnel. In 2012, those U.S. suppliers manufactured nearly 70 percent of the Caterpillar replacement parts sold offshore. 

Once the parts are built, the technology, expertise, and management behind a highly efficient distribution system are all here in 

the United States. Parts are distributed through Caterpillar’s parts 

logistics operation, which provides Caterpillar with one of its key 

competitive advantages. That operation is managed and run from 

the United States. 

Caterpillar’s Inventory Management Group, located in Illinois, 

uses complicated algorithms to forecast parts demand and ensure 

parts are manufactured in the quantities needed. 
4 

Caterpillar’s largest parts warehouse is in Morton, Illinois, where 

it stores and coordinates the movement of parts around the world, 

helping Caterpillar’s dealer network maintain inventory levels that 

meet customer demand and delivering even hard-to-find parts 

within 24 hours of an order anywhere in the world. 

In short, 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. 

Now, in 2012—that is just a year ago—minutes of the Caterpillar 

Board of Directors (BOD) meetings describe the company’s parts 

distribution operations as ‘‘U.S. centric.’’ So if the parts business is 

U.S. centric, how do most of the profits end up at Caterpillar’s 

wholly owned Swiss affiliate? Here is how. 

In 1999, PricewaterhouseCoopers provided the company, with a 

list of 49 potential tax strategies to lower its taxes, including a 

plan to avoid or defer U.S. taxes on the foreign sales of its parts. 

The transaction Caterpillar adopted was legally complex but 

straightforward. Caterpillar created a new Swiss affiliate called 

Caterpillar SARL (CSARL). CSARL replaced COSA as Caterpillar’s 

leading Swiss affiliate, and Caterpillar gave CSARL a license to 

distribute all of the company’s replacement parts outside of the 

United States. 

This arrangement changed nothing in the actual operation of the 

parts business, but caused a massive change in how profits on 

parts sales were split. Because CSARL lacks the personnel, infrastructure, or expertise to actually run the parts business, it reimburses Caterpillar U.S. its costs and a small service fee to continue 

running the operation. CSARL also pays Caterpillar U.S. a socalled royalty payment equal to about 15 percent of the profits on 

international parts sales, with CSARL keeping the other 85 percent. 

Now, although Caterpillar spent 90 years working to build up its 

international parts business, the license provided Caterpillar with 

no compensation for the assets transferred. That license gives 

CSARL the rights to use Caterpillar’s patents and trademarks; contracts with suppliers with whom Caterpillar had built relationships; it gives CSARL proprietary computer systems; and the 

know-how, methods and data used to manage the parts business. 

Caterpillar U.S. receives only the 15 percent of future profits from 

the operation it developed and continues to run. So Caterpillar in 

the United States did the lion’s share of the work building the business and does most of the work of operating the business, while 

Caterpillar in Switzerland gets 85 percent of the profit from the 

most profitable part of Caterpillar’s business. 

The law says that transfer pricing agreements between related 

parties must meet an arm’s-length transaction standard. In an 

arm’s-length transaction, no company would turn over a profitable 

business that took decades to develop without receiving compensation. Similarly, in an arm’s-length transaction, no business would 

relinquish 85 percent of the ongoing profits in exchange for 15 percent of the profits. 
5 

Not only did the arrangement change nothing about the actual 

operation of the parts operation, it changed nothing on the financial statements that Caterpillar shows the public and investors. 

That is because Caterpillar and CSARL are related companies, 

with the parent company issuing a consolidated financial statement. So Caterpillar still shows the 85 percent of the profits sent 

to CSARL as its own profits on the consolidated public financial 

statement, while telling Uncle Sam that those profits belong to its 

Swiss affiliate CSARL. 

Caterpillar has provided several justifications for this change in 

profit allocation which appear to be inconsistent with the economic 

reality of its operations. 

Caterpillar claims that the company merely cut out a redundant 

middleman—Caterpillar U.S.—and arranged for its third-party 

suppliers to sell directly to its Swiss affiliate. The fact is that Caterpillar U.S. is not a redundant middleman in its parts business. 

Caterpillar U.S. continues to play the vital role of managing and 

leading its non-U.S. parts business the same way it always had. 

Caterpillar U.S. is still designing parts for Caterpillar machines, 

forecasting parts demand, getting the parts built, and storing and 

shipping the parts to dealers and customers around the world. 

Caterpillar also contends that shifting 85 percent of the parts 

profits to CSARL made sense because its Swiss affiliate provided 

so-called intangible marketing services whose substantial value 

had not been recognized in the past and deserves the lion’s share 

of profit. 

But that explanation for sending most of its international parts 

profits to Switzerland is also inconsistent with how Caterpillar 

itself has valued the kind of services that CSARL provides. Prior 

to 1999, COSA, CSARL’s predecessor as Caterpillar’s Swiss affiliate, was one of many marketing companies that Caterpillar had 

around the world, each performing essentially the same function of 

working with Caterpillar’s foreign dealers to sell and service Caterpillar parts and machines. In 1999, as part of the Swiss tax strategy, Caterpillar consolidated several of those marketing companies 

into CSARL. Just a few years later, in 2002, Caterpillar merged 

into CSARL another of its marketing companies called CACO, 

which represented Caterpillar with its dealers in Latin America, 

the Caribbean, and Canada. In connection with the CACO merger, 

PwC, the same firm that designed the CSARL transaction, evaluated the intangible marketing assets being transferred from CACO 

to CSARL and concluded they had little value. The same intangible 

marketing assets were concluded to have little value just 2 years 

later in 2001. 

So, in other words, when CSARL was the recipient of the marketing intangibles from CACO, Caterpillar said the value was negligible. But when valuing those same intangibles as provided by 

CSARL, Caterpillar claimed they were so valuable that they justified transferring 85 percent of its profits. 

Now, that is not all. For many years, Caterpillar used an internal profit allocation system that it called ‘‘accountable profits’’ to 

help it decide how to award incentive pay, such as bonuses, to employees in its various divisions. Beginning in 1992, Caterpillar 

awarded each of its marketing companies an accountable profits 
6 

1See Exhibit No. 1e, which appears in the Appendix on page 280. 

share totaling about 13 percent of the parts profits within their regions. But when CSARL began receiving 85 percent or more of the 

profits related to parts, supposedly in recognition of how valuable 

CSARL’s functions were, CSARL’s employees stayed at the 13 percent profit figure internally when it came to allocating bonuses. In 

other words, Caterpillar again told one thing to Uncle Sam and another to its employees about the proportionate value of CSARL’s 

work. 

The unreality of Caterpillar’s current profits split can be illustrated by an example. Caterpillar builds a type of mining truck, the 

797, shown in the chart we are going to put up there, which works 

in mines around the world, for instance, in the Alberta tar sands 

in Canada.1 Major components are designed, manufactured, and 

assembled in the United States. The engine is manufactured by 

Caterpillar in Indiana; the transmission is manufactured by Caterpillar in Illinois; the axles are manufactured by Caterpillar in 

North Carolina; the tires are manufactured by a third-party supplier in South Carolina; the driver’s cab is manufactured by a 

third-party supplier in Illinois. When those mining trucks are assembled and sold to those mines in Alberta, they are exported from 

the United States, and 100 percent of the profits from those sales 

are reported on its U.S. tax return by Caterpillar. But when an 

order for finished replacement parts comes in to service those 

trucks, again, even though the parts are manufactured in the 

United States, stored at a Caterpillar U.S. warehouse, and shipped 

by Caterpillar U.S. employees to Alberta, the profits on those parts 

go to Switzerland. 

Switzerland has nothing to do with those trucks from start to finish. There is no economic basis for allocating those parts profits to 

Switzerland, yet that is where they go. 

And there is more. The unreality of the Swiss strategy can also 

be seen in Caterpillar’s so-called virtual inventory system. Caterpillar maintains a second set of parts inventory books solely for tax 

purposes. CSARL has $525 million worth of parts stored here in 

the United States. None are stored in Switzerland. The parts 

CSARL purportedly owns here in the United States are completely 

commingled with the parts owned by Caterpillar U.S. So when a 

U.S. warehouse employee fills an order for a part, that employee 

has no way of knowing which part is owned by which company. 

The part is just shipped. 

After the fact, Caterpillar’s virtual inventory system flags the 

parts shipped outside of the United States and retroactively indicates that they are CSARL-owned. For hundreds of thousands of 

parts shipped abroad each year, however, the parts that were 

shipped actually belonged to Caterpillar U.S. When that happens, 

the virtual inventory system nevertheless shows the part as owned 

by CSARL, indicates it was borrowed from Caterpillar U.S. at cost, 

and later replaces the part when new parts are added to the warehouse inventory. This after-the-fact virtual ownership system is one 

more sign of how transparent the whole Swiss tax strategy is. 

What is real is the U.S. tax revenue that the Swiss strategy 

erases. From 2000 to 2012, Caterpillar shipped—shifted $8 billion 
7 

in profits to its Swiss affiliate, reducing Caterpillar’s U.S. tax bill 

by $2.4 billion. 

At the bottom, the Caterpillar case study centers on a tax strategy purchased by its tax department whose purpose was tax avoidance. It used a licensing agreement that no company would enter 

into with an unrelated third party. It relied on a virtual inventory 

system that did not track ownership of parts. It allocated profits 

for tax purposes that bore no relationship to the profit allocations 

made for its own business purposes, including bonuses. 

Now, I am about as big a supporter of U.S. manufacturing as you 

will find. But the Caterpillar case study demonstrates that offshore 

profit shifting is not reserved for those high-tech companies that 

transfer intellectual property to themselves offshore. Some manufacturers, too, use offshore tax strategies to avoid paying taxes. The 

revenue lost to those strategies increases the tax burden on working families here in the United States; it reduces our ability to 

make investments in education and training, research and development, trade promotion, intellectual property protection, infrastructure, national security and more—investments, all of those, on 

which Caterpillar and other U.S. companies depend for their success. It is long past time to stop offshore profit shifting and to ensure that profitable U.S. multinationals meet their U.S. tax obligations. 

Senator McCain. 

OPENING STATEMENT OF SENATOR McCAIN 

Senator MCCAIN. Thank you, Mr. Chairman. After decades of 

growth, Caterpillar has built a global business in which 70 percent 

of its sales come from overseas. It is my information that at the 

core of Caterpillar’s overseas subsidiaries is an independent dealer 

network that informs the company about local demand and keeps 

it globally competitive. The Majority’s Report states that many significant functions of Caterpillar’s overseas parts business are managed from the United States. But I think two important questions 

should be asked before that observation can be properly evaluated 

today: First, what activities are most important in generating Caterpillar’s overseas sales? And, second, where are those activities 

conducted? 

In this case, an important factor in Caterpillar’s overseas sales 

seems to be its independent dealer network, which is overseen and 

managed by Caterpillar’s subsidiary in Switzerland. I understand 

that this Subcommittee has many important questions to ask about 

how Caterpillar chose to structure itself globally. I look forward to 

hearing from today’s witnesses so that we will be better informed 

as to the actual operations of Caterpillar and their policy implications. 

Today, the fact is that the United State of America has the highest corporate tax rate of any country in the world. There is no 

doubt that this is a factor in moving operations overseas and, as 

we have seen from previous hearings, parking those profits overseas rather than bringing them back to be subjected to a 35-percent corporate tax rate. 

This makes a compelling argument for broader tax reform in 

order to ensure our tax code is fair, competitive, and a vehicle for 
8 

1The prepared statement of Mr. Wells appears in the Appendix on page 99. 

economic growth. I want to thank Chairman Levin for his continuing passion on this issue, particularly, and on others, and I 

look forward to today’s hearing. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you so much, Senator McCain, and I want 

to thank you and your staff for the bipartisan work which is the 

hallmark of this Subcommittee. 

And Senator Johnson, thank you. 

Let me now call upon our first panel of witnesses: Professor Bret 

Wells, Assistant Professor of Law at the University of Houston Law 

Center, Houston, Texas; and Professor Reuven Avi-Yonah, the 

Irwin I. Cohen Professor of Law at the University of Michigan Law 

School in Ann Arbor, Michigan. We appreciate both of you being 

with us this morning. We look forward to your testimony. We appreciate your sharing your legal expertise today, and we look forward, again, to your perspective on the offshore profit shifting. 

Pursuant to Rule 6, all witnesses who testify before the Subcommittee are required to be sworn, so at this time I would ask 

both of you to please stand and to raise your right hand. Do you 

swear that the testimony you are about to give before this Subcommittee will be the truth, the whole truth, and nothing but the 

truth, so help you, God? 

Mr. WELLS. I do. 

Mr. AVI-YONAH. I do. 

Senator LEVIN. We are using a timing system today, and about 

1 minute before the red light comes on, you will see the lights 

change from green to yellow, which will give you an opportunity to 

conclude your remarks. Your written testimony will be printed in 

the record in its entirety. We would appreciate your limiting your 

oral testimony to 7 minutes. 

Professor Wells, we are going to have you go first, followed by 

Professor Avi-Yonah, and then we will turn to questions about both 

of you have testified. Professor Wells. 

TESTIMONY OF BRET WELLS,1 ESQ., ASSISTANT PROFESSOR 

OF LAW, UNIVERSITY OF HOUSTON LAW CENTER, HOUSTON, 

TEXAS 

Mr. WELLS. Very good. Thank you. My name is Bret Wells, and 

I am an Assistant Professor of Law at the University of Houston 

Law Center. I have over 20 years of experience in the tax area, 

much of that time in industry but also in academia. And I have 

published repeatedly on the topic of international taxation. 

I would like to thank both Senator Levin and Senator McCain for 

inviting me to testify. I am testifying in my individual capacity, 

and so my testimony does not necessarily reflect the views of the 

University of Houston Law Center or of the University of Houston. 

In the interest of time, I want to make a few opening remarks. 

First, when we think about Caterpillar, we are thinking about a 

very successful manufacturing business. The U.S. tax rules should 

properly characterize how to think about where the economic profits of that business come from. 
9 

When we think about Caterpillar, we also need to recognize that 

it has created a remarkable spare parts business system that explains much of its profitability. In this regard, once a CAT machine 

is sold, it represents an annuity for Caterpillar because the customer will come back to Caterpillar dealerships—for customized replacement parts to keep this machine working. 

Caterpillar management treats its proprietary spare parts business and the logistics surrounding this spare parts business as a 

core business of the company. Caterpillar’s integrated business system allows it to sell spare parts to a customer within 24 hours anywhere in the world, thus creating a sales opportunity at the exact 

moment when Caterpillar can extract substantial profit margins on 

proprietary spare parts sales. Consequently, the sale of a Caterpillar machine creates a future captive market for proprietary 

spare part sales, and Caterpillar’s logistical capabilities explain its 

ability to generate profitability in that business line. 

Prior to 1999, the profits related to the spare parts business were 

shared between Caterpillar Inc. and the independent dealers. A 

Swiss affiliate earned a routine profit. The routine profit earned by 

the Swiss affiliate was appropriate because its minimal profit was 

commensurate with its minimal functional contribution to the supply chain and to the factors that were creating the residual profits. 

In 1999, Caterpillar engaged in a supply chain restructuring exercise. In this restructuring, a new Swiss affiliate was designated as 

the entity that would now be entitled to reap substantially all of 

the annuity value of the spare parts business that Caterpillar and 

its independent dealers had carefully created. 

After CSARL’s formation, Caterpillar claimed that CSARL had 

newly discovered marketing intangibles that justified drastically 

increasing the profits allocable to Switzerland. To the extent that 

these intangibles originated from U.S. affiliates at the time of 

CSARL’s formation, CSARL should have paid a super royalty every 

year thereafter under Section 367(d) to compensate the U.S. affiliate in an amount commensurate to the newfound profitability of 

that contributed U.S. intangible, but the Subcommittee was provided no evidence that this was done or is currently being done. 

Caterpillar Inc. remained the creator and developer of the equipment designs, and Caterpillar maintained key operational control 

over the spare parts product design, procurements, logistics, and 

inventory management processes. However, although nothing in 

the spare parts business functionally, economically, changed from 

an operational perspective as a result of the 1999 tax restructuring 

exercise, the dominant share of residual profits from the spare 

parts business was gratuitously shifted to Caterpillar’s Swiss affiliate CSARL. 

The supply chain restructuring implemented by Caterpillar is 

premised on a transfer pricing mistake. The mistaken notion is 

that Caterpillar’s residual profits attributable to the integrated 

spare parts business system can be allocated away from the functions that economically generate those profits and instead simply 

assign to a Swiss entrepreneur entity whose functions did not 

meaningfully contribute to the annuity value of the Caterpillar proprietary spare parts market, nor meaningful participated in its ongoing development. 
10 

1The prepared statement of Mr. Avi-Yonah appears in the Appendix on page 106. 

It is Caterpillar Inc. and the Caterpillar foreign dealerships that 

deserve to share the residual profits because the functions that 

contribute to customer loyalty in the foreign marketplace are attributable to Caterpillar Inc.’s excellent manufacturing and 

logistical capabilities developed in the United States and to the 

customer relationships created by the Caterpillar independent dealers. CSARL’s role is that of a minimal risk distributor that possesses no external customer contacts and no significant manufacturing intangible. In this posture, CSARL’s profit margin should 

approach a cost-plus return. 

A court should look through the Caterpillar supply chain restructuring exercise and see that CSARL should not receive a share of 

the residual profits of the parts business. But even though a court 

has ample means at its disposal to reach the correct substantive 

transfer pricing result, current law provides less guidance than it 

should because Section 482 does not explicitly mandate a specific 

transfer pricing methodology. 

So Congress should make clear that any allocation of residual 

profits to a foreign affiliate must be justified using a residual profit 

split analysis. Allowing residual profits to simply migrate to a tax 

haven entrepreneur without further explanation is a mistake. If all 

of the non-routine functions that create residual profits reside in 

the United States, then all the residual profits should be allocated 

to the United States. 

As a second point, I would like to state that the fact that nothing 

operationally changed as a result of Caterpillar’s 1999 tax restructuring represents a potentially fatal implementation flaw because 

the operational activities among Caterpillar Inc. and CSARL appear to have created a de facto U.S. partnership that has its own 

U.S. taxable presence, which in turn creates a U.S. taxable presence for CSARL in the United States. In my written testimony, I 

set forth a much more expansive view of why that is so. 

Let me conclude by saying that the Subcommittee is to be commended for taking the time to understand these international profit-shifting practices. Profits attributable to U.S.-created intangibles 

should not end up in a jurisdiction without substance, nor should 

they end up in an entity that did not meaningfully contribute to 

their generation. 

Thank you for allowing me to speak. 

Senator LEVIN. Thank you so much, Professor Wells. 

Professor Avi-Yonah, welcome back. 

TESTIMONY OF REUVEN S. AVI-YONAH,1 ESQ., IRWIN I. COHN 

PROFESSOR OF LAW, THE UNIVERSITY OF MICHIGAN 

SCHOOL OF LAW, ANN ARBOR, MICHIGAN 

Mr. AVI-YONAH. Thank you very much. Thank you, Senator 

Levin and Senator McCain, for inviting me to speak here today 

about the Caterpillar tax strategy. I will try to make four points 

briefly. 

First is that this is, as the Subcommittee knows, part of a more 

general phenomenon. We have already had a couple of other hearings before this. There are $2 trillion more or less of profits that 
11 

are offshore in the case of American multinationals, and out of this 

$2 trillion, a significant portion relates to activities that economically take place in the United States, either in the form of developing intangibles or in this case in the form of developing replacement parts, logistical networks, and so on. 

Congress has been aware of this for a long time and has tried 

several times to legislate in order to prevent the shifting of profits 

from the United States overseas. Originally Subpart F in 1962 was 

intended precisely to prevent this kind of shifting, and there was 

a big part of Subpart F that was addressed specifically to the shifting from the United States to Switzerland. The so-called base company rule was designed to address a case in which Dupont shifted 

significant profits from the United States to Switzerland using 

similar strategies to the ones that are used here by Caterpillar. 

Then in 1996, Congress, being aware that the existing laws did 

not work very well, enacted the super royalty rule that Professor 

Wells mentioned, which says that every time you transfer an intangible from the United States to a foreign jurisdiction, there has to 

be a royalty paid that is ‘‘commensurate with the income’’ that is 

attributable to that intangible, which was designed to shift all of 

the profits back to the United States. To the extent that what Caterpillar did was to shift such an intangible, then it should have 

paid a super royalty. 

Third, I also think that in this case, Caterpillar’s transaction in 

1999 did not have the economic substance that is required under 

the tax law. Under the tax law, as it is now codified in Section 

7701(o) but was also the law before that, an transaction has to 

have economic substance in order to be upheld by the Internal Revenue Service (IRS) and in a court, and economic substance requires 

two things: It requires a subjective intent to make a profit and an 

objective ability to make a profit. In this case, we have sworn testimony from Caterpillar executives as well as extensive documentation that the Subcommittee has discovered in its investigation that 

we have reviewed that indicates that there was no business purpose to the transaction other than the shifting of taxable income 

from the United States to Switzerland. And in addition, it is hard 

to see what the objective business purpose of the transaction or the 

objective profit potential could be in a transaction in which 85 percent of profit is shifted from the United States to Switzerland without any actual change taking place on the ground, with everything 

still being done in the United States just like it has been before. 

So I think that the IRS should have attacked this transaction on 

economic substance grounds. It should have also asked itself 

whether there should have been a super royalty paid. It should also 

have perhaps attacked it on assignment of income grounds because 

if the sale of parts represents an annuity out of the sale of the machines, then the income from the sale of parts should go to the 

same place the income from the sale of the machine goes. So there 

are all of these opportunities that the IRS had to go after this 

transaction, and unfortunately they didn’t. 

So what are my conclusions? 

First of all, I think that the IRS should do a better job in addressing these transactions. Of course, we now in this case have 

the advantage of an extensive Subcommittee investigation of inter-
12 

nal, properly documented, maybe the IRS did not have at the time, 

but it should have, I think, addressed itself more to this kind of 

transaction, which, as we heard, shifted $8 billion in profits resulting in $2.4 billion less in taxes paid over the years, and, of course, 

it is still going on. 

Second of all, I think that Congress should address the issue, 

and I think the simplest way of addressing this is to fix the problem that we already tried fixing in 1962. At the moment there is 

an exercise going on in the Organisation for Economic Co-operation 

and Development (OECD) called the base erosion and profit-shifting (BEPS) exercise, under which all of these countries, especially 

the G–20, the largest 20 economies in the world, are concerned 

about this kind of profit shifting. None of the G–20 has a tax rate 

below 20 percent. They all have effective tax rates that are similar 

to that. There is no competitive disadvantage that would result 

from Congress reducing the U.S. tax rate and taxing these offshore 

profits currently. 

There certainly can be no competitive disadvantage in Congress 

taxing the $2 trillion that are currently accumulated because this 

income, these profits have already been accumulated, and no behavioral incentive or no competitive disadvantage can result from 

taxing them. So, in my opinion, Congress should tax this $2 trillion 

immediately and in the future should reduce the corporate rate and 

tax all offshore profits of U.S. multinationals on a current basis. 

Thank you very much. 

Senator LEVIN. Thank you very much. 

Why don’t we start with a 7-minute first round, and we can have 

a number of rounds. 

The tax strategy which we have started to discuss this morning 

was proposed, designed, and implemented over several years by tax 

consultants of PwC working with Caterpillar’s Tax Department. 

Caterpillar paid PwC more than $55 million. 

In evaluating the CSARL transaction, my question is: Is it relevant that the transaction was initiated and driven by tax personnel at Caterpillar rather than by business personnel and involved paying a large amount of money for an explicit tax strategy 

to lower the company’s taxes? Is that relevant, Professor Wells? 

Mr. WELLS. I think it is relevant. I do not think it is dispositive, 

but I think it is relevant. And I think what is also relevant is the 

inconsistent stories as it is being implemented, where the taxpayer 

says in more contemporaneous documents to the time that there 

are no marketing intangibles in CSARL. Sure, the independent 

dealers are adding a lot of value. They deserve a share of residual 

profits. But the Swiss affiliate is performing nothing but a routine 

function. 

When the CACO transaction was done, PwC had said that there 

was nothing in Switzerland that could not be easily replicated, it 

had no significant marketing intangibles. In earlier transfer pricing 

reports, they said that CAT played the largest role in developing 

the market and dealer development, it was the originator of the 

basic marketing system designs, and they said CAT was the designer of the systems and the owner of the Morton spare parts 

business. 
13 

All of that comes together as far as credibility of the witness. A 

judge is going to look at this case, and the judge is going to say, 

‘‘Where did the economic profits really come from? The person that 

is testifying to me today seems to be making inconsistent statements from everything else that is happening. Why did that story 

come up? Why is the story being postulated in front of me?’’ 

And a judge, a trier of fact, is going to look at the overall evidence, and they are going to try to determine what are the functions that create residual profits. When the strategy comes from a 

tax department and it is divorced from the business itself, then 

that is a significant fact that a judge is going to look at when the 

judge is charged with trying to determine what are the economics 

consequences, where are the economic profits truly being generated. 

Senator LEVIN. And if the transaction is designed for the purpose 

of lowering taxes, that is a relevant fact to the judge? 

Mr. WELLS. It should be a relevant fact. Again, it is going to be 

a combination of facts. 

Senator LEVIN. But that is one relevant fact. 

Mr. WELLS. That is a relevant fact. 

Senator LEVIN. OK. Now, since 1999, Caterpillar has allocated 

about $8 billion in non-U.S. parts sales income to Switzerland and 

so far avoided paying about $2.4 billion in U.S. taxes. Is it fair to 

call that ‘‘profit shifting’’? 

Mr. WELLS. I think that is a fair thing to say given the record 

that is in front of the Subcommittee today about this specific taxpayer and the functions that generated those $8 billion in profits. 

Senator LEVIN. Professor Avi-Yonah, we codified the economic 

substance doctrine in 2010 and we stated that the IRS can invalidate transactions that create no meaningful change in the economic 

position of the taxpayer and have no ‘‘substantial purpose other 

than to achieve a tax effect.’’ Is that right? Must there be economic 

substance in a transfer pricing transaction between related parties? 

Mr. AVI-YONAH. So the IRS—— 

Senator LEVIN. Put your mic on, if you would. 

Mr. AVI-YONAH [continuing]. Making sure that you meet both 

prongs—that is, the objective prong and the subjective prong; 

whereas, before, some courts held that you only needed to meet 

one. 

And, in addition, the IRS said that in a true arm’s-length transaction, they will not apply the economic substance; that is, if a 

transaction meets the arm’s-length standard of Section 482, they 

will not apply economic substance. 

However, in my judgment, a transaction in which you transfer 

100 percent of the profit in exchange for 15 percent, it is essentially 

you are transferring 85 percent of the profit to a related party, 

would never have been done on an arm’s-length basis, and, therefore, I do not think the arm’s-length standard applies here. And I 

think the economic substance doctrine can be applied to this transaction. 

Senator LEVIN. Now, Caterpillar, in its written statement submitted to the Subcommittee, says that even if it were stipulated 

that the changes made in 1999 were motivated primarily by tax 
14 

considerations and generated primarily tax effects, the economic 

substance doctrine would still not apply. 

Now, do you agree with the statement that the economic substance doctrine would not apply if the changes in 1999 were motivated primarily by tax considerations and generated primarily tax 

effects and the transaction did not meet the ‘‘arm’s-length standard,’’ which is a transaction that would not be made with an unrelated third party? 

Mr. AVI-YONAH. No, I think in this case the economic substance 

doctrine would apply to invalidate the transaction. 

Senator LEVIN. Professor Wells, is it true that the law requires 

in every case that a transfer pricing agreement must meet the 

arm’s-length standard, it must be a transaction that Caterpillar 

would enter into with an unrelated party? 

Mr. WELLS. That is exactly right. In fact, current law makes it 

clear that even if there are multiple transfer pricing methodologies, 

you must choose the best method, and the best method under existing Treasury regulations is the one that is the most reliable in putting the profits in the functions that generated those profits. So 

even if we have a debate between one method or a different method, a court is going to ask the question: What would an arm’slength party have done? 

Senator LEVIN. And would any reasonable business have entered 

into the type of exchange that occurred here? 

Mr. WELLS. No, because what occurred here was a failure to recognize that there was a captive spare parts market. If we use the 

words of Caterpillar, ‘‘seed,’’ ‘‘grow,’’ and ‘‘harvest,’’ when they are 

talking to the stock analyst about how to value their company, they 

said, ‘‘When we sell the Caterpillar machine, it is like seed and 

growing and the harvesting is the spare parts, which we get to do 

once that machine breaks down. And nobody would let someone 

come in at harvest time after the crop has been seeded, grown, and 

is ready for harvest, nobody except a related party that does not 

care about the profit shifting. 

Senator LEVIN. Do you agree with that, Professor? 

Mr. AVI-YONAH. Yes, I agree. 

Senator LEVIN. Thank you. Senator McCain. 

Senator MCCAIN. Thank you, Mr. Chairman, and I thank the 

witnesses. 

To the witnesses, this restructuring took place, it is my understanding, in 1999, and yet no case has been brought against them 

by the government for what you view as a clear violation of law. 

Do you have an explanation for that? 

Mr. AVI-YONAH. I think it is partly because some of the information that was provided to the Subcommittee would not have been 

available to the IRS, which relates to internal tax planning documents that are privileged. That is not obvious on its face from the 

outside. 

In addition, some of the information was based on a whistleblower that also was not available to the IRS at the time, who was 

a senior tax person inside the company. So we, today, have much 

more information to evaluate this transaction than was available 

to the IRS at the time. 
15 

In addition, in my opinion, the IRS is simply overburdened, and 

it has too many companies—even though it audits all the large 

companies, it has too many companies. These transactions are very 

complicated. They are extensively documented. The IRS has to go 

through thousands of pages of data. They just have a hard job to 

do. Nevertheless, I do think that they should have done a better 

job in this particular case. 

Senator MCCAIN. So the IRS looked at this restructuring, 

reached a conclusion that was a failure of the IRS to gather all the 

sufficient information or did not hear from a whistleblower. 

Wouldn’t that be a reason for the IRS to reopen the case? 

Mr. AVI-YONAH. I suspect that by the time the whistleblower 

case became public, these years have been closed already in the 

IRS—— 

Senator MCCAIN. Well, nothing prevents them from reopening it. 

Mr. AVI-YONAH. No. If a year is closed, that is, if the statute of 

limitations had run on a year, then they cannot reopen the year. 

They have settled with the company. 

Senator MCCAIN. They are operating today under a scheme that 

you view as illegal. Since when does the statute of limitations affect that? 

Mr. AVI-YONAH. I mean, there are two arguments here. There is 

the economic substance argument that relies to the original transaction. The original transaction, I believe, is closed, and they cannot go after that. There are other arguments. There is Professor 

Wells’ partnership argument. There is the question of whether 

there should be a super royalty under the transfer pricing rules. 

There is a question of whether there was an assignment of income. 

All those theories are still available to the IRS, and I would encourage the IRS to closely examine what is going on now between the 

company and CSARL and see whether they cannot criticize them 

on the basis of one of those theories. 

Senator MCCAIN. Did you have an additional comment, Professor? 

Mr. WELLS. I think it is an important public service to show the 

IRS, in hearings like this, the results of a thorough investigation 

of a factual record like this. At a time when companies are concerned and taxpayers are concerned about base erosion and profit 

shifting, one thing I would hope the Senate could all agree on is 

the following: Whatever reform needs to be made, currently law 

needs to make sure that the transfer pricing rules allow taxpayers 

and the government to be confident that taxes are paid on the profits that are economically earned in the United States. There may 

be other reform measures that the Senate may not be able to agree 

on, but I think Congress needs to agree on at least this goal. And 

I think the IRS needs to think about what do they need to do in 

order to do a better job of getting the facts in a detailed way like 

this Subcommittee has done. 

Senator MCCAIN. So when there is something this egregious 

going on, it requires a congressional hearing to get the IRS to carry 

out their responsibilities. It is my information that the IRS received an anonymous letter with allegations in 2004, 5 years after 

the restructuring, looked into it, and brought no charges. So the 
16 

American people and I do not have a lot of confidence in the IRS, 

but now we have less. 

Mr. WELLS. I think that is an important point, and I think it is 

hard to come up with good legislative reforms, Senator McCain, if 

we do not have detailed case studies like this. Congress needs to 

develop legislation in light of the current reality, not divorced from 

the current reality. So I think that is an important point. 

Senator MCCAIN. And, Professor, I think you would agree that there is at least—am I correct—$1.5 trillion that is parked overseas 

at this time? 

Mr. WELLS. My knowledge on that is only from publicly available 

information, but that is consistent with what I have read in the 

public. 

Senator MCCAIN. And some years ago, we did kind of a, whatever 

you call it, repatriation in the hopes that it would create more jobs 

and boost our economy, and I think the evidence shows that basically it went to pay salaries and stockholders. 

Mr. WELLS. I think that is a fair characterization of the empirical 

data. 

Senator MCCAIN. So any reform that we make or steps we may 

take in order to try to repatriate some of this money, this time 

maybe we should have requirements for job creation and how 

that—on funds that are returned. But also isn’t the larger question 

here, as I mentioned in my opening statement, if you are going to 

bring money home and pay 35 percent corporate tax, which is the 

highest in the world, you are going to try to find ways not to have 

to pay taxes on it, legally you are going to have to try and find a 

way, or in a gray area, or in violation of at least the spirit if not 

the letter of the law. 

So if you had a recommendation to Congress to address this issue 

and prevent future—no matter how you feel about this particular 

case or not—what would you recommend that Congress do to try 

to make sure that there is adequate taxation and a disincentive for 

this kind of activity that this Subcommittee has investigated on numerous cases? Could both of you give us a response? Either one 

first, I do not care. 

Mr. AVI-YONAH. If we cut the corporate tax rates to 20 to 25 percent, we could apply it to all of the overseas profits of U.S. multinationals without putting them at a significant competitive disadvantage because that is the same rate that our—— 

Senator MCCAIN. And that would be sufficient incentive, you 

think, for them to bring that home, a 20-percent rate, roughly? 

Mr. AVI-YONAH. I think so, yes. 

Senator MCCAIN. Thank you very much, Professor. 

Senator LEVIN. Thank you, Senator McCain. 

Mr. WELLS. My main point is when we talk about repatriation, 

tax rates, and whatever, I think the public may have a different 

point of view, Senator McCain, whether or not the profits are really 

U.S. origin profits that have migrated away and are circling back, 

or if they really are profits that are functionally created and attributable to activities that occur outside the United States. I think 

that before you look at any reform, Section 482 needs to be absolutely clear that you cannot just designate an entrepreneur to just 

take the profits of an multinational corporation (MNC). We need to 
17 

have rules that say that the profits are going to be scored in the 

right jurisdiction economically first. And then what we do with foreign income after that will be a next question. 

But I do not think that the public would be excited or happy 

about having profits end up as foreign income that are truly U.S. 

origin profits and get a different tax rate than what the general 

American has to pay for the taxes that they really are having to 

pay based on their wages earned in the United States. I think Section 482 is the first place that we need to make very sure is protected. 

Senator MCCAIN. OK. Thank you. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Senator McCain. Senator Johnson. 

Senator JOHNSON. Thank you, Mr. Chairman. 

Professor Wells, my information is that Caterpillar sells roughly 

70 percent of its total sales overseas and claims roughly 70 percent 

of its profits overseas. Is that pretty accurate? 

Mr. WELLS. That sounds pretty accurate. 

Senator JOHNSON. And, of course, transfer pricing allocation of 

profits is a pretty complex process, correct? 

Mr. WELLS. Not when you get the facts in front of you. When you 

get the question of excessive profitability related to spare parts, 

you then have to go through a complicated question of factually determining, Senator Johnson—— 

Senator JOHNSON. OK, and I got that from your testimony. So let 

me just ask a little bit—you have done an awful lot of practicing 

in tax law with large multinational corporations, I imagine. Talk 

to me a little bit about how the IRS works with a large multinational company like Caterpillar. What is that relationship like? 

Mr. WELLS. That is likely to be a better question for your next 

panelists. I have no specific information on how the Caterpillar 

audit worked. 

Senator JOHNSON. My understanding is Caterpillar in this case 

probably has about 12 full-time IRS agents auditing them—does 

that sound reasonable to you? Is that your understanding of it? 

Mr. WELLS. It could be. That sounds reasonable and consistent 

with my experience. 

Senator JOHNSON. I would think if you have full-time IRS agents, 

that is my experience as well—looking at your tax returns, poring 

over it, talking to tax managers in that business about how they 

are working to comply with the laws, that is a pretty ongoing monitoring and ongoing thorough investigation of the tax situation. 

Mr. WELLS. But, generally, the process at an audit level is 

through an information disclosure request (IDR), where a question 

is asked and answered. Subpoena power is very little used in an 

IRS and it—like the subpoena process used by this Subcommittee. 

So that when you ask for all documents, I want to know what are 

the relevant documents other than just the specific statement you 

want me to know, that is oftentimes not given over to the IRS. 

And so when cases go to trial or get docketed for trial, there may 

well be a complete set of documents handed over. But the IRS at 

the audit level typically will just be asking questions and will not 

be given all of the responsive documents or the emails or the internal documents or the internal—— 
18 

Senator JOHNSON. My experience with the IRS is they are pretty 

detailed, and they ask a lot of pretty good questions, and they require you to provide an awful lot of documentation on how you fill 

out your tax returns and how you reported income. 

Let us assume that Congress can address this situation and 

write a law to address what Caterpillar is doing here. With 70 percent of Caterpillar’s sales going overseas, what could Caterpillar do 

functionally to make sure that even if we change the law, the economically earned profits are actually earned overseas so they can 

take advantage of certainly lower tax jurisdictions than what we 

find here in the United States right now? 

Mr. WELLS. Yes, that is an excellent question. 

Senator JOHNSON. They could move operations overseas, couldn’t 

they? They could start manufacturing overseas. 

Mr. WELLS. Yes. 

Senator JOHNSON. Which probably, if we do this, would be exactly what large corporations like Caterpillar would do. They would 

stop manufacturing in the United States, and they would start 

manufacturing overseas so that they are matching their economic 

activity with their actual sales overseas. 

Mr. WELLS. Well, if what you are asking—— 

Senator JOHNSON. How would that benefit the United States? 

Mr. WELLS. If what you are asking is we want taxpayers to report their taxes consistent with the economic truth, then that is a 

worthy goal. If Congress wanted to promote in subsidies and some 

other way, then that is fine. But what we should not have, Senator 

Johnson, is have average Americans report on their tax returns 

taxes that they economically believe are due here. But sophisticated taxpayers are able to, through complex transactions ignore 

that truth. 

Senator JOHNSON. Through laws that Congress passes to 

incentivize manufacturers to stay here in the United States, provide jobs here, and yet export overseas. So then when you have a 

company like Caterpillar actually doing that, manufacturing here, 

exporting product overseas, now we are going to do a thorough investigation, as opposed to have this adjudicated in a tax court with 

tax law, we are going to hold a trial here against a company that 

is manufacturing and exporting, which is what everybody here, all 

these politicians here in Washington want us to do. I mean, does 

that sound just a little crazy to you? 

Mr. WELLS. It does not sound crazy to me if your goal is to know 

what the current reality is so that your laws for the Nation actually describe the truth, and so—— 

Senator JOHNSON. So we can change that law, we can change 

that reality, and then companies like Caterpillar will start manufacturing overseas. Does that make any sense to you at all? 

Mr. WELLS. I believe that Caterpillar, if they are benefiting from 

the U.S. economy, should avoid paying their fair share of taxes related—— 

Senator JOHNSON. They are paying 29 percent effective rate, are 

they not—— 

Mr. WELLS [continuing]. To their profits here, and allocating 

profits to a subsidiary that did not economically perform those 
19 

functions or create the residual profits; that is not an appropriate 

answer. 

Senator JOHNSON. So it is true that Caterpillar pays an effective 

tax rate of 29 percent, correct? 

Mr. WELLS. That is correct. 

Senator JOHNSON. In multinationals, that is a pretty high effective tax rate, correct? 

Mr. WELLS. Depending on who your benchmarking against, 

but—— 

Senator JOHNSON. I mean we—— 

Mr. WELLS. But if all of the functions that create the residual 

profits are in the United States, then I think it is not a high tax 

rate under current law. If what you are asking me, Senator Johnson, is should we reduce the corporate tax rate from 35 to 25, I 

think that is a fine suggestion. But whatever the tax rate is, we 

should not just say I can skim the rate down—— 

Senator JOHNSON. Well, no. You talked about fair share, and I 

am just saying when you have a corporation, a multinational paying 29 percent effective rate, I think that is generally—relative to 

other multinationals, that is a pretty high effective tax rate. I 

would be literally talking to my tax manager and going, ‘‘What are 

you potentially doing wrong here?’’ 

Let me just quickly ask the differentiation between tax avoidance 

and tax evasion. 

Mr. AVI-YONAH. So tax evasion is illegal and tax avoidance is 

legal. Neither of us I think would say that what was done here was 

tax evasion. This was tax avoidance. The question is whether it 

complies with the law. 

Senator JOHNSON. But I think you both said that what Caterpillar was doing was probably illegal and that the IRS should challenge it. 

Mr. AVI-YONAH. Well, I think that the IRS should challenge it, 

and I think that a court would hold that it violated the economic 

substance doctrine, which would still make it tax avoidance and 

not tax evasion. 

Senator JOHNSON. So, again, that is my final point. If Caterpillar 

is doing something wrong, the proper venue would be a court of 

law, tax court, and have the IRS adjudicate this thing, not Congress. Thank you. 

Senator LEVIN. Thank you, Senator Johnson. 

Let us have a second round. Professor Wells, I think your main 

point here is that if Caterpillar has 57 or 54 manufacturing facilities here and its economic functions are principally carried out 

here, that it should not pretend that it is in Switzerland. Is that 

basically right? 

Mr. WELLS. That is exactly right, and that in order to have the 

confidence that our laws are working correctly, what we should say 

is that you cannot just nominate a Swiss tax entrepreneur. The residual profits, if it is billions of dollars, and there is only a couple 

of million dollars in SG&A costs in that entity, if it is far in excess 

of what function it is actually performing, that is problematic. 

Senator LEVIN. Now, you have made reference to what you 

called, I think, ‘‘CACO.’’ I think they describe ‘‘C–ACO,’’ so I am 
20 

1See Exhibit No. 13, which appears in the Appendix on page 374. 

going to keep calling it ‘‘C–ACO.’’ Maybe the Caterpillar folks can 

give us the correct way to pronounce that acronym. 

But at any rate, in 1999, Caterpillar, as we indicated, hired 

Pricewaterhouse to review its business operations to reduce its 

taxes. And they, at that time, claimed that it identified that 

CSARL has certain marketing intangibles that were so valuable 

that they justified dramatically increasing the portion of non-U.S. 

profits sent to Switzerland, and you have discussed that is not the 

case in your judgment. And I have indicated that in my judgment, 

and I think our report makes it clear, that your judgment is indeed 

the correct one. 

But here is my question. In 2001, Caterpillar decided to transfer 

the same type of marketing intangibles from CACO to CSARL, and 

then Pricewaterhouse, found that those same marketing intangibles had little value. Here is what they said in 2001 relative to the 

same type of a transfer. They described the intangibles being transferred now to CSARL from CACO as existing contracts with dealers; training programs; order tracking software, which was originally developed by Caterpillar U.S.; written sets of procedures and 

manuals, which were originally developed by Caterpillar U.S.; marketing brochures and a Web site, both of which were originally developed by Caterpillar U.S.; any other marketing-related intangibles such as customer and dealer lists; goodwill and going-concern. 

They found that particular marketing company, which was doing 

the same kind of marketing as CSARL, dealing with customers, 

dealing with the dealers, they found that those CSARL-like marketing intangibles were routine. Have you seen that exhibit, by the 

way? 

Mr. WELLS. Yes, I have seen the exhibit, and I have it in front 

of me. 

Senator LEVIN. All right. I think it is Exhibit 13.1A1 Is that correct? 

Mr. WELLS. Yes, it is Exhibit 13. 

Senator LEVIN. All right. Now, they also said that these intangibles are common to most distribution and marketing companies, 

they only had limited economic life, easily reproduced, had little or 

no value on a stand-alone basis. 

Now, are those positions reconcilable? 

Mr. WELLS. No, they are not reconcilable. And PwC, I think, in 

a subsequent email on page 92 of your Report, they, after the fact, 

tell you that it is not reconcilable, where they say, caveat, that in 

2001 we said in another transaction there is no significant marketing intangibles. So even after they were maintaining that marketing intangibles magically or newly discovered intangibles were 

found, they recognized that making that argument, it was inconsistent and continues to be inconsistent with the CACO transaction, Senator Levin. 

And what I want to make sure that you and Senator McCain understand, that as to the CACO transaction, Section 367(d) gives a 

continuing, ongoing obligation every year for the next 20 years 

after that transaction to true it up. 
21 

Senator LEVIN. Now, there is another issue which has been referred to briefly, but I want to go into it, and that has to do with 

what was done from 1992 to 1998, which was to assign a routine 

profit to the divisions that performed routine business services and 

to assign the larger residual profit, called the ‘‘entrepreneurial 

profit,’’ to the divisions that contributed directly to the creation of 

those residual profits. 

According to Caterpillar’s internal management books, Caterpillar treated CSARL’s predecessor, COSA, as a routine parts distributor and gave it only a routine share of non-U.S. parts profits 

in the range of 15 percent. That is before this transaction. But now 

after the transaction, after the CSARL transaction, Caterpillar 

maintained the same practice. On their internal management 

books to determine bonuses, CSARL continued to receive credit 

only for the type of routine profits allocated to a parts distributor, 

about 15 percent. 

So when it comes to paying income tax, Caterpillar reports to 

Uncle Sam that CSARL received about 85 percent of the profits for 

the parts business, but when it comes to bonuses, internal financial 

practices, that was not the case. 

Now, let me ask you both, does the fact that the accountable 

profits for bonus purposes did not change affect—it would affect, I 

guess, anybody—as to which Caterpillar business functions created 

value and profit in the non-U.S. parts business? 

Mr. AVI-YONAH. It seems to me that is the most important indicator because that is what shows internally what the company valued it at, and I think that the IRS should look at these kind of 

compensation-related factors as a very important way to measure 

what the true profit assignable to each of their related companies 

is. 

Senator LEVIN. Professor Wells. 

Mr. WELLS. Yes, we are getting to the same question, Senator 

Levin, and a court will use a number of data points to determine 

what are the real functions and what will it take for—what contribution of those functions to the overall profits. And so that would 

be another important data point. 

Senator LEVIN. OK. My time is up. 

Senator MCCAIN. [Sen. McCain nodded that he had no questions 

at this time.] 

Senator LEVIN. All right. One of the common reasons that is offered for shifting profits under a licensing agreement to an offshore 

subsidiary in a tax haven is a claim by the U.S. parent that it also 

shifted the business risks to its offshore affiliate. The U.S. parent 

asserts, could assert that because the risk has been transferred, 

the offshore affiliate is entitled to the lion’s share of the business 

profits. But here, using that line of reasoning, Caterpillar has 

claimed that CSARL now has the risk for the parts business because it ‘‘owns the inventory.’’ But Caterpillar also issues a consolidated financial statement that includes all of CSARL’s financial results, which seems to me to indicate that Caterpillar retains the 

risk for the business. If something happens to that inventory, Caterpillar bears the risk, not just CSARL. 

So let me ask you both for your analysis on this point. Was the 

business risk really transferred to CSARL? Professor Avi-Yonah. 
22 

Mr. AVI-YONAH. I do not think you can transfer this kind of business risk. I mean, the risk to the parts business is the risk to the 

overall Caterpillar business. They build machines that only take 

these parts. To the extent that there is a risk to the parts business, 

it is a risk to the machines business, which is still centered in Caterpillar U.S. So there is no specific risk here that can be transferred. It is not like a situation where you develop an intangible 

and the research may succeed or may not succeed and you are putting that risk offshore. In this case, there was no risk independent 

of the risk of the entire business, and that remains in the United 

States. 

Mr. WELLS. Senator Levin, they shifted the risk until they did 

not. You remember the virtual inventory in your opening statement? I think it said it was, well, we want to claim that one company is the sole owner except when the part is needed somewhere 

else, and then it is assigned over back and forth. Over 10 percent 

of the parts shift seamlessly back and forth. 

So the course and conduct of the parties would be necessary to 

look to. So, I think I would answer you in two parts. One, when 

you say I have the risk of the parts, but the parts are managed and 

controlled by Caterpillar Inc., and whenever Caterpillar Inc. wants 

to use the part for any other purpose, they can, and it seamlessly 

shifts back and forth, I think it takes away that defined, immediate 

ownership. Point No. 1. 

The second point I would argue is that even if there is a routine 

profit for being an entrepreneur, the value here has nothing to do 

with that entrepreneur function. It has to do with the business system. It has to do with what the independent dealers created, the 

logistics capability, the manufacturing, and the spare parts that 

are specially designed to work in equipment and are being sold and 

can get to that customer at a moment when there is an urgent 

need by the customer to pay for those parts. It is that business system that was created by Caterpillar Inc. that explains the residual 

profits. That is the intangible that needs to be valued. 

So if CSARL deserves some entrepreneur profit for speculating in 

spare parts, strip out the proprietary aspect of the spare parts; 

strip out the logistics residual profits related to the sophisticated 

logistical exercise and the algorithms and all the rest; strip out 

those to the appropriate functions, and allocate the profits to the 

functions that create those aspects of the residual value. And when 

you do, you will find that there is very little left for CSARL other 

than what Pricewaterhouse said in their CACO report that there 

is nothing other than a routine function that CACO performs compared to everything else that is building this mousetrap. 

Senator LEVIN. If the value of the CACO transfer was treated the 

same as CSARL’s intangibles were, as claimed by Pricewaterhouse, 

doesn’t that create a huge tax liability? In other words, if they were 

treated the same way, the CACO transfer, in terms of intangibles, 

don’t you have a situation then where you have an ongoing tax liability for CACO and that means for America? 

Mr. WELLS. Yes, that is true. And the point that Congress dealt 

with when they enacted Section 367(d) is that if marketing intangibles do leave the U.S. taxpayer, the U.S. taxpayer needs to be paid 

a royalty commensurate with the income created from that mar-
23 

keting intangible. So as the company says that we have found this 

newly discovered value, then the royalty would have to be upticked 

by a commensurate amount. 

Senator LEVIN. And I guess I would restate the question a little 

bit more clearly, by the way. If their analysis of the value of those 

intangibles carried the day when they discovered those intangibles 

in CSARL, well, now when CACO transfers those same intangibles, 

and if the same valuation method is used, then that would be a 

major transfer, would it not? 

Mr. WELLS. It would. 

Senator LEVIN. And then would that not have an on going tax 

impact to Caterpillar because CACO is in the United States? 

Mr. WELLS. That is true. And what is also true, Senator Levin, 

is we would also have to ask the question, these newly discovered 

intangibles, did they come from a U.S. company in another transaction? Did they matriculate over to CSARL? And if so, then there 

needs to be a super royalty for those as well. 

Senator LEVIN. All right. Would you agree with that? 

Mr. AVI-YONAH. Yes. 

Senator LEVIN. OK. Just my last question, and this has to do 

with the question that PwC, as Caterpillar’s tax consultant, proposed, designed, and implemented this tax strategy that led to the 

formation we have just described. Now, at the same time, 

Pricewaterhouse performs two functions; in other words, it is Caterpillar’s independent auditor, but it is also its tax consultant, advising on Swiss tax strategy. So one of the auditors responsible for 

advising on tax issues, on the audit, at the same time spent about 

a third of his time working with his tax consultant colleagues on 

the Swiss tax strategy. 

So during this several-year period, Caterpillar paid PwC’s tax 

consulting service over $80 million, including more than $55 million for the Caterpillar Swiss tax strategy, while paying PwC’s auditing service more than $200 million. 

Now, when an independent auditor approves the tax strategy 

proposed by its own colleagues, it creates an appearance of a conflict of interest, and I want to be clear that Sarbanes-Oxley permits 

an accounting firm to provide tax consulting service while acting as 

a company’s auditor if the company’s board of directors gives its approval. And I want to be clear that the Caterpillar Board of Directors provided that approval. So there is no suggestion here that 

there was any violation of Sarbanes-Oxley. That is not my question. 

The question is: Should that be allowed? Because I think that is 

something we can perhaps get some expert testimony from you on 

this. Should a board of directors approve this kind of arrangement? 

They did, and I am not suggesting a violation of Sarbanes-Oxley, 

because they did approve it. But I just want to spend 1 minute before we turn to our next panel on this subject, because this goes 

to whether or not we should change the law in this regard. Professor Avi-Yonah. 

Mr. AVI-YONAH. I think we should. I do not think this should be 

allowed. I think there is an inherent apparent conflict of interest 

when the independent auditor is also the person that is devising 

the tax strategy that the independent auditor is supposed to pass 
24 

on. And under our new FIN 48 and its successor rules, there has 

to be an opinion that a tax strategy is more likely than not to succeed in order not to take a reserve on the financials, and when it 

is the same person doing both, then obviously you would reach that 

level more easily than when it is an independent person evaluating 

it. So I think we should change the law to make this kind of situation impossible. 

Senator LEVIN. Professor Wells. 

Mr. WELLS. I do not disagree with that, but I do want to say 

that, again, under current law, I think that Pricewaterhouse and 

Caterpillar, from what I have seen, did everything they needed to 

do to appropriately inform their board to get the appropriate permission. 

Senator LEVIN. Right. 

Mr. WELLS. So I want to make clear that—— 

Senator LEVIN. I made it clear in my question. 

Mr. WELLS. You did, and I just want to make it clear in my response that I do not think under current law there was any ethical 

or legal violation of Sarbanes-Oxley. I think that looking at having 

more silos between the person that is proposing tax strategies and 

the independent auditor is a fine thing to think through and perhaps needs to be recommended. 

Senator LEVIN. All right. And, again, I think it was clear that we 

were not suggesting otherwise. 

We had a picture up there of a mining truck where the parts 

profits go to Switzerland but that is about the only relationship 

that Switzerland had, the profits. There was no manufacturer of 

anything other than, United States, and it was sold in Canada, this 

mining equipment. So the question is whether or not you can assign income that way. Is there not a judicial doctrine that prohibits 

an inequitable distribution of profits that results from a taxpayer 

separating the fruit, or the income, as I think Professor Wells 

talked about, from the tree on which it grew? Can you explain how 

an assignment of income doctrine might apply to the facts in this 

case study? 

Mr. AVI-YONAH. So if you think of the sale of a part as something 

that is inextricably related to the sale of the machine that the 

parts fit into—and this is the way that both the company and 

PricewaterhouseCoopers described it, both in the board discussion 

where it discusses it as an annuity that flows out of the sale of the 

machine, in the seed-grow-harvest model that Professor Wells alluded to, in the PwC transfer price interpretation, the parts are always linked to the sale of the machines. If that is the case—and 

I think the IRS can make a good argument and a court may well 

accept an argument that the profit from the sale of the parts is inextricably linked to the profit from the sale of machines, and if that 

is the case, if the sale of the machines continues to be—the machines continue to be made in the United States and exported from 

the United States, the profit from the sale of the parts should go 

with the machine, including in the case of these mining trucks. 

Senator LEVIN. Professor Wells, do you have anything more to 

add on that? 

Mr. WELLS. Other than I agree with the statement that Professor 

Avi-Yonah said. 
25 

1The prepared statement of Mr. Quinn appears in the Appendix on page 116. 

Senator LEVIN. Thank you. You are excused. We will move to our 

second panel. 

We will now call our second panel of witnesses for today’s hearing: Thomas F. Quinn, a tax partner at PricewaterhouseCoopers in 

Chicago, Illinois; Steven Williams, a managing director at PricewaterhouseCoopers in McLean, Virginia; and James Bowers, a tax 

partner at PricewaterhouseCoopers in Dallas, Texas. We appreciate 

all of you being with us today. We look forward to your testimony, 

and I think as you have heard, pursuant to Rule 6, all witnesses 

who testify before the Subcommittee are required to be sworn. I 

would ask that you now just stand and raise your right hands. 

Do you swear that the testimony you are about to give before the 

Subcommittee will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. QUINN. I do. 

Mr. BOWERS. I do. 

Mr. WILLIAMS. I do. 

Senator LEVIN. Thank you. 

We will be using the timing system today, which means that 

about a minute before the red lights comes on, you will see a light 

change from green to yellow. That will give you an opportunity to 

conclude your remarks. Your written testimony, of course, will be 

printed in the record in its entirety, and we would ask that your 

oral testimony be÷ minutes less. 

And understand, Mr. Quinn, that you are going to be presenting 

the PricewaterhouseCoopers statement, so please proceed, with our 

thanks for being here today. 

TESTIMONY OF THOMAS F. QUINN,1 TAX PARTNER, PRICEWATERHOUSECOOPERS LLP, CHICAGO, ILLINOIS; ACCOMPANIED BY JAMES G. BOWERS, TAX PARTNER, 

PRICEWATERHOUSECOOPERS LLP, DALLAS, TEXAS; AND 

STEVEN R. WILLIAMS, MANAGING DIRECTOR, 

PRICEWATERHOUSECOOPERS, LLP, MCLEAN, VIRGINIA 

Mr. QUINN. Thank you. Good morning, Chairman Levin, Ranking 

Member McCain, and Members of the Subcommittee. I am going to 

make some brief oral remarks, but I will ask that my written statement be placed in the record. 

Senator LEVIN. And it will. 

Mr. QUINN. My name is Thomas Quinn. I am a Certified Public 

Accountant (CPA) and a partner at PricewaterhouseCoopers. I 

began my career with PwC in 1984 and have been advising companies with respect to their Federal income tax obligations for over 

30 years. I am joined by James Bowers, who also is a CPA and a 

partner in PwC’s tax practice. Having joined PwC in 1976, Mr. 

Bowers has been advising clients with respect to their tax obligations for over 37 years. I am also joined by Steven Williams, a 

managing director with PwC. Mr. Williams is an economist and 

holds a master’s degree with a concentration in international economics. He has been with PwC since 1982 and has specialized in 

transfer pricing for 28 years. 
26 

I understand that today’s hearing relates to the tax implications 

of a business reorganization that Caterpillar Inc. began almost 15 

years ago. I was one of the PwC partners who provided tax advice 

to Caterpillar and its outside law firm, McDermott Will & Emery, 

in connection with that matter. Mr. Bowers is a tax partner who 

assisted PwC’s audit team with its audit of the tax aspects of Caterpillar’s financial statements. And Mr. Williams provided Caterpillar with assistance regarding transfer pricing rules. 

At the outset, let me say on behalf of PwC that we recognize both 

the longstanding interest of this Subcommittee in corporate tax 

issues and the importance of those issues. In that spirit, PwC has 

cooperated fully with the Subcommittee throughout this inquiry 

and has willingly accepted your invitation to testify here this morning. 

Before addressing our engagement with Caterpillar, allow me to 

provide an overview of PwC’s tax practice. PwC is the leading provider of tax services worldwide in terms of both the size and scope 

of our tax practice and, we believe, in terms of our reputation. We 

strive to combine our specialized tax knowledge in national and 

local jurisdictions with a deep understanding of our clients’ business and economic environments in order to assist them with their 

tax compliance obligations across the globe. 

In working with multinational businesses, we routinely evaluate 

issues of international taxation, which can be particularly complex. 

Caterpillar is one of the world’s largest manufacturers of construction and mining equipment, diesel and natural gas engines, 

and industrial gas turbines. Caterpillar and its subsidiaries sell 

more than 300 different types of products to customers in 180 countries from facilities on six continents. 

Caterpillar and its subsidiaries sell both machines as well as replacement parts for those machines. Machine sales lead to parts 

sales, and parts sales support and encourage machine sales. There 

is no separate parts business. It is an integrated activity organized 

around Caterpillar’s product groups, and it is designed to maximize 

both value to its customers and Caterpillar’s profitability. 

Demand for replacement parts is derived from the independent 

dealer network and the field population of machines. That demand 

is then fulfilled through its logistics organization. 

Caterpillar’s business has been expanding throughout the world 

to meet increasing global demand. In the late 1990s, sales outside 

the United States accounted for more than 50 percent of consolidated sales. Today more than 65 percent of sales are outside of the 

United States. To meet that demand, Caterpillar has established 

subsidiaries outside the United States to market its products and 

provide product support abroad. 

Caterpillar also has expanded subsidiary manufacturing facilities 

worldwide to meet global demand for its products. Today the Caterpillar Group manufactures products in more than 20 countries. In 

short, Caterpillar has transformed itself from a U.S.-based manufacturer of machines and parts for sale to U.S. dealers into a global 

manufacturer of products and parts for dealers around the world. 

In 1998, as the globalization of Caterpillar’s business continued 

to evolve, Caterpillar engaged McDermott and PwC to advise the 

company with respect to its international tax position. To develop 
27 

our advice, PwC tax professionals first engaged in an extensive 

study of Caterpillar’s organization and its global operating footprint, spending considerable time at Caterpillar’s operating facilities all over the world. We observed that this business organization 

as it existed in 1998 failed to capture the evolution of the true economics of the business and subjected to current U.S. income taxation income earned from the sale of products to foreign customers 

largely as a result of the Subpart F rules. 

Working with Caterpillar’s operations group, its tax department, 

and McDermott, we analyzed alternatives that would better align 

the true economics of the business with Caterpillar’s operations 

and positively affect its global effective income tax rate. 

After reviewing the information provided by McDermott and 

PwC, and in light of the evolution of its global operating footprint, 

Caterpillar decided to undertake a significant reorganization of its 

foreign operations. 

Considering the growth of its foreign operations, Caterpillar determined that it made business sense to centralize within one company the manufacture and distribution of products outside of the 

United States. Through Caterpillar Overseas, Caterpillar already 

had a substantial business presence in Switzerland, with hundreds 

of personnel based in a multi-story facility in Geneva, including a 

number of key corporate executives. 

Beginning in 1999, Caterpillar Overseas transferred its assets 

and its operations to Caterpillar SARL, a company based in Switzerland. Over the next few years, Caterpillar SARL took over operations across the globe to handle sales of machines and parts outside of the United States. Caterpillar Inc. continued to handle sales 

of parts and machines in the United States. 

From its outset, Caterpillar SARL carried the business and market risks and received the profits or losses from being the owner 

and seller of the machines and purchased finished replacement 

parts (PFRPs), in the international markets. Caterpillar SARL purchased finished parts directly from third-party suppliers and sold 

finished parts directly to third-party dealers. Because the sales no 

longer involved a related-party transaction between Caterpillar and 

its foreign affiliates, or between foreign affiliates themselves, they 

were subject to the fundamental U.S. tax rule that foreign business 

income is not taxed until the income is remitted to Caterpillar in 

the United States. The reorganization culminated in changes to 

roles and responsibilities, had significant operating, legal, and economic effects, and resulted in significant tax savings. 

After the global business reorganization, Caterpillar Inc.’s role 

included acting as a service provider for certain purchases made by 

Caterpillar SARL in exchange for a service fee. Caterpillar also licensed its rights to Caterpillar SARL to make machines, to purchase and distribute replacement parts, and to use Caterpillar 

technology and trademarks on those products for sale outside the 

United States in exchange for a license fee. 

Because Caterpillar and Caterpillar SARL were related companies, these payments were subject to IRS transfer pricing rules. 

PwC tested these prices annually, not only under the Best Method, 

as required by U.S. law, but also under each of the other relevant 

transfer pricing methods prescribed by the Treasury regulations. 
28 

Each analysis supported the arm’s-length nature of Caterpillar’s related-party pricing. 

In addition to providing these tax services, PwC has also been 

auditing Caterpillar’s financial statements for many years. We 

have been asked to address the applicable auditor independence 

rules. 

The delivery of tax consulting services to audit clients subject to 

applicable safeguards has long been permitted by the rules of the 

Securities and Exchange Commission (SEC), the Public Company 

Accounting Oversight Board (PCAOB), and the American Institute 

of Certfified Public Accountants (AICPA). PwC’s tax and audit 

services to Caterpillar complied with these independence standards. PwC assessed its independence on a quarterly and yearly 

basis and disclosed to Caterpillar’s Audit Committee any relationship that bore on our independence. PwC’s provision of tax services 

to Caterpillar as our audit client was entirely appropriate. 

Chairman Levin and Members of the Subcommittee, thank you 

again for this opportunity to testify about PwC’s tax services with 

respect to Caterpillar. We firmly believed then, and firmly believe 

today, that the tax services we provided and the positions that Caterpillar took in that regard complied with the law and were entirely appropriate. Likewise, we believe that our tax and audit engagements satisfied both the letter and the spirit of the independence rules that govern our practice. 

We would be happy to answer any questions you have. 

Senator LEVIN. Thank you very much, Mr. Quinn. We understand you are giving the statement for all three. Is that correct? 

Mr. QUINN. That is correct. 

Senator LEVIN. All right. Thank you so much, and thank you 

again for being here and your cooperation with our Subcommittee. 

Mr. Quinn, I gather you were the lead partner for PwC tax consulting. Did Mr. Williams report to you at that time? 

Mr. QUINN. That is correct. 

Senator LEVIN. And Mr. Bowers was in the auditing shop. Is that 

correct? 

Mr. QUINN. Mr. Bowers is a tax partner who assisted the audit 

practice with their audit of the financial statements of Caterpillar. 

Senator LEVIN. OK. And the key contacts in Caterpillar for you 

were the people in the company’s Tax Department. Is that correct? 

Mr. QUINN. In part, Senator, that is true. We also had significant 

contact with individuals in the Operations Department of Caterpillar. The tax strategy that was developed was dependent very 

much on the understanding of the operations of the business, and 

contact with them was critical. 

Senator LEVIN. OK. Now, prior to the tax consulting engagement, 

Caterpillar had been reporting most of the income from the sale of 

its replacement parts outside of the United States on its U.S. tax 

return. Is that correct? 

Mr. QUINN. That is correct. 

Senator LEVIN. And that is when it sold parts to Caterpillar’s 

non-U.S. dealers. Is that correct? 

Mr. QUINN. Yes. 
29 

1See Exhibit No. 7, which appears in the Appendix on page 343. 

Senator LEVIN. And so 85 percent or more of its non-U.S. parts 

sales income was included on Caterpillar’s U.S. tax return. Is that 

correct? 

Mr. QUINN. That is correct. 

Senator LEVIN. After Caterpillar executed the CSARL transaction, starting in 1999, is it correct that Caterpillar basically reversed those percentages and allocated 15 percent or less of the 

non-U.S. parts income to itself in the United States and 85 percent 

or more to CSARL in Switzerland, which had an effective tax rate 

of somewhere between 4 and 6 percent? Is that correct? 

Mr. QUINN. That is correct. In terms of the arrangement that 

Caterpillar had with respect to its relationship with Caterpillar 

SARL, it was, in fact, a business arrangement that included a license for more than just the parts activities themselves, but it included the entire business activities undertaken by Caterpillar 

SARL, which included their manufacturing machines in France and 

Belgium as well. 

Senator LEVIN. All right. But the basic, in terms of the profits 

on the parts themselves, there was a shift between 85/15 to basically 15 and 85. Is that correct? Just looking at the parts. 

Mr. QUINN. Yes, that is correct. 

Senator LEVIN. OK. Now, if you would take a look at Exhibit 7.1

[Pause.] 

Mr. QUINN. OK. Yes, I have that, Senator. 

Senator LEVIN. All right. Well, before we get to the fact that you 

were hired in 1998 by Caterpillar through its tax advisor, 

McDermott Will & Emery, to review Caterpillar’s operations and to 

recommend ways to lower Caterpillar’s overall tax payments—is 

that correct, by the way? 

Mr. QUINN. Yes, that is correct. 

Senator LEVIN. OK. Is it not true that PwC had an ongoing program called Global Tax Optimization Program (GTOP), to reduce 

corporate taxes? Is that true? 

Mr. QUINN. Yes, correct. 

Senator LEVIN. And PwC approached a number of U.S. corporations to talk to them about a GTOP program. Is that correct? 

Mr. QUINN. That is correct. 

Senator LEVIN. So that your tax strategy—the Caterpillar tax 

strategy was a result of a PwC GTOP effort. Is that correct? 

Mr. QUINN. If I could—— 

Senator LEVIN. It followed that presentation. 

Mr. QUINN. It followed that presentation, yes. 

Senator LEVIN. All right. Now, the tax consultants, PwC, conducted a review of Caterpillar’s operations and in 1998 gave Caterpillar a list of 49 possible ways to lower its taxes, one of which was 

the Swiss tax strategy that involved assigning non-U.S. parts profits to a Swiss affiliate, and that is Exhibit 7. Is that correct? 

Mr. QUINN. This Exhibit 7 is from that report and is part of that 

original investigation, yes. 

Senator LEVIN. OK. And was this the strategy that was adopted 

finally? 

Mr. QUINN. In very simplified form, yes. 
30 

Senator LEVIN. All right. Now, if you will take a look at the top 

of that exhibit, this is labeled 4618 at the bottom—the purpose was 

to get CAT Inc. out of chain. That is the top headline: ‘‘Recharacterize Marketing Company Income to Achieve U.S. Tax Deferral.’’ 

Do you read that line? 

Mr. QUINN. Yes. 

Senator LEVIN. That was its purpose. Right? 

Mr. QUINN. Yes, that is correct. 

Senator LEVIN. OK. And the description of the idea was to, ‘‘Remove Caterpillar Inc. from the chain of title passage for purchased 

finished parts (from U.S. or foreign sources) sold to foreign marketers. The foreign marketers would then buy from and sell to unrelated parties.’’ 

So this was the description of the idea, your own description. 

Mr. QUINN. Yes, correct. This is a PwC document. 

Senator LEVIN. That is correct, to ‘‘Remove . . . from the chain 

of title . . . for purchased . . . parts.’’ 

The benefits: ‘‘Eliminates subpart F character of foreign marketers profits on purchased finished parts sales.’’ And, ‘‘Relatively simple re-invoicing requirements.’’ Do you read those words there? 

Mr. QUINN. I do. 

Senator LEVIN. Did I read those correctly. 

Mr. QUINN. I would also reflect on those, Senator, that in light 

of—this was done at the beginning of the project in terms of providing ideas in response to Caterpillar’s Tax Department with respect to our investigation. 

Senator LEVIN. Right. 

Mr. QUINN. I could tell you, reading these words, ‘‘Relatively simple re-invoicing requirements,’’ that following the implementation 

of this, those relatively simple re-invoicing requirements took probably 3 to 4 years of very difficult work by Caterpillar’s systems 

team in order to implement. 

Senator LEVIN. All right. Well, we will also get to the implementation in a minute. 

From 1999 to 2004, PwC was paid about, what, $55 million to 

implement this tax strategy? Is that correct? 

Mr. QUINN. That is correct. 

Senator LEVIN. Now, is it fair to say that you and Mr. Williams 

helped design and implement this strategy from the very beginning 

in 1999 and that Mr. Bowers worked at the same time that he provided tax advice to the audit team, he was working with you? Is 

that correct? 

Mr. BOWERS. That is correct, Senator. 

Senator LEVIN. And, Mr. Quinn, were you the lead partner for 

PwC tax consulting services on this matter? 

Mr. QUINN. Yes, I was. 

Senator LEVIN. And did Mr. Williams report to you? 

Mr. QUINN. Yes. 

Senator LEVIN. And you mentioned some of the key contacts at 

Caterpillar. Among them were Robin Beran—I am asking you, 

were they Robin Beran, the tax director; Rodney Perkins, senior 

international tax manager? 

Mr. QUINN. Yes, we had regular interaction. 
31 

Senator LEVIN. All right. My first round time is over. Senator 

Johnson. 

Senator JOHNSON. Thank you, Mr. Chairman. 

Mr. Quinn, in the earlier panel I was asking the professors the 

basic relationship—how does the IRS interact with a large multinational corporation. I would like to expand that not to a large 

multinational corporation like Caterpillar but also to a large accounting firm like yourselves. Can you describe how the IRS interacts during the whole tax year? 

Mr. QUINN. So the IRS’ interaction at Caterpillar in particular 

during the entire year is a continuous audit exercise, as you described earlier. They do maintain a continuous presence onsite. 

They actively engage with Caterpillar personnel directly. We do not 

have direct interaction with the IRS, only through Caterpillar, and 

when invited in by Caterpillar to assist them in those matters. 

Senator JOHNSON. Was there any consulting done, as you were 

working with Caterpillar, to obviously comply with the law but potentially lower their tax burden, was there any contact with the 

IRS by either yourself or Caterpillar during that point in time? 

Mr. QUINN. No, I had no contact with the IRS. 

Senator JOHNSON. Do you know whether Caterpillar did? 

Mr. QUINN. I do not know that. 

Senator JOHNSON. You are obviously familiar with Enron and a 

firm that used to be called Arthur Andersen? 

Mr. QUINN. I am. 

Senator JOHNSON. Would you say most CPAs or most accounting 

firms are pretty familiar with that situation? 

Mr. QUINN. Yes. 

Senator JOHNSON. Would you say what happened to Arthur Andersen, which no longer exists because of the Enron scandal, is 

that something that in general disciplines the accounting profession? 

Mr. QUINN. Absolutely. I think in reflection upon those events, 

it has been—in terms of my involvement in the profession, that 

was a considerable change following that activity. 

Senator JOHNSON. Can you talk a little bit about tax avoidance 

versus tax evasion? 

Mr. QUINN. Sure. I think the earlier panel described that accurately, correctly: that tax evasion is illegal, tax avoidance is appropriate in terms of managing your overall costs associated with your 

business, as long as it is done within the rules and regulations as 

provided by the tax authorities. 

Senator JOHNSON. So in light of obviously what happened to Arthur Andersen with the Enron scandal, you are preparing these 

types of documents, now they are being shown in a Senate hearing. 

Would these concern you if all of a sudden the IRS were to take 

a look at this and your interaction? Do you think this is basically 

what accountants do in working with their clients to comply with 

the tax code? 

Mr. QUINN. Yes, I do. Earlier, Senator, I think you had made a 

statement to the last panel about if you saw a tax rate of 29 percent, what would be your response to your manager of your Federal 

tax function? At the time that we started this project, Caterpillar’s 

tax rate was 35, 36 percent, effective tax rate, and that is exactly 
32 

what management was asking in the Caterpillar Tax Department 

and its service providers. 

Senator JOHNSON. That was actually the next question I was 

going to ask. How does that relate to other large multinational 

manufacturers? Well, first of all, 35, 36 percent, where is that in 

the range of effective tax rates for a multinational? 

Mr. QUINN. I would think that based upon my study in this area 

that 35, 36 would be not unusual for a manufacturing company 

which had its sales based all within the United States. When we 

take a look at those domestic companies that do not have extensive 

international operations, a tax rate between 35 and 39 percent is 

very much the rule. 

Senator JOHNSON. Again, that is when all your operations and all 

your sales are in the United States.? 

Mr. QUINN. Yes, correct. 

Senator JOHNSON. And then what happens, of course, if you are 

a multinational and you have 65 to 70 percent of your sales going 

overseas? 

Mr. QUINN. That would depend on how you would organize those 

transactions and those affairs. As was addressed, again, in the earlier panel many times those operations are subject not only to tax 

in the foreign jurisdiction, but because of the way they have been 

organized, they may be subject to U.S. tax at the same time. This 

document that we just looked at, this exhibit, is a good example of 

that, where Caterpillar did, in fact, have an extensive amount of 

international operations, but the way that the business had been 

structured, the way that the Operations Department had put in 

place the relationships it had in moving product to the international markets created a cost which could be avoided. 

Senator JOHNSON. And there is nothing wrong with any taxpayer 

trying to comply with the tax code and trying to lower their tax 

burden, correct? 

Mr. QUINN. That is correct. 

Senator JOHNSON. Can you talk a little bit about the types of tax 

laws that have been enacted by Congress to incentivize manufacturers to export product overseas? Can you just name some of the 

tax treatments that this body has actually enacted to induce that 

exact type of behavior that Caterpillar was engaged in? 

Mr. QUINN. Yes, certainly. That history goes back many years. 

Back when I first started practicing in the 1980s, the Domestic 

International Sales Corporation was promoted as an export incentive. That was succeeded by the Foreign Sales Corporation, which 

was a tremendous benefit for U.S. exporters, U.S. manufacturers, 

including Caterpillar. 

Senator JOHNSON. Exactly what did that do? 

Mr. QUINN. It incentivized companies to do manufacturing in the 

United States. With respect to the income that was earned on those 

transactions, it reduced their effective tax rate as much as 5 percent. So rather than paying 35 percent on that income, it would be 

closer to 30 percent. 

Senator JOHNSON. I had an earlier discussion with the previous 

panel that if we tried to change the tax law to try and capture 

more of the income on foreign sales, what would a large multinational corporation at least consider doing? 
33 

Mr. QUINN. I think exactly what you suggested: They would 

move operations offshore. They would move those functions and 

those jobs to foreign locations outside of the United States. The differential in tax rate is so great that you could not ignore that as 

a steward of the corporate assets. 

Senator JOHNSON. Are you aware of other businesses, maybe 

other of your clients, have done exactly that? 

Mr. QUINN. They have, in fact, yes. 

Senator JOHNSON. Do you care to name any examples? Or probably not the appropriate place to do it. 

Mr. QUINN. I would prefer not to. 

Senator JOHNSON. OK. Thank you very much, Mr. Quinn. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Senator Johnson. 

Senator Paul. 

Senator PAUL. Thank you. I would like to take my time to apologize to Caterpillar for this proceeding. I think rather than having 

an inquisition, we should probably bring Caterpillar here and give 

them an award. They have been in business for over 100 years. It 

is not easy to stay in business. It is not easy to start a business, 

but to keep a business employing 52,000 people for over 100 years 

is a remarkable achievement, and we should be complimenting 

Caterpillar and perhaps giving them an award. 

Caterpillar not only employs 52,000 people but pays $600 million 

in taxes every year. So, really, we have the wrong people on trial 

here. The tax code needs to be on trial here. It would be malpractice for PricewaterhouseCoopers to give advice to Caterpillar 

saying, well, we are not going to tell you how to minimize your 

taxes, but here is how to maximize your taxes. They would actually—they probably could be sued for giving bad advice on how not 

to minimize tax costs. 

So I think we are making a great mistake here, and we have to 

understand that behavior, legal behavior, to minimize your taxes is 

really your responsibility if you have stockholders. You have to do 

that. It is a requirement that you try to minimize your costs. So 

rather than chastising Caterpillar, we should be complimenting 

them. 

It is a big error not to know where the problem is here. The problem is in the tax code. Money is said to go where it is welcome. 

Some money is going overseas. For decades we have been lamenting the loss of American jobs overseas. Why? Because it is the tax 

code. We have the highest corporate tax rate in the world. Canada 

is now down to 15 percent. So you can see how what we are doing 

is pushing people and pushing people and pushing people, and then 

we bring them forward for ridicule and to swear an oath and to pry 

into every nook and cranny of their legal tax behavior. It is insulting to American business, and it should not occur. We should be 

doing the opposite. We should be giving an award to an American 

business that creates 52,000 jobs. 

There are some policy matters that we could address. Why don’t 

we lower the corporate income tax? We are at 35, give or take, 

throw in the State, 39-percent rate. Why don’t we lower the corporate income tax if we want businesses to stay here? If we want 

to encourage profit earned overseas to come home, why don’t we 
34 

have a low repatriation tax, 5-percent repatriation tax? When we 

did it in 2005, $20, $30 billion in revenue and hundreds of billions 

of dollars in income came back to the country to create jobs. Why 

don’t we do that instead of vilifying people for legal behavior? 

I guess my question ultimately would be: Do you have a legal responsibility to offer to companies that ask you or advice, are you 

legally responsible for offering advice that would minimize their 

tax costs? If you were to not tell a company about a legal option 

to reduce their taxes, could a company potentially sue you for not 

giving you complete advice? 

Mr. QUINN. I think, Senator, that is our professional proposition 

to our clients and their expectation is that when they come to us, 

we have an expertise in understanding the tax law, the rules, the 

regulations, and we can help them understand that so that they 

can take a look at their bona fide business transactions and understand what the tax cost is that is associated with those. 

So, yes, that is a client’s expectation of what we are bringing 

them, and even if it were not a legal issue, it would be from the 

standpoint of professionalism, I think, would be less than what was 

expected. 

Senator PAUL. Thank you. 

Senator LEVIN. Are you done, Senator Paul? 

Senator PAUL. Yes. 

Senator LEVIN. OK. Senator Portman. 

Senator PORTMAN. Thank you, Mr. Chairman, and I appreciate 

you all being here. I know we have another panel coming up, and 

I would like to have the opportunity to talk with them as well. But 

to me, the problem here is not Caterpillar. It is a broken tax code. 

And I think this is not just an important matter; I think it is an 

urgent matter. 

In response to the question Mr. Johnson asked earlier, you indicated that some of your other clients are actually moving some of 

their operations overseas. It is happening as we sit here today. And 

it is a fiduciary responsibility if you are a publicly traded company, 

as was said earlier, to look where you can maximize your profits 

for the stakeholders. I am very concerned about it. In my own 

State of Ohio, we have companies that have left our State to be 

domiciled somewhere else because of the tax laws. One company 

merged with a company one-quarter its size in Ireland in order to 

take advantage of the lower rates in Ireland. Their headquarters 

is now not in Cleveland, Ohio; we lost one of our Fortune 500 companies to Ireland. 

I am a beer drinker. If you want to try an American beer, good 

luck. Luckily, I like Sam Adams and Yuengling. They are the biggest now. They have 1-percent market share each. Every other beer 

company is now foreign owned. And when I ask people why, including the folks who purchased these companies, they tell me it is the 

tax code. And this is a big deal. It is not just the loss of jobs, although that happens. It is also the loss of corporate headquarters, 

which has an intangible impact on all of our communities, including a lot of the good work that our companies do here for nonprofits 

and to help make a better way of life for everybody in those communities. 
35 

So this is not just an important matter. It is an urgent matter. 

For that, I thank the Chairman for holding this hearing because 

I hope it will shine a light on the fact that we have a broken code, 

not just the highest rate among all the developed countries now, 

which is not a No. 1 you want to have. Now that Japan has lowered its rate, we are No. 1. The fact is that we have an international tax code system that is so non-competitive and so complicated that it is driving jobs, investment, and capital overseas. 

Of our OECD partners, the other developed countries, almost all 

of them have gone, as you know, to territorial systems. If you could 

talk about that for a second, I would appreciate it. Mr. Quinn, you 

may be the right person, but you all decide. What impact is this 

having on your clients as they look at what their options are going 

forward? Because of the U.S. tax law being so antiquated, inefficient, and non-competitive, what impact does it have on them? And 

specifically if you could address not just the rate being so high but 

the fact that we have a worldwide tax system that makes it difficult for them to be able to do business overseas and easier for 

them to move their businesses overseas? 

Mr. QUINN. Yes, it is the issue that is at the forefront of many 

decisions and many conversations that are taking place within corporate tax departments throughout the population of U.S.-based 

multinational companies, that this debate around how the United 

States has decided to tax foreign earnings is one that is of critical 

importance. As U.S. companies continue to grow and expand offshore, that cost becomes an increasingly larger portion of their 

overall cost structure for their business and impacts their ability 

to compete with foreign companies. 

As you said, we are one of the few, if not the last remaining 

country which still taxes worldwide earnings, that does not employ 

a territorial system. And that is a considerable competitive disadvantage when companies are trying to compete against companies that do not have the same tax burden, even in the United 

States, that a U.S.-based MNC might have. 

Senator, a lot of the debate that I hear, the discussions that take 

place among my clients, a lot of it has to do with rate as well. It 

is not just the basis of taxation but the rate that applies. And I 

think there was some questioning earlier about, well, what is the 

right rate that would incent this type of activity or cause this activity to go away. I think if the U.S. corporations could be subject to 

a rate of tax of 20 percent or less, there would probably be very 

little incentive to continue moving business activities outside of the 

United States. 

If you think about the opportunity now and express it in percentage terms, the opportunity to move from a 35-percent tax rate to 

a 10-percent tax rate is a 25-percentage-point improvement. That 

is material. When you start talking about a 20-percent tax rate 

moving to a 10-percent tax rate, that is only 10 percentage points, 

and it becomes, when you look at the costs and the relative benefits, much more of a push. So I think that companies might be looking at both sides of that question, both the basis of taxation in 

terms of the need for a territorial system, as well as the tax rate 

that would apply. Their feeling is that you might actually, at a 

lower tax rate, bring more income into the U.S. tax net. 
36 

Senator PORTMAN. I think that is very likely. In fact, you would see a lot of repatriation, wouldn’t you, of the nearly $2 trillion that 

is now tied up overseas? People are not going to bring it back at 

the high rate. So the two are combined. 

Let me just make the obvious point, which is that we have done 

this before. 

Mr. QUINN. We have. 

Senator PORTMAN. In the 1980s, we looked at our tax code and 

said let’s end up with a rate that is below the average to be competitive. And this was in the 1986 Tax Reform Act, and we took 

the rate, as you recall, down to 34 percent, thinking that that was 

getting us below the average. To get to below the average now, we 

would have to be, when you include our States corporate rates, as 

you indicate, somewhere in the low 20s probably; 25 is the rate 

that some of us talk about. But you need to get at least to that, 

which is probably right in the middle. 

Since 1980s, isn’t it true that every other one of our competitors 

around the world—all the other countries have reformed their 

codes. Every one of them has, except us. We are the ones left on 

the sidelines, and those reforms have included, as you indicate, 

going to a system of taxation that is more territorial, but also lowering the rates. And that combination of our competitives allowing 

companies to pay their income taxes where their earnings occur 

and a lower rate has made us non-competitive. 

So I think the United States, frankly, has waited way too long 

to make these reforms while every other country in the world that 

we compete with has moved ahead and gotten a more competitive 

tax system. And that is why it is urgent that we act now. 

By the way, on the international side, it has been since the 

1960s. So since the 1960s, we have not changed; whereas, all of our 

own OECD countries, all our developed competitives have adjusted. 

I hope that you can be in a position in the next few years to be 

able to tell your clients, ‘‘You know what? There is a new tax code 

that actually encourages you to stay in America and create your 

jobs here, and that is why we at PwC think you ought to stay here 

in America and take advantage of a better environment for success.’’ 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Portman. 

First of all, without doubt we have to reform our tax code. It is 

long overdue. Congress has been dawdling on this subject for a long 

time. You can argue what the corporate tax rate is currently. A 

Government Accountability Office (GAO) study says the effective 

corporate tax rate in the United States is 13 percent. But in any 

event, the use of all these tax loopholes, many of which give incentives to shift your profits to tax havens—not your operations, your 

profits to tax havens—is totally unacceptable. We ought to close 

those tax loopholes and not wait for a total reform of the tax code 

because that could be an endless wait. We cannot tolerate the loss 

of our taxable revenue the way it is currently lost to Uncle Sam, 

which is the use of these tax loopholes, which are unjustified and 

which are exploited and pushed over the limit at times. And we 

have had hearing after hearing which shows that. And I do not 

think we ought to accept it. 
37 

1See Exhibit No. 33, which appears in the Appendix on page 490. 

Of course, this company is a terrific company. That is not the 

question. And, of course, it pays taxes. That is not the question. 

The question is whether or not it properly avoided paying $300 million a year in taxes, which is what its tax saving is now as a result 

of this strategy. That is the question. We are very happy it pays 

$600 million a year in taxes. Should it pay $900 million? That is 

the question. That is a heck of a lot of money. But that is the issue, 

and we are not going to be distracted by the fact that this is one 

terrific American company. That is not the issue. The issue is: Was 

there a tax strategy here which was put in place which is justified 

under the current tax code? Change the code, I am all for it. But 

the question—we are going to come back to it now and not be distracted by the argument about whether or not this is a great company—it is—or whether or not it pays a lot of taxes—it does—or 

whether or not the effective tax rate in this country is 13 percent 

as distinguished from the statutory tax rate of over 30 percent, or 

whether we ought to change the tax code. 

So now let me get back to the subject of the hearing. Obviously 

you can structure a business to minimize taxes, but would you 

agree with me, Mr. Quinn, that when you send profits to a related 

party in a tax haven, that transaction must meet an arm’s-length 

standard? Do you agree with that? 

Mr. QUINN. Absolutely, Senator. 

Senator LEVIN. No matter how much you pay in taxes. 

Mr. QUINN. Yes. When you talk about the arm’s-length standard, 

what that requires is a measurement and an understanding of 

what functions exist offshore, what risks have been accepted offshore, what property exists offshore. 

Senator LEV

[Pause.]in. All right. But it must meet that standard. 

Mr. QUINN. And the exercise is then to align profit with those 

functions—— 

Senator LEVIN. Exactly right. Regardless of how many taxes you 

currently pay or do not pay, that must be met. Is that correct? 

Mr. QUINN. Absolutely. 

Senator LEVIN. And must you meet a business purpose standard? 

Mr. QUINN. I think in order to support the transfer pricing result, you would want to make sure that when we take a look at 

the functions and the risks and the property that has been evaluated, that it does, in fact, make sense within the business and how 

it has been operated. 

Senator LEVIN. All right. Now, take a look at Exhibit 33,1 if you 

would. We are trying to figure out what the annual parts benefits 

was from this structure, this strategy that was put in place. Do you 

have Exhibit 33? 

Mr. QUINN. I do. That is a district court document. 

Senator LEVIN. No, it is a Caterpillar—sorry did I say 43? 

Mr. QUINN. Oh, sorry. 

[Pause.] 

Yes, a PwC document. 

Senator LEVIN. All right. And it is entitled, if you look at No. 3, 

it has a mark of 2449 at the bottom, January 2010, Slide 19. It is 
38 

1See Exhibit No. 6, which appears in the Appendix on page 337. 

No. 3, ‘‘WW [worldwide] Parts Management in Geneva.’’ Do you see 

that? 

Mr. QUINN. Yes, I have it. 

Senator LEVIN. Take a look at the bottom line. 

Mr. QUINN. Sure. 

Senator LEVIN. ‘‘The WW’’—worldwide—‘‘Parts Management 

Structure provides further substance to preserve annual parts benefit of $300m [$300 million.]’’ Do you see that? 

Mr. QUINN. I do. 

Senator LEVIN. So that is the benefit, tax benefit, as a result of 

this tax strategy. Is that correct? 

Mr. QUINN. That is accurate. 

Senator LEVIN. OK. Now, take a look at Exhibit 6,1 if you would, 

Mr. Quinn. 

Mr. QUINN. A PwC document, Global Tax Optimization Case for 

Action. 

Senator LEVIN. Right. And if you will take a look at the number 

of Caterpillar at the bottom, 4646, do you see that? This was the 

document that laid out 32 tax strategies for Caterpillar, PwC. 

Mr. QUINN. Yes. 

Senator LEVIN. Page 12, it says, ‘‘Strategy for Caterpillar.’’ Do 

you see that? 

Mr. QUINN. Yes. 

Senator LEVIN. ‘‘We have developed a strategy that we believe 

will achieve tax optimization for Caterpillar. This strategy can be 

summarized as follows:’’ 

‘‘Migrate income from the U.S. to lower-tax jurisdictions.’’ Do you 

see that? 

Mr. QUINN. Yes. 

Senator LEVIN. And do you see below that, ‘‘Global Income Migration’’? 

Mr. QUINN. Yes, I do. 

Senator LEVIN. All right. Now, on that strategy is there any reference there at all to hiring new people, moving people, or changing operations? Do you see that anywhere—— 

Mr. QUINN. Oh, it can only be the consequence—— 

Senator LEVIN. Oh, I am sure of that, but do you see it anywhere 

on this document what you now say are the consequences? 

Mr. QUINN. Right, It is not in this document, Senator. 

Senator LEVIN. Was it on any document at the time that they 

would have to move people? 

Mr. QUINN. Yes, it certainly would have been. 

Senator LEVIN. How many people would they have to have 

moved? If they had less than 100 people working in parts—right? 

Mr. QUINN. If I can ask what particular part of the reorganization you might be referring to? 

Senator LEVIN. In Switzerland. 

Mr. QUINN. In Switzerland as it relates to the overall business? 

Senator LEVIN. No, the parts business. 

Mr. QUINN. The parts business. 

Senator LEVIN. Yes. 

Mr. QUINN. So our view—— 
39 

Senator LEVIN. Did they have less than 100 before? Did they 

have less than 100 after? 

Mr. QUINN. Our view then and our view now and our view at the 

time that we put this together is that the substance that exists 

with respect to the parts business is provided through the marketing organization, that those individuals, those thousands of individuals that are managed out of the organization based in Switzerland now that comprises the marketing company outside the 

United States for Caterpillar products and replacement parts associated with those are the substance which creates the demand for 

those products. They have nurtured the dealer relationships. They 

have created the field population upon which the demand is created for replacement parts activity as well as reflect the integrated 

nature that is taking place in the business, both selling parts as 

well as machines, going back to my opening statement, where this 

is, in fact, an integrated activity. 

Senator LEVIN. We understand. Did anybody have to move? 

Mr. QUINN. In order to support the parts planning? 

Senator LEVIN. No. As a result of this proposal that you were 

making here, which was adopted, did anybody have to move? 

Mr. QUINN. Yes, there were people that had to move as a result 

of it. 

Senator LEVIN. How many had to move? 

Mr. QUINN. A dozen. 

Senator LEVIN. Out of thousands? 

Mr. QUINN. Senator, that is because people were already—— 

Senator LEVIN. Whatever the cause is, if you could answer the 

question, that would be a dozen out of thousands. Is that correct? 

You just talked about thousands. I am just asking you a direct 

question. 

Mr. QUINN. Yes, correct. In terms of people that had to move—— 

Senator LEVIN. Is that a dozen out of thousands? 

Mr. QUINN [continuing]. To support the addition—the structure 

or the substance that was already in place, it was just the dozen. 

Senator LEVIN. So that structure, which was already in place—— 

Mr. QUINN. That is correct. 

Senator LEVIN [continuing]. Which then led to the shift from 15 

percent of the profits going to Switzerland to 85 percent of the profits going to Switzerland, that—— 

Mr. QUINN. No, Senator, that—— 

Senator LEVIN. Oh, you want to use 70 percent instead of 85 percent? 

Mr. QUINN. No—— 

Senator LEVIN. OK. 

Mr. QUINN. I will not argue with the percentages. 

Senator LEVIN. OK. 

Mr. QUINN. I will argue with what creates the ‘‘income shift,’’ as 

you call it, and that can only result as a result of the measurement 

of what has been taking place with respect to the functions, where 

those exist, the risks where those have been accepted, and the 

property where it exists in the company. And our evaluation of that 

within the context of this planning was that when we looked at 

substance and when we looked at economic substance, that we used 

rules which have been provided to us in case law as well as in the 
40 

Internal Revenue Code and its underlying regulations that say in 

order to evaluate that appropriateness of an income shift, first we 

have to look at what functions exist, what risks are in place, and 

what property exists. And then we align the income with that. We 

never shift income. 

Senator LEVIN. Well, I am talking about the allocation of profits 

was shifted. Is that correct? Following all that assessment. 

Mr. QUINN. The allocations of profits changed as a result of that. 

Senator LEVIN. Was changed, shifted, from approximately 15 percent to Switzerland to 85 percent. Is that true? Based on your assessment—— 

Mr. QUINN. Again, with respect to the parts business—— 

Senator LEVIN. Yes. 

Mr. QUINN [continuing]. Because we did view—— 

Senator LEVIN. Yes, with respect to the parts business. After 

your assessment, the allocation of profits shifted from 15 percent 

to approximately 85 percent. Is that true? 

Mr. QUINN. That is correct. 

Senator LEVIN. OK. 

Mr. QUINN. But what is—— 

Senator LEVIN. No people, but a few had to shift. It was just your 

assessment which looked at the whole operation, and in your judgment what had already existed justified the shift of profits from 15 

percent to 85 percent to Switzerland. 

Mr. QUINN. It absolutely does. 

Senator LEVIN. OK. Thank you. 

Senator Johnson. 

Senator JOHNSON. Thank you, Mr. Chairman. I just want to 

make a quick point and ask one question. 

Mr. Chairman, you stipulated that, yes, Caterpillar is one terrific 

American company and that is not what this hearing is about. I 

think that is exactly what this hearing is about. As Senator 

Portman mentioned, our concern about our uncompetitive tax code 

is that we actually want to maintain Caterpillar as an American 

company, and far too many American businesses are choosing not 

to remain an American company and far too few global manufacturers are willing to relocate here in America to create those types 

of jobs. 

Let us face it. When you have Canada with a top marginal tax 

rate, corporate tax rate, of 15 percent and Detroit at 35 percent, 

if you are a German manufacturer wanting to come here to take 

advantage of the world’s largest market, take advantage of relatively reasonably priced energy prices, are you going to locate 

your manufacturing facility for North America in Toronto at 15 

percent or Detroit at 35? 

So, no, this hearing is all about what do we need to do in America to make America an attractive place for global business investment, business expansion, and job creation? So I just disagree in 

terms of the purpose of this hearing. I think the purpose of this 

hearing is exactly that. Let us keep American companies American. 

Let us try and incentivize investment of global companies into 

America. And we are not doing a very good job that way. 
41 

Mr. Quinn, I hear the term all the time, and it is like fingernails 

on a chalkboard, talking about tax loopholes. Is there such a term 

in the tax code as a tax loophole? It is a political term, correct? 

Mr. QUINN. That is correct. 

Senator JOHNSON. Can you define some tax loopholes for me? 

What are we talking about when politicians use the term ‘‘tax loophole’’? 

Mr. QUINN. Generally they are either incentives which were deliberately placed in the tax code or they are—— 

Senator JOHNSON. I mean, just give us a couple pretty good examples of where it made some sense to create an incentive in the 

tax code to incentivize manufacturers or drilling or just give us a 

couple examples that might actually work. 

Mr. QUINN. Well, so we had talked about some earlier in the 

course of the hearing here. One was the old rules which existed 

around foreign sales corporations. I think that was characterized as 

well many times, inappropriately, as a loophole that was created 

for corporations that exported product. 

More recently, we talked about the Homeland Repatriation Act 

where companies had an opportunity to bring earnings back into 

the United States at a 5-percent effective tax rate. This was back 

in the early 2000s. And that as well was viewed as a loophole. 

Senator JOHNSON. Was it also safe to say that a lot of times people typified timing differences as a loophole? In other words, it is 

true that corporations account for things differently. There is book 

accounting, there is tax accounting. A lot of that has to do with 

timing differences, correct? For example, if you have a piece of machinery and you know it is going to wear out in 5 years, according 

to Generally Accepted Accounting Principles (GAAP) accounting, 

you depreciate it over that 5 years. But tax accounting made to 

incentivize investments in plant and equipment might grant you a 

10-year depreciation schedule, correct? 

Mr. QUINN. Correct, yes. 

Senator JOHNSON. What about oil drilling, a pretty risky venture? I am hearing all these subsidies for big oil. Can you just kind 

of speak a little bit about what those subsidies really are? And are 

those loopholes or are those incentives written into the tax code to 

give people the incentive to risk their capital to drill oil? 

Mr. QUINN. I think as someone who reviews the tax code regularly and understands the legislative process around it, I know that 

those are incentives, and many of those are put in there very deliberately to incent activity. 

Senator JOHNSON. Specifically, can you talk to some of these timing issues specifically? How oil companies have to account for their 

risk capital when they are investing? I know it is a little off subject, but I think it is exactly on point, because what we are talking 

about is how do you comply with a tax code that has been written 

by Congress that is trying to incentivize behavior? And, by the 

way, I would like to scrap the current tax code. I would like to just 

raise the revenue we need and stop economic and social engineering through the tax code. But that is the system we have right 

now, and companies take advantage of and respond to those incentives, correct? 
42 

Mr. QUINN. Yes, that is correct. And in terms of an example that 

you are looking for that would also apply not just to oil companies 

but to the particular facts at hand in this case study, the U.S. system with respect to foreign earnings works that way as well. When 

we think about the deferral opportunity that exists for foreign 

earnings, that is, in fact, a timing issue. And that timing issue can 

be affected either through paying a dividend back to the U.S. company, at which time that income then becomes immediately taxable; or it can happen as a result of the application of Subpart F, 

which takes a look at certain classes of income and says, despite 

the fact that you did not return that cash to the United States, the 

income is going to be immediately taxable. That is an example of 

a deferral strategy. It is also one where there are very deliberate 

actions that have been taken by Congress and by the Treasury Department in putting in place regulations in that area to respond to 

known business issues. 

Senator JOHNSON. When I took tax law in college, one of the tenets of tax law really was the ability to pay. I think most Americans assume that when a corporation or a business spends money, 

they get to deduct it. That is not the case, right? 

Mr. QUINN. That is correct. Absolutely. 

Senator JOHNSON. I mean, in so many cases businesses invest 

money. They pay out the cash. They may have to borrow it, but 

they are spending the money—— 

Mr. QUINN. It becomes capitalized. 

Senator JOHNSON. They are forced to capitalize, and then they 

have to amortize or depreciate that over—— 

Mr. QUINN. Sometimes it is not even amortizable. 

Senator JOHNSON [continuing]. A long period of time, correct. 

Mr. QUINN. Sometimes it is not even amortizable. Sometimes it 

is held up on the balance sheet, your tax balance sheet, forever. 

Senator JOHNSON. So let us say you have $100 and you decide 

to invest $100 in capital equipment—or let us say a million, you 

invest a million. If you make a profit that year, where is the money 

going to come from to pay the tax? 

Mr. QUINN. You will borrow it. 

Senator JOHNSON. You are going to have to borrow it, correct? So 

that is not real incentivizing from the standpoint—— 

Mr. QUINN. No. 

Senator JOHNSON [continuing]. Having people risk their capital. 

So, again, I just think it is extremely important for people to understand really how our tax code operates, the incentives that Congress has written into the law, the disincenting nature of high tax 

rates, of forcing businesses to capitalize cash that is spent, not 

being able to recover that for years. That is not a loophole. That 

is actually economically very disincentivizing and it is very harmful 

in terms of job creation. 

OK. Thank you. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Johnson. Senator 

Portman. 

Senator PORTMAN. Mr. Chairman, thanks very much, and I just 

had a couple questions to followup on how the international tax 

code works, specifically as it relates to Caterpillar. 
43 

You talked earlier about the fact that U.S. companies are competing globally at a disadvantage given that we have a relatively 

high rate and because we are taxing on a worldwide basis rather 

than what they call a territorial basis, meaning if you have active 

income earned abroad, it is taxed at U.S. rates. 

What does that do to a company, Caterpillar is an example, but 

any U.S. company, that wants to take advantage of the international marketplace and that wants to be competitive in terms of 

acquisitions as they come up? Eighty percent of the purchasing 

power in this world is outside the United States; 95 percent of the 

consumers are outside the United States. We want our companies 

to access those consumers, that purchasing power, in order to create more jobs here, right? 

Mr. QUINN. That is correct. 

Senator PORTMAN. And with regard to Caterpillar in particular, 

do you have any idea how many of their 51,877 U.S.-based employees are dependent to some extent on their international sales? I understand their revenue is about 67 percent from overseas. So how 

many of the people who work here, over 50,000 people, have their 

jobs because Caterpillar does business overseas? 

Mr. QUINN. I do not know the exact number, Senator, but I 

would expect it is a large portion of those who support the export 

nature of the business. 

Senator PORTMAN. You had some testimony that some of your 

colleagues gave that 14 years ago you estimated that exports supported 16,000 U.S. Caterpillar jobs here and another 30,000 U.S. 

supplier jobs here. 

Mr. QUINN. I would not find that unreasonable. 

Senator PORTMAN. So that number is going to be a lot bigger 

than that now, now that they have more employees and they do 

more internationally, correct? 

Mr. QUINN. Correct. 

Senator PORTMAN. So we are talking about U.S. jobs here being 

supported by U.S. companies having access to foreign markets. 

That is something we want to encourage, not discourage, because 

it creates more jobs here in America. 

Again, if there is an acquisition that comes up, let’s say there is 

a company that becomes available and the competitors, let’s say, 

are a German company, a French company, a Brazilian company, 

a Chinese company, a Korean company, and Caterpillar is in the 

mix. What is the relative advantage or disadvantage based on the 

tax laws for those acquisitions? 

Mr. QUINN. What they will be looking at whenever an acquisition 

is made is what is the earnings opportunity in the future, and that 

earnings opportunity is going to be viewed on an after-tax basis. So 

they will take a look at the tax costs that will be associated with 

the earnings in that business as well. I am sure the example you 

gave earlier of the company within your State took a very similar 

approach to it. Just the hard economics of looking at what is that 

after-tax cost of operating as a U.S.-based MNC or a foreign-based 

multinational company. 

Senator PORTMAN. What I am hearing from the companies in 

Ohio, and I am sure the same is true in Michigan and Wisconsin, 

is that they are not just at a competitive disadvantage globally, but 
44 

in terms of these acquisitions, other companies can pay a premium 

because of those after-tax profits that they are looking at. 

Mr. QUINN. That is correct. 

Senator PORTMAN. In other words, we are having to not just compete head to head, but we are shrinking as American companies, 

relative to the size we should be, because of our tax code, because 

other companies can come in who are domiciled somewhere else 

and say, ‘‘Hey, I will pay you a premium.’’ So we are not expanding 

as we should be and, therefore, not taking advantage of international opportunities that create jobs here in America. 

Who are CAT’s biggest foreign competitors, do you know? 

Mr. QUINN. Certainly Komatsu, which is a Japanese-based company. Steve [Williams], would you have any others to add? 

Mr. WILLIAMS. Volvo, which is a Swedish company. Now some 

Chinese companies are competitors. 

Mr. QUINN. And from Korea as well. 

Mr. WILLIAMS. From Korea, Samsung, and others. 

Senator PORTMAN. Volvo is their top competitor in Europe, I am 

told, by far; Komatsu probably in Asia, and the Chinese companies 

are growing their market share. Volvo is in Sweden where the top 

rate is 22 percent, so it is 17 points lower than the combined U.S. 

corporate rate of 39.1, which would be the combined State and Federal role. Based on the public financial statements for both companies, CAT’s effective tax rate was 28.5 percent last year. Do you 

know what Volvo’s effective tax rate was last year? 

Mr. WILLIAMS. Certainly lower than that, I would think. 

Senator PORTMAN. Do you have a guess? 

Mr. WILLIAMS. Low 20s. 

Senator PORTMAN. Twenty percent. So 28.5 percent for CAT; 

Volvo, their biggest European competitor, 20 percent. So it sounds 

to me like Caterpillar spent lots of money coming up with a tax 

strategy last year that did not even allow it to come close to achieving tax parity with its primary rival in Europe. Is that accurate? 

Mr. QUINN. That is a characterization—— 

Senator PORTMAN. You should not feel guilty about it. I mean, 

that—— 

Mr. QUINN. Yes, it is accurate, Senator. 

Senator PORTMAN. That is the reality. 

I would also say that there is a big issue here as to the ability 

to deploy resources to their most efficient uses. So it is not just the 

fact that the Volvos of the world have a lower rate. It is the fact 

that because they work on a territorial basis rather than a global 

basis, they can move capital around to where they need it, which 

is a huge advantage. And Komatsu has the same advantage. 

Mr. QUINN. Yes. 

Senator PORTMAN. So, the Japanese have a 95-percent exemption 

rate, as you know, meaning that they allow their companies to do 

business in the United States, but then bring those profits back 

home and to deploy them in Japan or elsewhere without any tax 

penalty. 

I know this is about Caterpillar today, and I know that the 

Chairman is raising some specific points about our current code. 

But this all just cries out for reform, and if we do not do that, we 

are going to continue to see an erosion of U.S. jobs, U.S. capital 
45 

going overseas, a lack of investment here in this country, and an 

inability for U.S. companies to expand as they should be able for 

the reason we stated earlier, that they are not as competitive on 

these acquisitions. 

So I really appreciate you all being here today, and I hope that, 

again, in the next few years you will be in a position to tell your 

clients that the United States now has a competitive tax structure 

and you ought to stay right here and build your jobs and build your 

investments in the United States of America. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Portman. 

I have to agree with Senator Portman about the need for the tax 

code to be totally reformed, and now let us talk about the tax strategy which Caterpillar used to save $300 million a year. And that 

is ongoing. 

Would Caterpillar have offered this deal to anybody but a related 

company? Would they have offered this license to anybody but a related company? 

Mr. QUINN. That was not what we were asked to opine on or 

under the tax—— 

Senator LEVIN. In your judgment. You do an awful lot of this for 

decades. 

Mr. QUINN. So there is some recent—— 

Senator LEVIN. I am just asking you the very simple, straightforward question. Caterpillar has created this very strong company, 

90 years to buildup. It turns over to its own—to itself in a tax 

haven 85 percent of the future profits on parts. OK? It does not get 

any pay for it. It does not get any compensation for it, any consideration for it. 

Mr. QUINN. I—— 

Senator LEVIN. Well, let me just finish. 

Mr. QUINN. I am sorry. 

Senator LEVIN. OK. And the deal is on future parts you over 

there, my wholly owned subsidiary, you are going to get 85 percent 

of the profits on these parts; I am going to keep 15 percent. I am 

asking you just a very simple question based on your experience. 

Is there any way in heaven that Caterpillar would transfer its 

rights to those profits to a company that was not related to itself? 

That is all I am asking. I am not asking you whether it has to. I 

am just asking you would in your experience—— 

Mr. QUINN. What is—— 

Senator LEVIN. No compensation, no consideration. It loses 85 

percent of the profits it had been receiving. It continues to operate 

the company. It has to continue under the agreement the same operations in Illinois. So it keeps doing the same thing it has always 

done, but it is turning over 85 percent of the parts profits worldwide and gets nothing, no consideration for it. 

Mr. QUINN. Well, it—— 

Senator LEVIN. Yes or no. 

Mr. QUINN. As a hypothetical, what Caterpillar would look at is 

exactly what you are expressing. What is the return it would receive for that? 

Senator LEVIN. My question is: Would it offer that to a non-related company? That is my question. 
46 

Mr. QUINN. I do not know. 

Senator LEVIN. Sure you know. 

Mr. QUINN. What I—— 

Senator LEVIN. Sure you know. You have been in this business 

for a long time. I am asking you a straight question. Do you not 

think it is incredible to believe that Caterpillar would hand over 

85 percent of its worldwide profits on parts, keep 15 percent, continue to operate in Illinois the way it always has and everywhere 

else around the world where it does, get no consideration for that 

transfer, do you think that in any way they would offer that—— 

Mr. QUINN. They would never do it for no consideration—— 

Senator LEVIN [continuing]. For a non-related company? 

Mr. QUINN [continuing]. The rules that we were required to use 

were ones which did, in fact, evaluate the compensation that Caterpillar received and determined that—— 

Senator LEVIN. I am just asking you, is there any way in your 

experience that Caterpillar would make this deal with a non-related company? This was a deal it made with itself to shift profits 

to Europe. You say it was legitimate. I do not. But that is beside 

the point at the moment. That is not my question. My question is: 

Is there any way that they would make this deal with a non-related company? That is my question. 

Mr. QUINN. I am sorry. I cannot answer that. I do not—— 

Senator LEVIN. You cannot or you will not? You have an opinion 

on that, don’t you, after all your years of experience? 

Mr. QUINN. I see companies that dispose of business operations 

all the time. Caterpillar has done it as well. Caterpillar has done 

it within their logistics organization. 

Senator LEVIN. You know what the deal was here: 85 percent of 

the profits were shifted to a related company in Switzerland. The 

tax savings are $300 million a year as a result of that strategy. 

That is why it was done. You have conceded that. Everybody has 

conceded that. That is why it was done. That is why you sold it 

to them. 

Mr. QUINN. Senator, I am focused on the question of value that 

you are asking as well, that Caterpillar would do that—— 

Senator LEVIN. I am focused on a simple question. 

Mr. QUINN [continuing]. If they understood the value was appropriate. 

Senator LEVIN. No. I am focused on a simple question, and I am 

asking you to give us an honest answer. 

Mr. QUINN. Were the economics of that deal appropriate? Yes, 

they would. 

Senator LEVIN. I am asking you a question—— 

Mr. QUINN. I cannot—— 

Senator LEVIN. Whether or not—— 

Mr. QUINN. I cannot answer without that qualification. It would 

have to be based upon their believing that they were receiving a 

return in exchange for that—— 

Senator LEVIN. It would have to believe—would any rational 

company believe they are getting a return, handing over 85—— 

Mr. QUINN. Oh, if, in fact, they were being relieved of all the risk 

associated with that, if they were relieved of the capital—— 
47 

1See Exhibit No. 4a, which appears in the Appendix on page 302. 

Senator LEVIN. They are operating the company. They continue 

to operate the company in Illinois. It is the same operations. No 

people are shifted. Five thousand people—a dozen people have to 

shift. Five thousand people work for Caterpillar. Less than 100 

people work in parts in Switzerland. Nothing changes, maybe 12 

people move. I am just—— 

Mr. QUINN. But it is not all—— 

Senator LEVIN. I am asking you for an honest answer. Is there 

any rational company that would give up 85 percent of ongoing 

profits in a business that has been highly profitable put together 

over 70 years, a highly profitable company, is there any way that 

this would be sold, given away, no consideration, 85 percent of the 

profits on the ongoing parts business, hand it over to—— 

Mr. QUINN. Yes, the answer is yes, under the economic circumstances which Caterpillar accepted. We cannot—— 

Senator LEVIN. I am just asking you would they accept that with 

a non-related company, an arm’s-length transaction? 

Mr. QUINN. Yes, that is the standard that we have to apply. 

Senator LEVIN. Not the standard. I am asking you in the real 

world would a company do that. I am just asking you a simple, 

straightforward question. 

Mr. QUINN. It is—Senator, in the real world, that is a hypothetical that would also still be based upon an economic analysis. 

Senator LEVIN. OK. Take a look, if you would, Mr. Williams, at 

Exhibit 4a.1

[Pause.] 

Mr. WILLIAMS. Yes, sir, I have that. 

Senator LEVIN. This is a document from 1994. Pricewaterhouse 

looked at the intangibles for all of Caterpillar, including its Swiss 

marketing company, COSA, which was CSARL’s predecessor. Now, 

here is what PwC described as the relative roles of Caterpillar and 

its marketing companies in developing the dealer network. This includes COSA as a marketing company: ‘‘Cat Inc. has the largest 

role with regard to market and dealer development.’’ Do you see 

that word there? 

Mr. WILLIAMS. It is on page 8685. 

Senator LEVIN. Do you see that on page 8685? 

Mr. WILLIAMS. Yes, I do see it. 

Senator LEVIN. OK. ‘‘Cat Inc. has the largest role with regard to 

market and dealer development, since 1) it has the largest single 

market, 2) it was the originator of the basic marketing systems and 

concepts, 3) it continues to be involved with the development and 

oversight of worldwide marketing programs and approaches.’’ And 

then it says, ‘‘The marketing companies’’—that includes CSARL— 

‘‘also have major responsibility for market development; in fact, 

this is their primary responsibility’’ is to do that. OK? 

So CAT Inc. in the description of Pricewaterhouse has the largest 

role in 1994 with regard to market and dealer development. Was 

that true? 

Mr. WILLIAMS. What I said there was that the dealer network 

was developed first, the concept, in the United States, in the 1920s, 

1930s. It originated it. That is what it says there. And it continued 
48 

1See Exhibit No. 4b, which appears in the Appendix on page 312. 

to be involved with the oversight. However, COSA and other marketing companies employed those concepts, developed those concepts, expanded the dealer network, and had the daily interaction 

with dealers all over the rest of the world. 

Senator LEVIN. Where do you see that? 

Mr. WILLIAMS. It is implied in the last—— 

Senator LEVIN. Not implied. Where do you see that? 

Mr. WILLIAMS. That is my knowledge of the company. 

Senator LEVIN. No, where do you see that? I am reading from a 

document. 

Mr. WILLIAMS. It does not say that on the page. I was explaining—— 

Senator LEVIN. Thank you. Now let us go back to this document. 

‘‘Cat Inc. has the largest’’—this is what you said in 1994. It has 

‘‘the largest role with regard to market and dealer development,’’ 

OK, and then it gives the three reasons. The marketing companies 

also have a major responsibility, but the largest role, you said in 

1994, was Caterpillar. Was that true? 

Mr. WILLIAMS. That was the way Caterpillar viewed it—— 

Senator LEVIN. Was that the way you viewed it? 

Mr. WILLIAMS. That was my understanding at the time. 

Senator LEVIN. All right. So you believe it was true. 

Mr. WILLIAMS. That was what we wrote, and I believed that at 

the time. 

Senator LEVIN. OK. Now, then if you take a look at 1995 transfer 

pricing documentation, Exhibit 4b,1 Bates page 8930, ‘‘‘Cat Inc. had 

the largest role with regard to market and dealer development,’’ in 

1995. Right? Was that true? 

Mr. WILLIAMS. That is what it says in this text, yes, sir. 

Senator LEVIN. Did you write that text? 

Mr. WILLIAMS. I was certainly involved in—— 

Senator LEVIN. Was it true when you wrote it? 

Mr. WILLIAMS. I am sorry? 

Senator LEVIN. Was it true when you wrote it? 

Mr. WILLIAMS. That was how the company viewed it at the time. 

Senator LEVIN. Did you believe it was true when you wrote it? 

Mr. WILLIAMS. Yes, that was how the company viewed it, 

and—— 

Senator LEVIN. Did you believe it was true when you wrote it? 

Mr. WILLIAMS. At the time Caterpillar, starting in 1994, 

changed—— 

Senator LEVIN. I understand all that. I am just asking you 

whether that statement was true when you wrote it in 1995. 

Mr. WILLIAMS. That is my understanding, yes. 

Senator LEVIN. Now, was it true when you said the same thing 

in 1997? 

Mr. WILLIAMS. Senator, we used much of the same language in 

these reports as they were updated each year, so I had the 

same—— 

Senator LEVIN. And did you believe it was true? 

Mr. WILLIAMS. I used that language in 1997. 
49 

1See Exhibit No. 13, which appears in the Appendix on page 374. 

Senator LEVIN. It is a pretty straightforward question. Did you 

believe it was true when you wrote it? 

Mr. WILLIAMS. Based on the facts at the time, yes, I believed 

that. 

Senator LEVIN. Thank you. Senator McCain. 

Senator MCCAIN. I thank the witnesses again. 

Mr. Quinn, your job is to advise companies and corporations how 

they can maximize their profits and keeping with the existing tax 

code as it is written. Is that true? 

Mr. QUINN. That is true, particularly with respect to their operations. 

Senator MCCAIN. So this restructuring obviously resulted in increased profits for Caterpillar, right? 

Mr. QUINN. I believe the increased profits largely resulted from 

the expansion of their markets. This provided the opportunity for 

them to expand their markets using a different base. 

Senator MCCAIN. To this day, do you believe that there is any 

violation of the tax code as it was written then—And I do not know 

how much it has changed since—that you were completely in compliance with existing law and regulations? 

Mr. QUINN. Yes, that is my belief. That is my firm’s belief. 

Senator MCCAIN. I thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Senator McCain. Senator Johnson. 

Senator JOHNSON. No more. 

Senator LEVIN. Thank you. 

Mr. Williams, during the 1990s, Caterpillar assigned a 13 percent profit to its marketing companies, so it indicated it viewed 

them as having some value, which I think everybody concedes, but 

not a lot of value. That was before the 1999 tax strategy was implemented. So now let us look at what Caterpillar did after the tax 

strategy was implemented. Let us look at 2001. 

Would you please look at Exhibit 131? 

[Pause.] 

Senator LEVIN. Do you have it? 

Mr. WILLIAMS. Yes, sir, I have it. 

Senator LEVIN. Thank you. This is a 2001 economic analysis prepared by PwC valuing the marketing intangibles of Caterpillar 

Americas. Do you pronounce it ‘‘C–ACO’’? 

Mr. WILLIAMS. Caterpillar always called it ‘‘C–ACO.’’ 

Senator LEVIN. OK. And this is a Miami-based U.S. company 

that was transferring its assets to CSARL. Now, CACO had served 

as Caterpillar’s marketing company for the dealer network in Latin 

America, the Caribbean, and Canada. Did you work on this analysis? 

Mr. WILLIAMS. Yes, I participated in this analysis. 

Senator LEVIN. OK. PwC describes CACO’s responsibilities. They 

are virtually identical to the functions of CSARL. They include 

signing contracts with independent dealers in the region, purchasing products and parts from the U.S. parent, reselling them to 

the dealers, helping with logistics support, maintaining minor parts 

inventories, helping dealers identify performance issues, providing 

dealers with marketing information and sales training, helping 
50 

them with financing, and conducting monitoring and oversight activities to ensure compliance by dealers with the terms of dealer 

sales and service agreements. That is all from this document. 

Now, on page 4, PwC lists the marketing intangibles at CACO. 

They consist of: CACO’s relationship with Caterpillar’s independent 

dealers, its training programs, its order tracking software, various 

procedures and manuals, market brochures, its Web site, its goodwill and its going-concern value, and any other marketing-related 

intangibles. Sounds familiar because these are the same as 

CSARL’s. 

Then on page 6, Mr. Williams, take a look at the description of 

all these markets intangibles. Do you see at the bottom there, 

‘‘Functional Analysis Conclusions’’? o you see that? 

Mr. WILLIAMS. Yes, I have that. 

Senator LEVIN. ‘‘Based on our analysis of the Intangible Assets 

Transferred, we conclude that they are routine and common to 

most distribution and marketing companies. These assets have 

only limited economic life and could be effectively reproduced by a 

new startup company with sufficient investment and time resources.’’ 

‘‘Therefore, we conclude that the Intangible Assets Transferred 

have very limited economic value and this value is mostly related 

to its assembled workforce in place.’’ 

Was that true? 

Mr. WILLIAMS. That was the analysis we wrote, and I would like 

to explain—— 

Senator LEVIN. Well, finish that sentence, if you would. 

Mr. WILLIAMS. I am sorry, sir? 

Senator LEVIN. Would you finish the sentence? ‘‘This was the 

analysis that . . . ?’’ 

Mr. WILLIAMS. That we wrote, and I would like to expand on it. 

Senator LEVIN. All right. Was it true, is what I am asking you? 

I know you would like to expand on it now in front of this hearing. 

I understand that. I am just asking you: Was that true when you 

wrote it? That is all I am asking. 

Mr. WILLIAMS. That was an understanding we had at the time. 

I think it was—as you pointed out, it was partially inconsistent 

with some of the other language we said. The reason for that is 

these were different analyses under different times and actually 

looking at different assets and different values. 

Senator LEVIN. I see. These are not basically those same intangibles? 

Mr. WILLIAMS. These were looking at—— 

Senator LEVIN. Were these basically the same intangibles of 

CSARL’s? 

Mr. WILLIAMS. These were looking at the intangibles that were 

inside the United States. 

Senator LEVIN. I understand that. 

Mr. WILLIAMS. It did not include—— 

Senator LEVIN. Were these basically—— 

Mr. WILLIAMS [continuing]. The intangibles outside the United 

States. 
51 

Senator LEVIN. But were these basically—when you described 

these intangibles, they are pretty much the same as CSARL’s, were 

they not? 

Mr. WILLIAMS. CSARL created a lot of intangibles outside the 

United States, and many of CACO’s field and service reps were 

also outside the United States, working with the dealers who were 

outside the United States. 

Senator LEVIN. I understand, but these were basically the same 

intangibles, were they not, that you had previously described as 

CSARL intangibles? 

Mr. WILLIAMS. I think they are—— 

Senator LEVIN. Are they basically the same intangibles? 

Mr. WILLIAMS. No, they are not basically the same. 

Senator LEVIN. They are not? They are different intangibles? 

Mr. WILLIAMS. They are different—— 

Senator LEVIN. The ones I just read are different from CSARL’s? 

Mr. WILLIAMS. These are the intangibles without the activities of 

the individuals who deploy those intangibles. 

Senator LEVIN. And your judgment—— 

Mr. WILLIAMS. The activities are offshore—the activities are performed by the non-U.S. employees. 

Senator LEVIN. And this was the marketing company for Latin 

America, Canada, and the Caribbean? 

Mr. WILLIAMS. That is correct. 

Senator LEVIN. And these were the intangibles that they had— 

is that correct? You identified these intangibles. 

Mr. WILLIAMS. These were the identified intangibles, yes. 

Senator LEVIN. OK. We can compare them one for one. I have already done that to the best—I think accurately, but nonetheless, 

my question is: When you said that those intangibles—and I will 

read it to you again. Those intangibles that I read have very limited economic value, and this value is mostly related to its assembled workforce in place, I am just asking you this question: Was 

that true? 

Mr. WILLIAMS. I think that is not totally complete. Tom, [Quinn] 

would—— 

Senator LEVIN. No. Do not refer to somebody else. You wrote this 

thing. So what you are saying is it was true but incomplete? 

Mr. WILLIAMS. I said I would prefer to expand on it by talking 

about the assets that CSARL—I am sorry, CACO had offshore with 

its employees. 

Senator LEVIN. Yes, I am sure you would, but this is the assessment that you made at the time. Is that correct? 

Mr. WILLIAMS. That is the assessment I made at the time. 

Senator LEVIN. All right. 

Mr. QUINN. Senator, I think I could offer some further explanation that might be helpful for you to understand—— 

Senator LEVIN. No, I think the explanation—someone else, if 

they want, can ask you for it, but I am asking what was said at 

the time about these intangibles. And in 1999, you attributed huge 

value to similar intangibles, OK, you can say they are not similar. 

We will let the record speak for itself. We have read them, and you 

can—we will have someone else determine, reading them side by 

side, whether those intangibles, which were given huge value rel-
52 

1See Exhibit No. 12, which appears in the Appendix on page 372. 

ative to CSARL’s value, but given no value when it came to transferring these intangibles from the American company. I am just 

going to—— 

Mr. QUINN. This report reviews those intangibles absent of the 

services that support them. It is a completely different context, 

Senator. 

Senator LEVIN. All right. OK. We will let anyone reading those 

two documents decide. He said—Mr. Williams—it was incomplete. 

Was it incomplete? Mr. Quinn, was it incomplete? 

Mr. QUINN. He did not have the opportunity to—— 

Senator LEVIN. No. Was this assessment incomplete? 

Mr. QUINN. Oh, this assessment is complete with respect to the 

asset it is evaluating. 

Senator LEVIN. OK. 

Mr. QUINN. It is not evaluating the same asset that you are referring to from the earlier report. 

Senator LEVIN. OK. In other words, this does not list all the intangibles that CSARL had. 

Mr. QUINN. It is two different bases. This is looking just at the 

intangible asset itself, and the way that the rules and regulations 

require that we value an asset is separate and apart from the services that might support those. When we take a look at the earlier 

report, it was clear that is trying to evaluate the income potential 

and the income being generated by Caterpillar SARL. In that case, 

it adds to the asset the service itself. So it is comparing apples and 

oranges. 

Senator LEVIN. Both were intangibles, right, in both cases? 

CSARL—— 

Mr. QUINN. No. In one case, you had an intangible. In the second 

case, you had an intangible plus its enabling service. 

Senator LEVIN. But both were listed as intangibles. Is that correct? When the transfer was made, they were both intangibles. Is 

that correct? 

Mr. QUINN. No, that is not correct. 

Senator LEVIN. OK. Then we are going to let the record speak 

for itself. 

Now, if you would turn to Exhibit 12,1 Mr. Williams? This is now 

2007. 

[Pause.] 

Do you see that, Mr. Williams? 

Mr. WILLIAMS. Yes, I have that, sir. 

[Pause.] 

Senator LEVIN. Is that not an email from you to a Mr. Matthews? 

Mr. WILLIAMS. Yes, it is, sir. 

Senator LEVIN. OK. You were talking about CSARL, that they 

spent decades building up the dealer network around the world, 

which is what a marketing company does; building the brand name 

through advertising. And then you say this. You say that—it is 

about the second or third paragraph from the bottom. 

Mr. WILLIAMS. Yes, sir. 
53 

1See Exhibit No. 46, which appears in the Appendix on page 545. 

Senator LEVIN. It says there is a caveat: ‘‘. . . in 2001’’—this is 

what you said—‘‘we said in another transaction’’—that is CACO, 

right? 

Mr. WILLIAMS. I believe that refers to CACO, yes, sir. 

Senator LEVIN [continuing]. ‘‘That there is no significant marketing intangibles other than the workforce in place.’’ 

Mr. WILLIAMS. No significant U.S. marketing intangibles because 

the—— 

Mr. WILLIAMS. It does not say United States. It says ‘‘no significant marketing intangibles.’’ 

Mr. WILLIAMS. It does not include the word ‘‘United States,’’ but 

the marketing intangibles were a part of CACO’s efforts offshore 

already—— 

Senator LEVIN. Well, then, what is the caveat? 

Mr. WILLIAMS. The caveat was that I was recognizing that—— 

Senator LEVIN. There was an inconsistency here? 

Mr. WILLIAMS. I was recognizing that in two different transactions under different circumstances and different approaches, different assets being valued, that there was a different conclusion. 

Senator LEVIN. Is that what you said here? You do not say there 

is—what is the caveat? Why do you have to say a caveat? Is there 

not an apparent inconsistency that you are worried about? 

Mr. WILLIAMS. There is an apparent inconsistency because of the 

differences in the transactions, and that was what I was advising 

my staff, is that we needed to reconcile those different approaches. 

Senator LEVIN. So you yourself saw that there was an apparent 

inconsistency at that time? 

Mr. WILLIAMS. I would use the word ‘‘apparent,’’ yes, sir. 

Senator LEVIN. OK. Now, take a look—Mr. Quinn, you were responding to an email of Mr. Williams. Take a look at Exhibit 46,1

please. 

Mr. QUINN. It is an internal email. I have that. 

Senator LEVIN. I would like both you and Mr. Williams to look 

at this email exchange between the two of you regarding what you 

both seem to see as a problem regarding CSARL’s ability to justify 

receiving the lion’s share of the non-U.S. parts profits in Switzerland. 

In the first email, Mr. Williams, you wrote to Mr. Quinn, in the 

last sentences, ‘‘. . . just curious—say they decide most PMs [product managers]’’—‘‘stay in the U.S. How do we retain CSARL parts 

profit if those ‘US entrepreneurs’ claim both machine AND parts 

profit?’’ 

Mr. WILLIAMS. If I can, sir, the PM there refers to product managers. 

Senator LEVIN. Product. I am sorry. Did I say ‘‘parts’’? I mean 

product manager. Now, did you have a concern here, Mr. Williams, 

about whether the product managers located in the United States 

might claim the parts profits related to the parts that they designed? 

Mr. WILLIAMS. Sir, my point was related to—— 

Senator LEVIN. Could I ask you this question just directly? Did 

you have a concern here about whether product managers located 
54 

in the United States might claim the parts profits related to the 

parts that they designed, was that a concern of yours? 

Mr. WILLIAMS. The concern was relocating the product managers 

from Switzerland back to the United States. I was concerned that 

by taking those entrepreneurial functions out of Switzerland and 

relocating them back to the United States, that would give me a 

concern. 

Senator LEVIN. Is the answer then it was not—the answer is, 

‘‘No,’’ to my question? 

Mr. WILLIAMS. There was a concern, yes, sir, about the relocation—— 

Senator LEVIN. No. I am saying that they might claim the parts 

profits. That is what I am asking, whether product managers—I 

am going to ask you again. Was there a concern that product managers located in the United States might claim the parts profits related to the parts that they designed? Yes or no. 

Mr. WILLIAMS. No. I was concerned about the relocation of the 

individuals from Switzerland back to the United States. 

Senator LEVIN. All right. Now, Mr. Quinn, you responded to Mr. 

Williams in the next email: ‘‘PMs [Product managers] in US will 

put some pressure on the parts profit model. These guys are really 

bought into the [idea that] PM is king concept. We are going to 

have to create a story that will put some distance between them 

and parts . . . to retain the benefit. Get ready to do some dancing.’’ 

Mr. QUINN. Is there a question there? 

Senator LEVIN. Yes. What did you mean you were going to have 

to tell ‘‘a story’’ and ‘‘get ready to do some dancing’’? ow, let me just 

ask you this question: Was it not the fact that product managers 

who designed parts here in the United States normally get the 

profits related to those parts but that you were going to have to 

justify sending most of the parts profits to Switzerland where they 

have few product managers? Is that not the case? 

Mr. QUINN. This was a—— 

Senator LEVIN. Is the answer yes or no to that? 

Mr. QUINN. I am not sure could you repeat the question, please? 

Senator LEVIN. Yes. Was it the fact that product managers who 

designed parts here in the United States normally get the profits 

related to those profits, but that you were going to have to justify 

sending most of the parts profits to Switzerland where they have 

few product managers? 

Mr. QUINN. No, that is not the intention of this statement. 

Senator LEVIN. What did you mean by ‘‘dancing’’ then? 

Mr. QUINN. Senator, that was a very poor choice of words, but 

this was, in fact, the first time I had knowledge of a restructuring 

that Caterpillar was proposing in 2008, which would change some 

of the substance that was put in place back in the earlier reorganization that began in 1999. My concern here was that, in fact, 

that would change some of the circumstances that we rely upon in 

terms of our economic analysis, and that we needed to make sure 

that management understood the consequences, the tax consequences of their actions. 

Senator LEVIN. Mr. Williams, this says, ‘‘. . . say they decide 

most PMs [product managers] stay in US.’’ Now, that is consistent 
55 

with what you just said, which was about product managers moving to the United States. 

Mr. WILLIAMS. There were product managers in Geneva who 

were supervising important products outside the United States. 

This reorganization announced at the end of 2008 to take effect in 

2009 would have relocated those product managers to the United 

States and taking with them the significant entrepreneurial responsibilities. That was our concern. 

Senator LEVIN. But you said, ‘‘. . . say they decide most PMs 

[part managers] stay in US [the United States],’’ not ‘‘move to the 

United States,’’ ‘‘stay in US.’’ Is that not your memo? 

Mr. WILLIAMS. The word says ‘‘stay.’’ Out of the—— 

Senator LEVIN. Yes. 

Mr. WILLIAMS. Out of the 15 or 20 product managers, they were 

proposing that all of them be in the United States. That is the 

meaning of the word ‘‘stay.’’ 

Senator LEVIN. But you are saying the concern was that they 

move to the United States. That is not what the concern was in 

this memo. 

Mr. WILLIAMS. We were—— 

Senator LEVIN. Why did you use the word ‘‘stay’’ instead of 

‘‘move’’? 

Mr. WILLIAMS. Because we knew what the existing location of 

them was, and the recommendation was to have them all in the 

United States. So that is what we mean by ‘‘stay.’’ 

Senator LEVIN. You were worried about ‘‘move’’ to the United 

States. Is that right? 

Mr. WILLIAMS. Move and staying in the United States. in the future, no longer having those positions in Switzerland, staying in 

the United States instead. 

Senator LEVIN. Didn’t you just say that the concern was that 

they would move in the United States? Isn’t that what you just testified? 

Mr. WILLIAMS. I said to you ‘‘stay’’—I said to you ‘‘move.’’ 

Senator LEVIN. To the United States? 

Mr. WILLIAMS. Yes. 

Senator LEVIN. The email says the concern was that they stay in 

the United States. I am just asking you. Do you see—— 

Mr. WILLIAMS. At that time already there were several important 

product managers in Switzerland. The point here is stay in the 

United States in 2009 and future. So the reorganization would 

have put and stayed everyone in the United States, and we were 

concerned about that reorganization and its effect on the tax benefits. We were needed to assist Corporate Tax to explain to the Executive Office the tax effect of their proposed reorganization. 

Senator LEVIN. Mr. Williams, you responded, ‘‘What the heck. 

We’ll all be retired when this comes up on audit.’’ 

Mr. WILLIAMS. Yes, sir, that was also an inappropriate use of 

words in an attempt at humor. My point was it—— 

Senator LEVIN. Is this humor: ‘‘Ed Bodham and Chris Dunn will 

have to solve it’’? 

Mr. WILLIAMS. No, that is not humor, sir. 

Senator LEVIN. Would that be humorous to them? 

Mr. WILLIAMS. No, that would not be humorous to them. 
56 

Senator LEVIN. Mr. Bowers, you were on the audit team. Did you 

know that Mr. Quinn and Mr. Williams had to figure out a story, 

that they had these views, that they were going to do some dancing, that they had plans to be retired when the whole issue came 

to a head? Were you aware of that? You were on the audit team. 

Mr. BOWERS. Mr. Chairman, I was not aware of these emails. 

Senator LEVIN. And, Mr. Bowers, did you know that PwC’s tax 

consultants had taken inconsistent positions regarding the value of 

marketing intangibles at CSARL and CACO? 

Mr. BOWERS. Mr. Chairman, I believe the—— 

Senator LEVIN. Were you aware of that apparent—— 

Mr. BOWERS [continuing]. Intangibles—— 

Senator LEVIN. But were you aware of that apparent inconsistency? 

Mr. BOWERS. Well, I do not agree with that inconsistency. 

Senator LEVIN. So you do not believe there was an apparent inconsistency. 

Mr. BOWERS. That is correct. 

Senator LEVIN. OK. Mr. Bowers, one of our experts today said he 

had never heard of a company keeping two sets of inventory books 

using a virtual inventory system separate and apart from the company’s general inventory system—one to track the parts for the 

business enterprise, the other to keep track of inventory for tax 

purposes. Prior to Caterpillar’s use of the inventory system, had 

you ever heard of a virtual inventory system? 

Mr. BOWERS. Senator, different management books from—or 

legal books are very common. 

Senator LEVIN. I am not talking about that. I am asking about 

inventory systems. Had you ever heard of a virtual inventory system prior to Caterpillar’s use of an inventory system? Had you ever 

heard of it? 

Mr. BOWERS. That particular term I had not heard of. 

Senator LEVIN. No, put aside that, have you ever heard of a virtual inventory system? 

Mr. BOWERS. An inventory system similar to what has been referred to as ‘‘virtual’’ I have seen before. 

Senator LEVIN. You have? 

Mr. BOWERS. Mm-hmm. 

Senator LEVIN. You have seen it. But you just never heard it described as a virtual one? 

Mr. BOWERS. Yes, it is difficult to understand an inventory bin 

is a very physical thing. 

Senator LEVIN. Is that what you told our staff, by the way? We 

asked you specifically if you had ever heard of a virtual inventory 

system or similar system. You said no, before you saw this system. 

Did you not tell our staff you had never heard of it? 

Mr. BOWERS. It depends upon how the question gets asked, sir. 

Senator LEVIN. The way I just asked it. 

Mr. BOWERS. A virtual inventory system I have not heard of, but 

when you think about what that sentence says, an inventory bin 

is a very real thing. 

Senator LEVIN. Therefore? 

Mr. BOWERS. Therefore—— 

Senator LEVIN. If it is all merged? 
57 

Mr. BOWERS. Very straightforward to have an inventory bin full 

of parts, some parts belong to one owner, other parts belong to another owner. 

Senator LEVIN. Are they usually identified some way? 

Mr. BOWERS. Why would that be the case? 

Senator LEVIN. They do not need to identify them? 

Mr. BOWERS. No. 

Senator LEVIN. OK. Did you have discussions with the PwC audit 

team or the consultant for Caterpillar about tax risks associated 

with this virtual inventory? Did you ever have discussions about 

tax risks in doing what they were doing? 

Mr. BOWERS. I did have conversations about tax risks. That is 

my role to provide assistance and advice to the audit partner. 

Senator LEVIN. Did you have concerns? 

Mr. BOWERS. Not with respect to this inventory system. 

Senator LEVIN. And so you never discussed any concerns about 

this inventory system with them? 

Mr. BOWERS. I explained this inventory system to him, and—— 

Senator LEVIN. I am just asking: Did you ever have concerns 

about it? 

Mr. BOWERS. I did not have concerns about it. 

Senator LEVIN. OK. Thank you all very much. We appreciate 

your testimony and your cooperation with this Subcommittee. 

Let me now call our final panel of witnesses for today’s hearing: 

Julie Lagacy, Vice President of the Finance Services Division of 

Caterpillar; Robin Beran, Chief Tax Officer at Caterpillar; and Rodney Perkins, a former Senior International Tax Manager at Caterpillar. 

Thank you all for being with us today. Thank you for your cooperation with this Subcommittee. And pursuant to Rule 6, all witnesses who testify before the Subcommittee must be sworn, so we 

would ask you to please raise your right hand as you stand. Do you 

solemnly swear that the testimony you are about to give to this 

Subcommittee will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Ms. LAGACY. I do. 

Ms. BERAN. I do. 

Mr. PERKINS. I do. 

Senator LEVIN. Thank you. A minute before the red light comes 

on on the timer, you will see a light change from green to yellow, 

giving you an opportunity to conclude your remarks. Your written 

testimony will be printed in the record in its entirety, and please 

limit your oral testimony to 10 minutes. And I understand, Ms. 

Lagacy, that you are going to be presenting the statement for Caterpillar. Is that correct? 

Ms. LAGACY. Yes, I will. 

Senator LEVIN. Please proceed. 
58 

1The prepared statement of Ms. Lagacy appears in the Appendix on page 129. 

TESTIMONY OF JULIE A. LAGACY,1 VICE PRESIDENT, FINANCE 

SERVICES DIVISION, CATERPILLAR INC., PEORIA, ILLINOIS; 

ACCOMPANIED BY ROBIN D. BERAN, DIRECTOR, GLOBAL 

TAX AND TRADE, AND RODNEY PERKINS, FORMER INTERNATIONAL TAX MANAGER, CATERPILLAR INC., PEORIA, ILLINOIS 

Ms. LAGACY. Good afternoon, Chairman Levin and Senator 

McCain. Thank you for the opportunity to appear before the Subcommittee today. My name is Julie Lagacy, and I am the Vice 

President of the Finance Services Division at Caterpillar, which includes its tax and accounting functions. 

On my left is Caterpillar’s Director of Global Tax and Trade, 

Robin Beran, a 24-year Caterpillar employee, and on my right is 

Rod Perkins, who retired in 2009 as one of our international tax 

managers after 35 years of service. We are proud to represent Caterpillar before you today. 

Caterpillar is a great American company, and our reputation is 

one of our greatest assets. I want to emphasize, Caterpillar complies with the U.S. tax laws, and we pay everything we owe. We 

are proud of what we do. We are proud of the men and women who 

make it possible. And we are equally proud of our U.S. and worldwide heritage. 

Our average effective tax rate is 29 percent. That is one of the 

highest for a multinational manufacturing company, 3 percentage 

points higher than the average effective rate for U.S. corporations. 

This is particularly high when you consider that more than 65 percent of our sales and revenues are abroad. Over the last 15 years, 

we have increased employment in the United States by 35 percent 

to nearly 52,000 jobs, and we have more than tripled our exports 

to $16 billion. 

Caterpillar enjoys a strong legacy, and, in fact, my family has a 

long history with this company. Both of my grandfathers worked 

at Caterpillar. During World War II, my grandmother stepped up 

to work in the factory to help build the machines our servicemen 

relied upon. My father, whose career spanned 38 years, began as 

an apprentice and worked his way up to manage one of our factories in East Peoria. Along the way he met my mother, who 

worked a decade at Caterpillar. All told, three generations of my 

family have more than 140 years of service at Caterpillar, and I am 

a current steward of this tradition. 

At Caterpillar, stories like mine are not uncommon. For nearly 

90 years, Caterpillar has helped build the world, including the 

backbone of modern America. What began with two American inventors now employs over 118,000 people worldwide, and nearly 

52,000 of those people are right here in the United States. When 

you consider our independent dealer and supplier networks, the 

worldwide reach of our company is even greater. At our roots, we 

are an American company. Our equipment was there to build the 

Golden Gate Bridge and create the interstate highway system. Caterpillar products, dealers, and employees also show up after tragedy strikes. In Oklahoma City, at Hurricane Katrina, and Ground 
59 

Zero, we joined the first responders in cleaning up, powering up, 

and paving the way for recovery. 

We are proud that many of our products are ‘‘Made in America.’’ 

Along the Illinois River in our East Peoria factories, we make the 

machine on which our company was founded: The track-type tractor, better known as the bulldozer. Just down the road in Decatur, 

Illinois, is the only place in the world where we make the world’s 

largest mining truck, which stands 21⁄2 stories tall and can carry 

400 tons. Eight out of 10 large mining trucks made in Decatur are 

shipped outside of the United States. There are other examples like 

this across the country—from engines rolling off the line in Texas, 

to the locomotives we are building in Indiana, or the excavators 

made in Georgia. Our customers depend on Caterpillar’s unmatched products, services, solutions, and the reliability of our machines. 

We grow and build near our customers worldwide, not only because it is what they demand but because remaining globally competitive helps create jobs right here at home. Growing where our 

business is means growing where our customers are located, not 

just in the United States but throughout the world. Most importantly, while more than 65 percent of our sales and revenues come 

from outside the United States, Caterpillar remains committed to 

our manufacturing roots here in America. That is why we continue 

to invest here at home with 69 manufacturing and logistic facilities 

and CAT dealers from coast to coast. 

Remaining globally competitive helps create jobs right here at 

home. In the past 15 years, we have increased our U.S. employment by more than 13,000. Many of these jobs came from our exports, which last year alone totaled $16 billion. As you may remember, our effort to grow U.S. manufacturing jobs was highlighted by 

President Obama in his 2013 State of the Union address. 

I want to emphasize again that Caterpillar has fully complied 

with U.S. tax law. For 2013, we estimate that Caterpillar incurred 

approximately $700 million in income, property, sales, and use 

taxes to U.S. Federal, State, and local governments. Additionally, 

our wages accounted for approximately $1.7 billion in U.S. Federal, 

State, and local employment taxes. 

Over the last 8 months, Caterpillar has responded to several 

Subcommittee questionnaires and other information requests, has 

produced thousands of pages of documents, has voluntarily permitted and facilitated 11 separate Subcommittee staff interviews of 

current and former personnel, and has cooperated in every way 

possible with the Subcommittee’s inquiry. We understand the 

Chairman and his staff are interested in one aspect of our company’s business: parts sales outside of the United States. 

Caterpillar’s philosophy is that our business structure drives our 

tax structure. We do not invent artificial tax structures. When we 

identify options that align with our business structure, comply with 

the tax laws, and generate tax savings, we pursue those opportunities. The restructuring of Caterpillar SARL, or CSARL for short, 

was one of those opportunities. 

Decades ago, Caterpillar had the vision to see new opportunities 

worldwide that would drive our business growth in the United 

States and globally, so Caterpillar established a subsidiary in Ge-
60 

neva, Switzerland, that would be responsible for putting in place 

a robust network of employees, independent dealers, and suppliers. 

That subsidiary is now known as CSARL. By the 1990s, CSARL 

had thousands of people supporting the business and almost 500 

employees in Geneva, Switzerland, alone. 

CSARL is a vital business subsidiary responsible for manufacturing, marketing, and selling machines, engines, and parts outside 

of the United States. The Geneva entity has held these responsibilities since 1960. The 1999 restructuring further refined this role. 

One result of this restructuring was that CSARL streamlined its 

process and began buying parts directly from U.S. suppliers. 

Prior to the restructuring, Caterpillar Inc. acted as an unnecessary middleman, buying these parts from independent suppliers 

and selling them to CSARL, which then sold them to dealers outside the United States. Prudent, lawful business planning required 

us to eliminate the unnecessary middleman from the transaction 

flow. We cannot remain competitive, we cannot create jobs, and we 

cannot increase exports by incurring unnecessary expenses. Americans pay the taxes they owe, but not more. And as an American 

company, we pay the taxes we owe, not more. 

In planning and implementing the restructuring, Caterpillar appropriately relied on the advice of two of the world’s leading tax advisory firms: PricewaterhouseCoopers, a leading Big Four U.S. and 

international accounting firm; and the law firm McDermott Will & 

Emery, renowned for its international tax practice. Both firms provided the advice that the changes were appropriate under the tax 

laws, and both stand behind that advice. This advice was consistent with the experience and judgment of Caterpillar’s Tax Department. Caterpillar’s in-house tax professionals and outside advisors manage tax risk every day, and we remain convinced that the 

restructuring and subsequent transactions comply with the tax 

law. 

CSARL’s purchases and sales of parts have more than sufficient 

business substance to be respected for tax purposes. The 1999 restructuring of parts purchases and sales did not in any way violate 

generally applicable judicial doctrines in the tax area. An independent expert, Professor John Steines, of the New York University School of Law, confirms this conclusion. Professor Steines’ report was provided to the Subcommittee staff on March 10, 2014. 

CSARL pays Caterpillar Inc. an arm’s-length royalty for all intangible property, including intellectual property made available by 

Caterpillar Inc. to CSARL as well as arm’s-length service fees for 

all activities performed by Caterpillar Inc. for CSARL. So even 

with respect to parts that are sold to dealers located outside the 

United States, a portion of the resulting income is subject to current basis U.S. tax. 

CSARL’s direct purchase of its parts inventory reflects nothing 

more than the standard business operations and tax planning that 

any prudent business would employ in conducting its operations 

and complying with U.S. tax laws. 

In closing, I would like to emphasize again that Caterpillar is a 

great American company—an iconic company, you might say—publicly listed since 1929. We have steadily grown by working our 

business model day in and day out. Caterpillar does a significant 
61 

1See Exhibit No. 7, which appears in the Appendix on page 343. 

1See Exhibit No. 32, which appears in the Appendix on page 487. 

amount of business around the world, creates jobs, invests in the 

communities where we do business, and bears one of the highest 

effective tax rates for a multinational manufacturing company. 

Caterpillar complies with its legal obligations with respect to payment of taxes. 

We are happy to answer your questions. Thank you. 

Senator LEVIN. Thank you, Ms. Lagacy. 

My first question is for you. Were you involved in the implementation of the CSARL transaction in 1999? 

Ms. LAGACY. No, I was not. 

Senator LEVIN. Mr. Perkins, at the time of the 1999 CSARL 

transaction, you were working for Caterpillar in Peoria. You were 

serving as its Tax Department’s main point of contact with PwC. 

Is that correct? 

Mr. PERKINS. Mr. Chairman, that is correct. 

Senator LEVIN. And, Mr. Beran, you or Mr. Perkins, I believe— 

what was your role in 1999? 

Mr. BERAN. I was and am the head of the Tax Department. 

Senator LEVIN. OK. And you worked directly on the CSARL 

transaction? 

Mr. BERAN. I was involved with its formulation, yes. The implementation, other people did much more work than I. 

Senator LEVIN. So you were involved in the formulation of it. 

Mr. BERAN. Yes. 

Senator LEVIN. And would you look at Exhibit 7,1 please. This 

was the way in which PwC recommended that Caterpillar could reduce its taxes. It is one page from the document, and here is what 

it says. Purpose: Take ‘‘CAT Inc. out of chain. Recharacterize Marketing Company Income to Achieve U.S. Tax Deferral.’’ 

And then if you look further down, the description of—and the 

chart there shows how it was simply done. As you point out, Caterpillar was, as you said, Ms. Lagacy, taken out of the chain as an 

unnecessary middleman. We will get into that in a minute as to 

just how unnecessary Caterpillar may have been. But at any rate, 

the direct purchase, so-called, went to COSA in Geneva from these 

suppliers. Is that correct so far, Mr. Beran? 

Mr. BERAN. Yes, sir. 

Senator LEVIN. All right. Mr. Perkins, is that correct? 

Mr. PERKINS. Yes, it is. 

Senator LEVIN. All right. Now, was it the Caterpillar Tax Department that came up with the idea to remove Caterpillar Inc. from 

the title chain, or was that a PwC idea? 

Mr. PERKINS. Mr. Chairman, I can respond to that. The original 

idea or the genesis of that was within the Caterpillar Tax Department. 

Senator LEVIN. All right. 

Mr. PERKINS. Predated the PwC proposed changes by at least a 

half a dozen years. 

Senator LEVIN. OK. Now, take a look at Exhibit 32,1 if you 

would. By the way, before we leave Exhibit 7, I will repeat it again. 

One of the benefits and costs was this change in the title, ‘‘rel-
62 

atively simple re-invoicing requirements’’; in other words, the parts 

never went to Switzerland. Is that correct, Mr. Beran? 

Mr. BERAN. The parts would be distributed all over the world. 

Senator LEVIN. But they did not go to Switzerland. 

Mr. BERAN. Many of them went to one of the—well, they went 

to warehouses that—— 

Senator LEVIN. Switzerland itself. 

Mr. BERAN. They went to the warehouses that CSARL oversees. 

Senator LEVIN. And how many warehouses are there in Switzerland? 

Mr. BERAN. None in Switzerland. 

Senator LEVIN. How many warehouses in the United States, do 

you know? 

Mr. BERAN. I do not know the exact number. It varies. 

Senator LEVIN. Ten, does that sound about right? 

Mr. BERAN. In the range. 

Senator LEVIN. In the range, OK. Now let us get to Exhibit 32. 

This is February 2011. It is a deposition of Sally Stiles under oath. 

Do any of you know who Sally Stiles is? Let me ask you, is she the 

Caterpillar director of global tax, do you know, Mr. Beran? 

Mr. BERAN. She is the director of global tax operations now. 

Senator LEVIN. OK. So she is now the director of global tax. Here 

is what she said in her deposition: 

‘‘Question:’’—this is Exhibit 32. ‘‘Is it fair to say that the driving 

force behind . . . CSARL was the tax department and not any 

business unit’’? nd her answer is: ‘‘Yes.’’ Was that correct? 

Mr. BERAN. Senator, the context is that the Tax Department has 

to continually adapt to the way the business is run. 

Senator LEVIN. I understand. 

Mr. BERAN. And that is what we were doing. 

Senator LEVIN. I understand. Was her statement correct, that 

the Tax Department was the driving force? 

Mr. BERAN. At the point in time we were aligning our tax reporting with the way the business was run, yes, we have to propose 

that, business—— 

Senator LEVIN. I am not arguing with you. I am just asking you 

whether or not the Tax Department was the driving force behind 

the CSARL transaction. That is all I am asking. 

Mr. BERAN. Yes. 

Senator LEVIN. OK. Now, according to information which PwC 

has provided us, from 1999 to 2003 Caterpillar paid PwC $55 million to design, develop, and implement the Swiss tax strategy involving CSARL, which Caterpillar called the Global Value Enhancement (GloVE), program. Does that match what you know, Mr. 

Beran? 

Mr. BERAN. I believe that is in the range. 

Senator LEVIN. All right. Mr. Perkins, does that match your understanding, too? 

Mr. PERKINS. Yes, it does. 

Senator LEVIN. All right. So from the beginning, the decision to 

use CSARL and direct Caterpillar’s non-U.S. profits to Switzerland 

was to shift profits to a low-tax jurisdiction. Is that correct? 

Mr. BERAN. Senator, as I said, it was to align the profit recognition where the business was being run and managed. 
63 

1See Exhibit No, 7, which appears in the Appendix on page 343. 

Senator LEVIN. But wasn’t the purpose to shift profits for tax 

purposes to a low-tax jurisdiction. Is that correct? 

Mr. BERAN. We had to get the profits where they were earned. 

Senator LEVIN. Well, I am asking you—— 

Mr. BERAN. So it was not a shift. It was to get them to where 

they were earned. I mean, it changed the location, but the point 

was to get them to where they were earned. 

Senator LEVIN. Take a look at page 4619 in Exhibit 7.1 Do you 

have that page. It says at the head of the page, ‘‘Increase Profit Associated with Marketing, U.S. Tax Deferral.’’ Do you see that? 

Mr. BERAN. Yes. 

Senator LEVIN. OK. And then look at ‘‘Benefits/Costs,’’ where it 

says, ‘‘Migrates profits from CAT Inc. to low-tax marketing companies.’’ Do you see that? 

Mr. BERAN. Yes. 

Senator LEVIN. OK. Was that accurate? Was that a benefit? 

Mr. BERAN. Yes, it is a benefit to earn income in low-tax jurisdictions. 

Senator LEVIN. All right. 

Ms. LAGACY. Senator, could I add that—— 

Senator LEVIN. Well, let me just finish. To migrate the profits 

from CAT Inc. to a low-cost marketing company. Is that what it 

says? 

Mr. BERAN. Yes. 

Senator LEVIN. And this was the plan that you put in place. Is 

that correct? 

Mr. BERAN. That is PwC’s choice of terms, I guess. 

Senator LEVIN. Whose? 

Mr. BERAN. PricewaterhouseCoopers’ choice of wording. 

Senator LEVIN. That is their choice of wording. 

Mr. BERAN. Yes. 

Senator LEVIN. Fair enough. And that is what your company 

bought? 

Ms. LAGACY. And, Senator, could I add, please? 

Senator LEVIN. Well, I just want first Mr. Beran; then you will 

have a chance. 

Mr. BERAN. We paid them for their services, yes. 

Senator LEVIN. So you bought their plan, their strategy. 

Do you want to add something there, Ms. Lagacy? 

Ms. LAGACY. Yes, just that, again, keep in mind that CSARL and 

its predecessor company, COSA, were in business since 1960. At 

the time of this realignment, we had approximately 500 employees 

in our Geneva office, but perhaps more importantly, thousands of 

employees outside the United States doing the work to help sell 

parts on machines. 

Senator LEVIN. Oh, sure. Those employees were all Caterpillar’s 

employees, were they not? 

Ms. LAGACY. No. There are Caterpillar employees and also 

CSARL employees. 

Senator LEVIN. How many employees did Caterpillar have? 

Ms. LAGACY. In 1999? 
64 

Senator LEVIN. No, at the time—the moment you just talked— 

you just said—— 

Ms. LAGACY. I do not know the exact number of total Caterpillar 

employees. 

Senator LEVIN. How many employees did CSARL have? 

Ms. LAGACY. CSARL had thousands of employees. We had 500 

employees at that time in Geneva, Switzerland. 

Senator LEVIN. Right. 

Ms. LAGACY. But many other employees around the world. 

CSARL is not just in Geneva, Switzerland. It is the effort that markets—does also manufacturing and sells machines, engines, and 

parts outside of the United States. 

Senator LEVIN. And you had another 400 or so in Singapore, but 

all of the employees around the world, other than that, are working 

for Caterpillar or Caterpillar-owned companies. Is that not correct? 

Ms. LAGACY. CSARL—— 

Senator LEVIN. Take a look at your own numbers of employees, 

total number of Caterpillar employees around the world are in 

the—— 

Ms. LAGACY. We have over 118,000 employees around the world 

today; 52,000 of those employees are in the United States. So more 

than half of our employment is outside of the United States. 

Senator LEVIN. Of course, but that is Caterpillar’s offshore employees. 

Ms. LAGACY. But I—— 

Senator LEVIN. Is that not true? 

Ms. LAGACY. No. 

Senator LEVIN. OK. Let me give you the numbers, and then if 

you can tell me where we are wrong—— 

Ms. LAGACY. OK. 

Senator LEVIN. These numbers came in a letter to the Subcommittee. Total Caterpillar employees globally, 118,000. Caterpillar U.S. employees, 52,000. Caterpillar offshore employees, including CSARL, 66,000. 

Now let us get down to CSARL. CSARL employees global, 682. 

CSARL employees Switzerland, 400. 

Is that wrong? That is a letter that came into the Subcommittee 

from you? 

Ms. LAGACY. There are also employees that I believe you have 

not included there from Singapore and some other areas. 

Senator LEVIN. We give you the total Caterpillar employees, so 

how many of the 118,000 employees then would you attribute to 

Singapore? 

Ms. LAGACY. I do not have those exact numbers, but, again, if I 

could get that document, I can research that and check that, 

please. 

Senator LEVIN. OK. We will get you this document that you sent 

to us. OK? 

Ms. LAGACY. OK. Thank you. And, again, those non-U.S. employees we talked about, they are working for entities that report up 

to CSARL. 

Senator LEVIN. They are—you say ‘‘report to CSARL.’’ But they 

are Caterpillar employees, are they not? 
65 

1See Exhibit No. 50b, which appears in the Appendix on page 563. 

Ms. LAGACY. I do not understand the distinction you are making 

there exactly, but again—— 

Senator LEVIN. Do they get a check from CSARL? 

Ms. LAGACY. There are definitely employees of CSARL, many employees outside the United States supporting the work of CSARL. 

Senator LEVIN. Well, we are going to look at your chart.1 We are 

going to give you your chart. 

Ms. LAGACY. OK. 

Senator LEVIN. According to what we take off your document, 

CSARL employees globally are 682. Is that wrong? 

Ms. LAGACY. I do not recognize that number, so I would like to 

review the chart, if I could. 

Senator LEVIN. Do you know how many employees of CSARL in 

Switzerland? 

Ms. LAGACY. I know that in 1999 there were about 500. 

Senator LEVIN. All right. So at least in Switzerland there are 500 

CSARL employees. We think there are 400 now, but we will not 

argue over 100. OK? 

Ms. LAGACY. I think that is probably right. 

Senator LEVIN. All right. And the total number of Caterpillar 

U.S. employees are 52,000. Is that correct? 

Ms. LAGACY. Yes. 

Senator LEVIN. And the total number of parts employees globally, 

according to your letter, 8,300. Does that sound right? 

Ms. LAGACY. Again, it depends on how you define parts, because 

we do not have a parts business—— 

Senator LEVIN. OK. 

Ms. LAGACY [continuing]. And we do not identify that separately. 

I do not agree that those are all the employees working on parts 

now. 

Senator LEVIN. Will you take a look at Exhibit 50b? 

I will stop here because I have gone over my time. But just take 

a look at Exhibit 50b, answer number 10. This is the question: 

‘‘With regard to replacement parts business, for each year from 

1999 through 2012, please provide the following information: The 

percentage of your company’s worldwide headcount and payroll assigned to the PFRP [purchased finished replacement parts] business and located in the U.S. The percentage . . . assigned to [that] 

business and located in Switzerland.’’ 

Your answer is that you do ‘‘not have employees assigned to a 

replacement parts business, however there are organizations 

throughout the enterprise that support purchase, storage, movement, and sales of replacement parts. In the chart below, we have 

identified divisions participating in these activities and provided 

U.S. based and non-U.S. based headcount statistics for the years 

2006 through 2012.’’ 

And here is what you say: parts distribution, parts pricing, parts 

marketing. So on that chart you identify a certain number of employees related to parts distribution, and you show US Headcount, 

Total US Headcount, 3,619; Non-US Headcount Hourly, Non-US 

Headcount Management; and then your Total non-US Headcount, 

2,027. And then you identify Geneva four or five lines down, Parts 
66 

Pricing. You have—it is all parts, parts, parts, parts, parts. You got 

four in Geneva, you got six more in Geneva. Then you got Parts 

Marketing Support. And then you show these non-US Headcounts 

and so forth. So these are your numbers. So the chart that I read 

you is your numbers, but that means there are 4,900 parts-related 

employees in the United States, 66 in Geneva. Those are the totals 

from this chart. 

Ms. LAGACY. Senator, could I comment on that? 

Senator LEVIN. Of course. 

Ms. LAGACY. Just referencing our earlier questions, there is a 

line here for total non-U.S. headcount of 2,027, and then within 

purchasing another total non-U.S. headcount of 1,080. And, of 

course, as you referenced, there are some in Geneva. So it does appear to be thousands of employees outside of the United States. 

Senator LEVIN. Of course. That is what we said, and we believe 

those are all not CSARL employees but Caterpillar employees, and 

treat themselves as Caterpillar employees. Senator McCain. 

Senator MCCAIN. Thank you, Mr. Chairman. 

The U.S. corporate tax rate is 35 percent, but I understand that 

the effective tax rate that Caterpillar paid was 29 percent, which 

is 3 percent higher than the average effective tax rate for U.S. corporations. How does that happen? And does that include the overseas subsidiary income? 

Ms. LAGACY. Yes, Senator McCain, that does include—it is a rate 

that is an average rate on our global business, and so our overall 

average effective tax rate is 29 percent. That does include our global business. 

Senator MCCAIN. So even though there are significant profits 

made by your overseas operation, you still pay an overall effective 

tax rate of 29 percent? 

Ms. LAGACY. Yes, that is correct. 

Senator MCCAIN. How do you account for that? 

Ms. LAGACY. We do publish in our financial statements and our 

10–K, if we look at the most recently completed year, we start with 

the U.S. statutory tax rate of 35 percent. About 5 points or so 

comes off of that due to all of our business outside the United 

States, not just CSARL, of course, but all business outside the 

United States. 

There are then some provisions like the R&D credit and the production deduction that are part of U.S. tax law. You would then 

add some back in for State and local taxes. At the end you come 

up to 29 percent. 

Senator MCCAIN. Again, I just am curious why it is that you 

would pay—even with the overseas profits, that you would still pay 

a higher effective tax rate than most other corporations. 

Ms. LAGACY. And we do think that that is significant, especially 

considering 65 percent of our business is outside of the United 

States. 

Senator MCCAIN. Mr. Beran, when and how often since 1999 has 

the IRS audited Caterpillar? 

Mr. BERAN. Senator, we are under continuous examination. The 

IRS literally sits right outside my office. In that timeframe, we 

have closed 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006—— 

Senator MCCAIN. What haven’t you closed? What year? 
67 

1See Exhibit No. 56c, Memorandum to File from the Permanent Subcommittee on Investigations’ Majority Staff regarding False Testimony Related to IRS’ Position on Caterpillar’s Tax Liability, which appears in the Appendix on page 633. 

Mr. BERAN. Two-thousand seven and later years are still under 

exam. 

Senator MCCAIN. They are still under examination. So you are 

under constant auditing from the IRS? 

Mr. BERAN. Yes, we are. 

Senator MCCAIN. And they have not claimed you are in violation 

of IRS regulations? 

Mr. BERAN. Each year’s return provides substantial information, 

including transfer pricing information related to our international 

businesses. They have proposed no adjustments.1

Senator MCCAIN. You heard that the first panel of witnesses said 

that the IRS was not doing their job. Would you agree with that? 

Mr. BERAN. Well, they ask extensive questions about our business. We provided a lot of information to them, answered a lot of 

questions, reviewed our transfer pricing processes with them. I 

think they have been pretty diligent. 

Senator MCCAIN. Maybe you could submit for the record the 

number of audits and the specific reasons for investigations by the 

IRS that they gave when they audited you. Could you do that? 

Mr. BERAN. Certainly, Senator. 

Senator MCCAIN. Caterpillar obviously can deliver a replacement 

part anywhere in the world in 24 hours or less. What role does the 

Swiss subsidiary and its dealer network play in making the 24- 

hour replacement parts delivery possible? 

Ms. LAGACY. CSARL plays a significant role in that, so at 

CSARL, who is administering dealers outside the United States, 

they first helped develop that dealer network; now they administer 

those dealers. So they are working regularly with dealers on how 

best to serve our customers around the world, which includes forecasting the needs of the customers, developing merchandising and 

marketing programs, etc. 

Senator MCCAIN. The parts come from the United States, or 

where? 

Ms. LAGACY. Parts come from all over the world. Specifically 

CSARL does purchase about 70 percent of their purchased finished 

parts from the United States. They do get parts from other parts 

of the world, also. 

Senator MCCAIN. Well, I thank you. I thank the witnesses. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator McCain. Senator 

Johnson. 

Senator JOHNSON. Thank you, Mr. Chairman. 

Just getting back to your relationship with the IRS, Mr. Beran 

you said that they are sitting right outside your office. How many 

are sitting right outside your office, on average? 

Mr. BERAN. On average, two or three work outside my office but 

several others, three or four work offsite. They have a number of 

members assigned, but they are in and out. 

Senator JOHNSON. Full-time. So you closed out through 2006, 

2007? 

Mr. BERAN. Two-thousand six. 
68 

1See Exhibit No. 56c, Memorandum to File from the Permanent Subcommittee on Investigations’ Majority Staff regarding False Testimony Related to IRS’ Position on Caterpillar’s Tax Liability, which appears in the Appendix on page 633. 

Senator JOHNSON. Are they all just looking at 2007 now, or are 

they looking at all those years in kind of compilation? 

Mr. BERAN. They typically do 2- or 3-year audit cycles. If they 

get behind, they extend. 

Senator JOHNSON. In the closed-out audits, you said they looked 

to transfer pricing. I mean, that encompasses this entire relationship with CSARL and, again, because they have proposed no adjustments, they have basically given their blessing to what you 

have done here from the standpoint of compliance with tax law, 

correct? 

Mr. BERAN. That is the way I have taken it. There is extensive 

documentation that is provided every year, and we know they ask 

questions about it.1

Senator JOHNSON. Ms. Lagacy, in the scheme of things, in terms 

of the expenses of Caterpillar, what is your largest expense? Labor? 

Material? 

Ms. LAGACY. Yes, it would be the cost to build and make our 

products, yes. 

Senator JOHNSON. OK. In that hierarchy of costs, where does the 

tax expense fall? 

Ms. LAGACY. It is not the primary driver of our costs. 

Senator JOHNSON. But it is a large—— 

Ms. LAGACY. Yes. 

Senator JOHNSON. It is a large cost center, correct? 

Ms. LAGACY. Yes. 

Senator JOHNSON. Certainly something that any responsible 

management team would take a look at managing, just like you 

manage labor, just like you manage material purchases, that type 

of thing. 

Ms. LAGACY. Correct. 

Senator JOHNSON. There is nothing nefarious in trying to minimize that tax burden? 

Ms. LAGACY. No, absolutely not. 

Senator JOHNSON. You had a whistleblower say that you did not report $2 billion worth of income tax to the United States. Let us 

say legally, properly or improperly, let us just stipulate that you 

saved yourself $2 billion in tax expense to the U.S. Government by 

complying with the U.S. tax code. What did Caterpillar do with 

that $2 billion or any tax savings that you may have enjoyed because of your compliance with the tax code? 

Ms. LAGACY. Well, I would like to say that we did have a former 

employee—he did file an employment lawsuit. That was resolved, 

and all of his concerns were taken seriously, and all of the experts, 

both internally and externally, PricewaterhouseCoopers and 

McDermott Will & Emery, found there to be no merit in his concerns. 

But to answer your question regarding what we do with that, we 

have continued to invest that in our business, and that is why we 

have seen the growth that we have seen. So in 1999, we were a 

$20 billion company. Last year our sales were $56 billion. Our exports and our U.S. business grew over that time period. 
69 

Senator JOHNSON. So you did not stuff any kind of tax savings 

in a mattress or a pillow case. I mean, you actually put that to 

use—— 

Ms. LAGACY. Correct. 

Senator JOHNSON [continuing]. Growing your business, creating 

jobs. 

Ms. LAGACY. Correct. 

Senator JOHNSON. Both domestically as well as overseas. 

Ms. LAGACY. Yes, exactly. 

Senator JOHNSON. So those tax savings—I mean, we can quibble 

over who should have claimed those dollars. I mean, certainly had 

we taken them here in the Federal Government, we would have 

spent it somewhere. But you actually spent it putting people to 

work. 

Ms. LAGACY. We put it into our business, to grow our business, 

yes. 

Senator JOHNSON. Let us say we were able to pass a law here 

and capture a bigger share of Caterpillar’s income. What options 

would Caterpillar have under that scenario if the tax burden just 

became too competitive and you could not compete with your global 

competitors? 

Ms. LAGACY. I think that is really the key, Senator. It is really 

important that we have a tax code that allows us to compete fairly 

in the global marketplace. We are not looking for a free lunch, but 

we are looking for the ability to compete fairly with companies inside and outside of the United States. 

Senator JOHNSON. Can you just speak to the relative competitiveness of what you are paying tax-wise to your competitors, the ones 

that were mentioned earlier in the hearing? And maybe just name 

the competitors that are your primary—— 

Ms. LAGACY. Yes. Again, we talked about Volvo earlier in the 

hearing, who had a much lower effective tax rate; Komatsu is another one of our primary competitors outside the United—— 

Senator JOHNSON. Do you know their exact tax rate? Can you 

give us the relative difference there? 

Ms. LAGACY. I do not have their exact tax rates. 

Senator JOHNSON. Mr. Beran. 

Mr. BERAN. It varies year by year, depending upon profitability 

and their mix of income, just as it does with us. But they now have 

a lower Japanese statutory rate. But on top of that, they now have 

a territorial system that allows them to earn money in lower-tax 

environments and can move it wherever they can best employ it in 

their business. 

Senator JOHNSON. Do you feel that Caterpillar is at a competitive 

disadvantage because of the U.S. tax system? And can you be specific in terms of exactly what is the worst part of it? 

Mr. BERAN. One of the worst parts is the international regime, 

which taxes much more foreign activity income than any of our 

competitor nations. So a business like CSARL would not tax that 

business at all back in their home country. You just pay the Swiss 

tax. And then the complexity of the U.S. rules that cause us to 

have to do much greater effort to be able to move money across our 

foreign subsidiaries, particularly back to the United States. 
70 

Senator JOHNSON. Are you specifically aware of any maybe large 

contracts you have lost and potentially believe that it was because 

of our uncompetitive tax system? 

Mr. BERAN. I could not say that we have lost contracts that way. 

It would probably come up more if we were looking to buy a company and a foreign competitor could bid more for that company. 

Senator JOHNSON. OK. So it puts you at a disadvantage in terms 

of M&A activity. 

What total percentage of your sales is parts? 

Mr. BERAN. I do not know. 

Senator JOHNSON. Anybody on the panel know? 

Ms. LAGACY. Yes, we actually, Senator, do not separate our parts 

business, so we do not have a separate parts business. It is very 

integral to our products and our machine products. So it is our 

business model. 

Senator JOHNSON. OK. I was just trying to get a little bit better 

feel for the headcount issue that Senator Levin was talking about. 

I kind of view—and this is just my assumption, that CSARL in Geneva is kind of a headquarters, with a limited headcount, but you 

have people with other divisions internationally, either with direct 

reporting responsibility that may not be called CSARL but they are 

basically either directly reporting into CSARL or there is a dotted 

line of reporting. 

Ms. LAGACY. Correct. 

Senator JOHNSON. Can you describe that a little bit? Is that a 

correct assumption? 

Ms. LAGACY. Yes, exactly. That is a very correct assumption. We 

have a lot of key decisionmakers and a number of employees outside the United States who do as you just suggested. They understand our customers, they understand the needs of our customers. 

They work with our dealers on everything from financing to inventory management to understanding what the needs are to best 

serve the customers in that territory. 

Senator JOHNSON. So, again, I was trying to interpret the schedule that Senator Levin was talking about in terms of headcount, 

but I guess—maybe it is not direct. Maybe it was not answered because you were being very specific in terms of CSARL. But there 

are thousands of employees that really in some way, shape, or form 

are reporting or certainly contributing to—— 

Ms. LAGACY. Yes. 

Senator JOHNSON [continuing]. The activities of CSARL. Is that 

an accurate statement? 

Ms. LAGACY. Yes. That is true. 

Senator JOHNSON. OK. Well, thank you for your testimony. 

Thank you, Mr. Chairman. 

Senator LEVIN. Are you saying that CSARL has thousands of employees? 

Ms. LAGACY. Again, there are—— 

Senator LEVIN. I know there are a lot of people who communicate 

with CSARL. I am just asking you, are you saying CSARL has 

thousands of employees? 

Ms. LAGACY. Again, if you are asking very specifically on the 

legal entity structure of CSARL and it has a number of subsidiaries, I know that there are thousands of employees doing the work 
71 

1See Exhibit No. 52, which appears in the Appendix on page 589. 

of administering the dealers, manufacturing, selling machines, etc., 

that are part of CSARL. 

Senator LEVIN. I do not know—‘‘part of?–’’ You are saying a lot 

of people communicate with CSARL. Are you actually saying 

CSARL has—we know how many employees Caterpillar has, right? 

Ms. LAGACY. Yes. 

Senator LEVIN. We have the number. How many employees does 

CSARL have? 

Ms. LAGACY. I do not have the exact number—— 

Senator LEVIN. Do you have an approximate—— 

Ms. LAGACY [continuing]. Of CSARL employees. 

Senator LEVIN. Do you have an approximate number? 

Ms. LAGACY. Again—— 

Senator LEVIN. Just do you have an approximate number? 

Ms. LAGACY. No. 

Senator LEVIN. Now, let me ask you about what Caterpillar does. 

Take a look, if you would, at Exhibit 52.1 This is the servicing 

agreement between Caterpillar and CSARL, because Caterpillar 

just kept doing what it was always doing, a parent corporation, 

most of the employees by far, CSARL with very few employees, relatively, and here is what—— 

Mr. RYAN. Mr. Chairman, could we just get to the exhibit? 

Senator LEVIN. Sure. 

Mr. RYAN. We are not on the exhibit yet. 

Senator LEVIN. OK. And who is that just spoke? 

Mr. RYAN. I apologize, Your Honor. Stephen Ryan. I am counsel 

to the company. The witnesses were looking. 

Senator LEVIN. Thank you. I was just wondering, since you 

spoke, for our reporter to know who it was. 

Mr. RYAN. Thank you, sir. 

Senator LEVIN. So at the back of this Exhibit 52 is Schedule 1 

that has a number 661 on it, ‘‘Schedule of Services to be Provided 

by Caterpillar.’’ This is the list of what they do. Have we got it? 

Ms. LAGACY. I am looking for Schedule 1. 

Senator LEVIN. OK. 

Ms. LAGACY. Yes, I have it. 

Senator LEVIN. It includes the following: creating and translating 

services manuals and materials for replacement parts; provides inventory availability management; provides parts custom service to 

dealers; processes dealer parts returns; maintains information systems; provides marketing consulting services to dealers; provides 

strategic planning and accounting services. 

Now, for the U.S. warehouses, Caterpillar—and, again, CSARL 

has no warehouses. Caterpillar agrees to manage and monitor inventory levels worldwide and perform expediting services, arrange 

for transportation of CSARL parts, perform general warehousing 

services and provide warehousing facilities, perform inventory 

management services. And for all those services, on the last page, 

Caterpillar gets reimbursed its costs plus 5 percent of those costs. 

So basically Caterpillar agreed to keep running the program for 

CSARL. CSARL has 65 employees handling parts, according to 

your charts, no warehouses, no parts suppliers, no parts inven-
72 

1See Exhibit No. 18, which appears in the Appendix on page 411. 

tories, no forecasting or other software being administered from 

CSARL. 

My question: Would Caterpillar perform all of these same services for a third party at cost plus a small service fee while giving 

up 85 percent of its profits? Ms. Lagacy, would you do that? 

Ms. LAGACY. Yes, and I would like to—— 

Senator LEVIN. You would? 

Ms. LAGACY. Your question—— 

Senator LEVIN. You are offering to a third party—— 

Ms. LAGACY. No, I thought you asked me if I would answer the 

question. 

Senator LEVIN. No, I was asking you whether you would offer 

this—I thought you were making an offer right now to a third 

party to buy all that. 

Ms. LAGACY. No. I was attempting to answer your question. So, 

first, you said CSARL kept doing what it was doing, and, again, 

CSARL and its predecessor company were in business since 1960 

doing this work of supporting our dealers and selling parts, marketing parts, machines and engines in the territory—— 

Senator LEVIN. You have gone into what CSARL has done, and 

I am—— 

Ms. LAGACY. So I think that is significant. 

Senator LEVIN [continuing]. Just now telling you what your documents say Caterpillar is doing. That is all. Did I read it correctly? 

Ms. LAGACY. Yes, you read the document correctly. 

Senator LEVIN. OK. Now, take a look at Exhibit 18,1 Caterpillar 

Board of Directors Minutes. If you look at the first line in the second paragraph—do you have it? Exhibit 18, did you get it? 

Ms. LAGACY. I am on Exhibit 18. 

Senator LEVIN. OK. Second paragraph—— 

Ms. LAGACY. Which page? 

Senator LEVIN. It says, ‘‘Mr. Larson.’’ Who is that? 

Ms. LAGACY. I do not see that in the document. 

Senator LEVIN. OK. Is this a Board of Directors meeting you 

have, the minutes? 

Ms. LAGACY. Caterpillar Board of Directors Minutes Excerpts. 

Senator LEVIN. Yes. 

Ms. LAGACY. It starts with page 5? 

Senator LEVIN. Well, look at 1857 at the bottom, page 8. 

Ms. LAGACY. OK. 

Senator LEVIN. ‘‘Larson,’’ do you see that there? 

Ms. LAGACY. Yes. 

Senator LEVIN. ‘‘Larson next described the efforts underway to 

transform the parts distribution business from a United States centric model’’—this is 2012, there are ‘‘efforts underway to transform 

the parts distribution business from a United States centric 

model.’’ So in February 2012, about a year ago, your parts distribution business is called ‘‘United States centric.’’ That is what was 

told to the Board of Directors. Are you aware of that? 

Ms. LAGACY. No, I am reading those words on this page. I was 

not involved in this meeting, so I do not know the context under 

which this discussion occurred. But, again, I can tell you that we 
73 

1See Exhibit No. 1f, which appears in the Appendix on page 281. 

have employees and parts being handled all around the world by 

a number of people today and have for many years. 

Senator LEVIN. I am sure of that. That is not the question. The 

question is whether 85/15 is an appropriate split of profits on your 

parts, international parts deal, business. 

Ms. LAGACY. I would like to respond to that, if I could, Mr. 

Chairman. 

Senator LEVIN. Well, let me keep to these questions. ‘‘Mr. Larson 

next described the efforts underway to transform the parts distribution business from a United States centric model’’—this is a 

year ago, and you are not aware of that description to the Board 

of Directors. Is that correct, you are not aware of that by Mr. 

Larson? 

Ms. LAGACY. No. I mean, I was not a part of this. 

Senator LEVIN. This is the first you have seen that? 

Ms. LAGACY. If I have seen it at all, it has been simply for preparation for this hearing. 

Senator LEVIN. All right. Now, there was a discussion here at the 

board meeting, according to the title there, on ‘‘Parts Growth and 

Distribution Facility Footprint Expansion.’’ That was at the board 

meeting. Did you know that the board was going to be discussing 

that in February 2012? 

Ms. LAGACY. I did not. 

Senator LEVIN. OK. Now, let me ask you, Mr. Beran, information 

which has been provided to the Subcommittee by Caterpillar shows 

that 70 percent of all purchased finished replacement parts sold 

offshore were manufactured in the United States. That is a chart 

we are going to put up. That is Exhibit 1f,1 which is the same thing 

as the chart. And I think, Ms. Lagacy, you used the same figure 

a moment ago. Is that correct? 

Ms. LAGACY. Yes, approximately 70 percent—— 

Senator LEVIN. Of all purchased finished replacement parts sold 

offshore manufactured in the United States, correct? 

Ms. LAGACY. Yes. 

Senator LEVIN. OK. Mr. Beran, would you—— 

Ms. LAGACY. Purchased finished, replacement parts again, by 

suppliers, yes. 

Senator LEVIN. Right. Do you agree with that, Mr. Beran? 

Mr. BERAN. Yes. 

Senator LEVIN. And how many purchased finished replacement 

parts are manufactured in Switzerland, Mr. Beran? 

Mr. BERAN. Narrowing things down to Switzerland does not describe—— 

Senator LEVIN. I am just asking you a question. You would ask 

yourself a different question. How many parts are manufactured in 

Switzerland? 

Mr. BERAN. CSARL manages—— 

Senator LEVIN. Could you answer my question, please, and I am 

not asking you what you think they manage. We have gone 

through that. I am asking you a simple, direct question. 

Mr. BERAN. They do not have any manufacturing in Switzerland. 
74 

Senator LEVIN. Thank you. Now, what percentage of how many 

warehouses are there in Switzerland, Caterpillar warehouses or 

CSARL warehouses? Do you know? 

Mr. BERAN. None, to my knowledge. 

Senator LEVIN. Do you know how many warehouses there are in 

the United States, Caterpillar warehouses? 

Mr. BERAN. I think we discussed earlier there are around 10, but 

I do not know the exact number. 

Senator LEVIN. Is it true, Mr. Beran, that Caterpillar has its 

largest parts warehouse and manages its global parts inventory in 

Morton, Illinois? The largest parts warehouse of Caterpillar in Morton, Illinois. That is my question. 

Mr. BERAN. Morton has a very sizable facility. I think it is the 

largest. 

Senator LEVIN. Thank you. 

Mr. BERAN. But we have large ones in Belgium, in Singapore, 

in—— 

Senator LEVIN. None in Switzerland. 

Mr. BERAN. None in Switzerland. All of them are owned by 

CSARL or one of its subsidiaries. 

Senator LEVIN. I understand. You say ‘‘owned’’? CSARL owns 

those? 

Mr. BERAN. Owns—— 

Senator LEVIN. Who owns CSARL? 

Mr. BERAN. CSARL owns all of the—excuse me? 

Senator LEVIN. Who owns CSARL? 

Mr. BERAN. Ultimately it is owned by Caterpillar Inc., but every 

government in the world expects us to report by legal entity. 

Senator LEVIN. Right. So CSARL is owned by Caterpillar. 

Mr. BERAN. That is correct. 

Senator LEVIN. You say CSARL owns those warehouses? 

Mr. BERAN. CSARL either owns the warehouses or owns the entity that owns them. 

Senator LEVIN. Right, and who owns the entity that owns 

CSARL? 

Mr. BERAN. Ultimately Caterpillar Inc. 

Senator LEVIN. Fine. Are the names Stuart Levenick, Stephen 

Gosselin, Stephen Larson, and Barbara Hodel—are those names familiar to you? 

Mr. BERAN. I recognize those names, yes. 

Senator LEVIN. Do you know those names, Ms. Lagacy? 

Ms. LAGACY. Yes, I do. 

Senator LEVIN. Do they work in the United States? Do you 

know? 

Ms. LAGACY. Could you read the list again? I am sorry. Stu 

Levenick—— 

Senator LEVIN. Stuart Levenick? 

Ms. LAGACY. Yes. 

Senator LEVIN. Stephen Gosselin, Stephen Larson, and Barbara 

Hodel. 

Ms. LAGACY. Yes, all of them work in the United States. 

Senator LEVIN. Are they key leaders of Caterpillar’s parts business? 
75 

1See Exhibit No. 53, which appears in the Appendix on page 600. 

Ms. LAGACY. They are key leaders, but, again, keep in mind we 

do not have a parts business. 

Senator LEVIN. I am sure, but are they key leaders in the parts 

part of your business? 

Ms. LAGACY. They are key leaders of Caterpillar. 

Senator LEVIN. And do they work heavily in the parts part of 

Caterpillar, even though it is not signified as parts separately? 

Ms. LAGACY. They have, again, especially Stu Levenick would 

have multiple responsibilities that would go well beyond parts, but 

he does have some responsibilities there also. 

Senator LEVIN. And how about Stephen Gosselin? Does he have 

significant—— 

Ms. LAGACY. He has significant overall product support responsibilities, but, again, not all of those—— 

Senator LEVIN. Does that include parts? 

Ms. LAGACY. Yes. 

Senator LEVIN. Stephen Larson. 

Ms. LAGACY. Stephen Larson has retired. 

Senator LEVIN. OK. Barbara Hodel? 

Ms. LAGACY. Barb Hodel works in our parts distribution area, logistics. 

Senator LEVIN. Does she work in the United States? 

Ms. LAGACY. Yes, she does. 

Senator LEVIN. OK. Do you know how many parts approximately 

are warehoused in the United States? 

Ms. LAGACY. I do not. 

Senator LEVIN. Do you know, Mr. Beran? 

Mr. BERAN. The number of parts—— 

Senator LEVIN. Approximately, within a hundred million or so, 

warehoused in the United States. Would you know, Mr. Perkins? 

Mr. PERKINS. No, I do not. 

Senator LEVIN. How about within half a billion? 

Ms. LAGACY. I would say in total I believe we have just under 

a million serviceable replacement parts. I do not know how many 

of those are stocked in the United States. 

Senator LEVIN. Would it surprise you to know that there is about 

a billion and a half parts, not types of parts but parts, that are 

warehoused in the United States? 

Ms. LAGACY. I do not know that number. 

Senator LEVIN. OK. It would not surprise you? 

Ms. LAGACY. Individual, so not part numbers but just individual 

numbers of parts, I frankly have no idea how many there might be 

housed in the United States. 

Senator LEVIN. OK. Would you take a look, please, at Exhibit 

53?1

Ms. LAGACY. I do not have an Exhibit 53 in my book. 

Senator LEVIN. OK. 

Ms. LAGACY. Thank you. 

Senator LEVIN. Do you have it now? 

Ms. LAGACY. Yes. 

Senator LEVIN. OK. I want to talk to you about the value of what 

was transferred to CSARL as part of the license: ‘‘What intangible 
76 

1See Exhibit No. 51, which appears in the Appendix on page 576. 

2See Exhibit No. 7, which appears in the Appendix on page 343. 

property will be transferred from CAT Inc. to COSARL under the 

replacement parts license?’’ ‘‘Under the replacement parts license,’’ 

that is what we are talking about, replacement parts, not machines, replacement parts license. 

So, first, please note that the document talks about parts, not 

machines, and ‘‘COSARL’’ refers to what we have been calling 

‘‘CSARL.’’ 

So here is what was planned to be transferred: patents and designs; parts, including patented elements; trademarks; parts sold 

under CAT trademark; contracts; buying from suppliers Caterpillar 

already has screened, qualified, negotiated prices with; systems 

and procedures; CAT proprietary LogNet information; know-how, 

methods, forecasts, estimates. 

Now, if you take a look at Exhibit 51,1 if you would, page 2 

under ‘‘Intellectual Property.’’ This was transferred. Intellectual 

property includes, but is not limited to, know-how, processes, designs, specifications, engineering standards, trade secrets, inventions, patent applications, patents, copyrights, trademarks, Caterpillar production system, customer lists, supplier lists, systems and 

more. 

So the economic rights to use that were transferred to your subsidiary in a tax haven. Would you have transferred all that to anyone but a related party? Now you have a chance to answer that 

question. Ms. Lagacy. 

Ms. LAGACY. Keep in mind that again I do not agree with your 

characterization of a tax haven, but—— 

Senator LEVIN. You do not think Switzerland is a tax haven? 

Ms. LAGACY. I do not really know the definition of a ‘‘tax haven.’’ 

Senator LEVIN. Oh, OK. But you said you disagreed with my definition. 

Ms. LAGACY. Right, so I would not—— 

Senator LEVIN. Obviously you do not know what a definition is. 

Ms. LAGACY. It is where we have done business and where we 

had headquarters since 1960. 

Senator LEVIN. All right. But it is a low-tax jurisdiction under 

your own documents, and that was one of the purposes of these 

transfers. Under your own documents, to a low-tax jurisdiction. 

That is what it says: ‘‘Migrate profits to a low-tax jurisdiction.’’ 

Ms. LAGACY. We, again, have had a headquarters in Geneva 

since 1960 and found it to be a good base from which to grow our 

business outside the United States, and we have been fairly effective—— 

Senator LEVIN. Well, I am sure you said that, but take a look 

again at Exhibit 7:2 ‘‘Benefits: Migrates profits from CAT Inc. to 

low-tax marketing company.’’ It is not irrelevant, is it, that it was 

a low-tax marketing company? Or is it irrelevant? That is your own 

document. I have read it to you three times. 

Ms. LAGACY. Right. This is—— 

Senator LEVIN. Exhibit 7, page 3 at the end: Before: ‘‘Migrate 

profits from CAT Inc. to low-tax marketing companies.’’ 
77 

1See Exhibit No. 17, which appears in the Appendix on page 403. 

Ms. LAGACY. Yes, and this is a PwC document, I believe. But I 

certainly would agree that the tax rate in Switzerland is much 

lower than the tax rate in the United States. 

Senator LEVIN. OK. So you use words, too, ‘‘low-tax [marketing] 

countries’’? Don’t you ever use those words? Doesn’t Caterpillar use 

those same words? Yes or No. 

Ms. LAGACY. We do not use the word ‘‘tax haven,’’ but there are 

certainly—— 

Senator LEVIN. How about ‘‘low tax’’ and ‘‘high tax’’? 

Ms. LAGACY [continuing]. Countries that are lower tax than others. 

Senator LEVIN. How about ‘‘low tax’’? Do you ever use those 

words? Take a look at Exhibit 17.1 The number at the bottom is 

5979. It has a CAT number at the bottom. Do you see it, page— 

I think it may be page 6 on your—do you see that? 

Ms. LAGACY. Starting—the title—— 

Senator LEVIN. Effective tax drivers. 

Ms. LAGACY [continuing]. Is ‘‘2009 Effective Tax Rate—Drivers.’’ 

Senator LEVIN. Yes, do you see that in that oval at the right, 

‘‘Losses in high tax rate countries, profits in low’’? Do you see that? 

Ms. LAGACY. I do see that. 

Senator LEVIN. OK. My question is: Would you have transferred 

all that, all of that that was in the licensing agreement to anybody 

but a related party? 

Ms. LAGACY. Again, to answer that question, keep in mind that 

everything that we have done has been at an arm’s-length standard, so all of that—— 

Senator LEVIN. Well, that is my question. Would you sell that to 

an unrelated party? Would you give a license to an unrelated 

party? That is my question. 

Ms. LAGACY. That would require a business decision based on the 

economics of that situation. I cannot simply answer that yes or no. 

Senator LEVIN. You cannot answer that no? 

Ms. LAGACY. No, I cannot. 

Senator LEVIN. OK. I think it is you would not answer that no. 

But you can answer it no because nobody in their right mind would 

sell to an unrelated party what Caterpillar transferred in that license agreement for nothing. 

Ms. LAGACY. I think it would be—— 

Senator LEVIN. No company will do that. 

Ms. LAGACY. And, again, it was not for nothing, of course. There 

is a royalty—— 

Senator LEVIN. Well, not for nothing. They kept 15 percent of the 

profits and transferred 85 percent of the profits in the future, but 

there was no consideration for the transfer. 

Ms. LAGACY. And, again, if you look at the 15-percent number, 

if you consider CSARL’s full—I do not think it gives a total picture 

because if you consider CSARL’s total licensed business, that number is slightly above 30. And if you then add on to that the service 

fees and the Subpart F income, it is actually more than half of the 

income from CSARL that incurs U.S. tax rates. 
78 

Senator LEVIN. My question to you is: Do you think any company 

would transfer with no consideration what was in that license? Are 

you not able to answer that? I think every corporate executive in 

the world would answer that, but you in front of this Subcommittee. There is no way you would transfer that to an unrelated company. Is that not true? 

Ms. LAGACY. Keep in mind—— 

Senator LEVIN. OK. You cannot answer that. Is that right? You 

cannot give a yes or no answer to that? 

Ms. LAGACY. I am trying to answer your question. 

Senator LEVIN. Are you able to give a yes or no answer to that 

question? 

Ms. LAGACY. I cannot give a yes or no answer to that question 

without understanding the full situation and the economics of what 

you are talking about. I think it would be irresponsible—— 

Senator LEVIN. I am talking about the license that was given to 

CSARL. That is what I have been talking about. 

Ms. LAGACY. Right. There was a license granted to CSARL, and 

CSARL was the organization that had developed the dealer network and continued to work with the dealer network to—— 

Senator LEVIN. Had developed the dealer network? You mean 

Caterpillar never developed the dealer network? 

Ms. LAGACY. COSA, CSARL’s predecessor company, COSA, was 

in business since 19—— 

Senator LEVIN. Of course. I am not saying they did not help develop a dealer network, but according to your own transfer documents, the major developer was Caterpillar. I am not saying 

CSARL did not help develop a network. 

Ms. LAGACY. Right. 

Senator LEVIN. Of course they did. 

Ms. LAGACY. COSA, the predecessor company to CSARL, COSA, 

developed that dealer network outside of the United States. 

Senator LEVIN. They helped develop, but Caterpillar was the 

major developer of markets everywhere, according to your transfer 

agreement, your transfer documents, which I have read before. 

Ms. LAGACY. Again, I do not agree with the statement. 

Senator LEVIN. OK. All right. Are patents, trademarks, knowhow, are they not crown jewels of a company? 

Ms. LAGACY. Those are very important, yes. 

Senator LEVIN. They were transferred to CSARL, the economic 

rights to those? Is that not true? 

Ms. LAGACY. So, again, there was a license agreement—— 

Senator LEVIN. I am just asking you if it is true. 

Ms. LAGACY. There was a royalty paid. 

Senator LEVIN. I am just asking you if it is true. 

Ms. LAGACY. My colleague Mr. Beran may be able to talk more 

precisely about specifically what was included in the CSARL license. 

Senator LEVIN. Well, I read it to him once before. I read the patents, trademarks—OK? I read that to all of you. Are those not 

crown jewels of a company? 

Mr. BERAN. What was transferred was the right to use them. 

Senator LEVIN. Of course. 
79 

Mr. BERAN. Caterpillar did not give them up. Caterpillar Inc. 

continued to receive compensation—— 

Senator LEVIN. How much? 

Mr. BERAN [continuing]. For the utilization of those. 

Senator LEVIN. You are just talking about the parts profits that 

they retained. 

Mr. BERAN. No, the patents were related not just to the parts activities but—— 

Senator LEVIN. I understand. I am talking about patent 

parts—— 

Mr. BERAN [continuing]. To the overall—— 

Senator LEVIN. Come on, Mr. Beran. We are talking about patents relating to parts. 

Mr. BERAN. The patents were related to all Caterpillar IP related 

to product design and parts. 

Senator LEVIN. And parts. That is what we are talking about. 

That is what the strategy related to, was parts. 

Mr. BERAN. It is an overall license for the entirety of the business. 

Senator LEVIN. Including the parts. 

Mr. BERAN. Parts are an integral element of our overall—— 

Senator LEVIN. That is why I say ‘‘including the parts.’’ 

Mr. BERAN [continuing]. Product strategy. 

Senator LEVIN. That is why I said ‘‘including the parts.’’ 

Mr. BERAN. Yes, it includes the parts. 

Senator LEVIN. OK. The tax strategy, related to parts, did it not? 

Mr. BERAN. It related to the overall business. We were aligning 

with how the product managers and the other managers of the 

company ran the business. 

Senator LEVIN. No, I understand what you are repeating here, 

but I am just reading document, after document, after document, 

after document, parts, parts, parts, parts. That tax strategy related 

to parts, did it not? That is my question. 

Mr. BERAN. If you talk—— 

Senator LEVIN. Did the tax strategy relate to parts? That is my 

question. 

Mr. BERAN. It included parts. 

Senator LEVIN. All right. It did not relate to parts. It included 

parts. Did you see anything other than parts? Did you ever see 

anything other than parts related on the documents that I have 

read? 

Mr. BERAN. Well, Senator, if you select documents prepared by 

people from our logistics business, they will primarily talk about 

parts. 

Senator LEVIN. And do you have documents with you that say 

that what was transferred was something other than parts? 

Ms. LAGACY. Well, again, CSARL is an integrated entrepreneur—— 

Senator LEVIN. I know. I am just asking you—— 

Ms. LAGACY. That does include—— 

Senator LEVIN. You are talking about the documents which we 

got. I am just asking you, do you have other documents? 

Mr. BERAN. I did not bring any documents. 
80 

1See Exhibit No. 7, which appears in the Appendix on page 343. 

2See Exhibit No. 34, which appears in the Appendix on page 493. 

Senator LEVIN. Take a look at Exhibit 7.1 I am going to just go 

back to this one more time. This was the proposal that you accepted and implemented for this tax strategy in Switzerland: ‘‘Recharacterize marketing company income’’—recharacterize it, mind 

you—‘‘to achieve U.S. tax deferral.’’ And look what is said down 

here. What is left out? ‘‘Out of chain.’’ 

Ms. LAGACY. I am still—— 

Senator LEVIN. Are you having trouble finding it? 

Ms. LAGACY. Could you help me see—I am at the bottom it is 

4619. Is that the—— 

Senator LEVIN. No. 

Ms. LAGACY. OK. 

Senator LEVIN. 4618. 

Ms. LAGACY. OK. 

Senator LEVIN. Do you see where it says, ‘‘Remove Caterpillar 

Inc. from the chain of title for purchased finished parts . . .’’? Do 

you see that? 

Ms. LAGACY. Yes. 

Senator LEVIN. That is the strategy. I am going to read it to you 

for the last time, because this is the strategy, is to ‘‘Remove Caterpillar Inc. from the chain of title passage for purchased finished 

parts . . .’’ OK? I do not know—— 

Ms. LAGACY. But I believe—— 

Senator LEVIN. I know. I understand there was more than that, 

but I am just talking about—— 

Ms. LAGACY. Right, it was more than that. 

Senator LEVIN. I am talking about the tax strategy. 

Ms. LAGACY. Well, again, the tax strategy was established to follow the business strategy. CSARL was set up as an integrated entrepreneur, and it did include more than parts. It did also include 

manufacturing facilities and other things. 

Senator LEVIN. All right. Mr. Perkins, if you take a look at Exhibit 34,2 this is a deposition that you provided under oath in 2010 

about the Swiss tax strategy designed by Pricewaterhouse for Caterpillar involving CSARL and the non-U.S. parts profits. When you 

were asked in that deposition, ‘‘Was there any business advantage 

to Caterpillar Inc. to have this arrangement’’—meaning the CSARL 

transaction—‘‘put in place other than the avoidance or deferral of 

income taxation at higher rates?’’ you responded under oath, ‘‘No, 

there was not.’’ Was that truthful? 

Mr. PERKINS. Mr. Chairman, at the time that I gave that deposition in the employment lawsuit, it was a couple years after I had 

retired. In terms of the response to that specific question, that is 

a true statement. But I would like to have the opportunity to clarify what I did not say at that time. The activities associated with 

the removal of CAT Inc. from the supply chain did, in fact, have 

significant business activities accompanying them. When I responded to this question, I responded negatively, but the point is 

I—— 

Senator LEVIN. I know what the point is now. I am asking you 

was it true that, when you said to the question, was there any 
81 

1See Exhibit No. 17, which appears in the Appendix on page 403. 

business advantage to Caterpillar to have this arrangement put in 

place other than the avoidance or deferral of income taxation at 

higher rates, your answer: ‘‘No, there was not.’’ And my simple 

question to you—and I know what you would like to say now. My 

simple question to you is: Was that true when you said it? 

Mr. PERKINS. When I responded, I am responding from a tax 

viewpoint, and I look at things from a financial impact, first upon 

legal entity, then upon the business unit, certainly from a legal entity standpoint there was a financial advantage, that legal entity 

changes are transparent to our business units. And so any aftertax benefit that was generated creating a financial advantage to 

the enterprise, that was not reflected on the business unit’s performance. 

Senator LEVIN. ‘‘Question: What was the benefit to Caterpillar 

Inc. to have CSARL purchase finished replacement parts instead of 

having Caterpillar Inc., buy them and sell them to CSARL?’’ 

Your answer: ‘‘It would alter the character of the income from 

CSARL from includable deemed distribution income to the U.S. 

[United States].’’ 

Was that true? 

Mr. PERKINS. Again, from—— 

Senator LEVIN. I am just asking, was your answer true? 

Mr. PERKINS. Yes, it was. 

Senator LEVIN. ‘‘Question:’’—same deposition under oath—‘‘So 

the advantage to Caterpillar Inc. would be that it would pay less 

Federal income tax?’’ 

‘‘Answer: Yes.’’ 

Was that true when you said it? 

Mr. PERKINS. Yes. 

Senator LEVIN. Mr. Beran, are CSARL’s financial results included within Caterpillar’s U.S. consolidated financial statement? 

Mr. BERAN. Yes, they are. 

Senator LEVIN. Are any CSARL losses that might come to pass 

ultimately then be reflected in that financial statement? 

Mr. BERAN. They would be in the financial statements; they 

would not necessarily be reflected in the U.S. tax returns. 

Senator LEVIN. Of course. But in that financial statement, they 

would be included? 

Mr. BERAN. In our—— 

Senator LEVIN. Consolidated financial—— 

Mr. BERAN [continuing]. Consolidated financial statements, yes, 

they would. 

Senator LEVIN. Any of CSARL’s losses are in that consolidated 

Caterpillar, as the parent, financial statement. Please take a look, 

if you would, at Exhibit 17.1

[Pause.] 

On page 5984, it says ‘‘Cash Management, ‘Crossover’ cash buildup in Geneva.’’ Do you see that page? 

Ms. LAGACY. Yes. 

Senator LEVIN. OK. ‘‘Caterpillar Definition: Crossover occurs 

when offshore cash no longer can be accessed in the United States 

without incremental U.S. tax cost.’’ In other words, if you tried to 
82 

bring that offshore cash back to the United States, you would have 

to pay taxes on it. And even with a credit for taxes paid in Geneva, 

it indicates you would have to pay 25 percent on that cash. 

At the bottom it says you are working to ‘‘develop tax efficient 

repatriation strategies.’’ And then on page 12, it lists some of those 

strategies, with a goal of repatriating $3 billion. It talks about 

loans, tax-efficient dividends, prepaying royalties, and goods prepayment. 

Did you work on those strategies, do you know, Ms. Lagacy? 

Ms. LAGACY. I was not there at that time, but I think I can shed 

some light on this general topic. We are, again, about a $56 billion 

company—— 

Senator LEVIN. Well, I am not talking about at that time. I am 

saying have you continued to work—let me put it in the present— 

on those tax strategies? 

Ms. LAGACY. We have approximately $3.5 billion offshore at this 

point outside of the United States, and that is available for general 

corporate use and can be repatriated without significant additional 

U.S. tax. Most of that money is outside the United States because 

it is needed to run our businesses outside the United States. Again, 

65 percent of our $56 billion in sales and revenues comes from outside of the United States. 

Senator LEVIN. And how much, if you repatriated, would be subject to tax here? 

Ms. LAGACY. Again, because of previously taxed income, transactions that have already been taxed at the U.S. rate, a substantial 

sum can be returned, significant amounts can be returned, nearly 

all of that, without any substantial income tax in the United 

States. 

Senator LEVIN. All right. Is there any part of that which you 

would have to pay a tax on, U.S. tax? 

Ms. LAGACY. There might be some very minor, but it would be 

very insignificant. It is available for general corporate use and 

could be brought back to the United States without any additional 

significant tax burden in the United States. 

Senator LEVIN. What does this mean, ‘‘tax-efficient repatriation strategies,’’ and why can’t you just—it says $3 billion. Why can’t 

you just bring it back to the United States? 

Ms. LAGACY. Again, I believe this is a 2010 document, and I am 

not exactly sure of the situation back in 2010 with cash. But, 

again, I am telling you that today I know you have situations of 

companies that you have talked to that have significant amounts 

of cash outside the United States that cannot be repatriated, but 

we are not one of those companies. 

Senator LEVIN. All right. So, in other words, you said $17 billion? 

How much did you have in cash? 

Ms. LAGACY. No. We have $3.5 billion in cash as of the end of 

2013. 

Senator LEVIN. And you could repatriate all of that without paying any U.S. tax on it? 

Ms. LAGACY. What I said was it is available for general corporate 

use, and that cash could come back without significant additional 

U.S. tax. There may be some small amounts there. 

Senator LEVIN. No. You answered the question. 
83 

1See Exhibit No. 4a, which appears in the Appendix on page 302. 

Ms. LAGACY. OK. 

[Pause.] 

Senator LEVIN. I had made a reference before to documents that 

were written in the 1970s which said that CAT Inc. had the largest 

role with regard to market and dealer development. Do you agree 

with that? These are Caterpillar documents. I have read them before, today, and you were here, I believe. Exhibit 4a,1 if you want 

to look at it again. 

Ms. LAGACY. Yes, Exhibit 4a. Oh, this is a Pricewaterhouse document? 

Senator LEVIN. Yes. The same thing was said in 1996, 1995, 

1994, and 1997. 

Ms. LAGACY. Right. That was stated by Pricewaterhouse. 

Senator LEVIN. Right. I am just asking you, it says here, ‘‘Cat 

Inc. has the largest role with regard to market and dealer development,’’ gives the reasons, it acknowledges or says that the marketing companies also have major responsibility for market development. In fact, this is their primary responsibility. That is what 

they do. But it says that the largest role with regard to market and 

dealer development is CAT Inc. Do you agree with that statement? 

That is what I am asking. 

Mr. BERAN. Senator, at that time the U.S. market was over half 

the world, so by definition it would have the largest responsibility 

related to that. 

Ms. LAGACY. But, again, as we have said, COSA had the primary 

responsibility, the predecessor company to CSARL, to developing 

that network outside of the United States. 

Senator LEVIN. All right. By the way, it says it has the largest 

role with regard to that for three reasons. The third is, ‘‘it continues to be involved with the development and oversight of worldwide marketing programs and approaches.’’ Did you agree with 

that statement? 

Ms. LAGACY. Could you point me to the page that you are on 

now. 

Senator LEVIN. The same page. 

Ms. LAGACY. OK. Thank you. 

Senator LEVIN. No. 3, ‘‘it continues to be involved with the development and oversight of worldwide marketing programs and approaches.’’ Do you agree with that? 

Ms. LAGACY. I would say that most of the specific marketing programs and discounting and merchandising programs and such that 

happen outside of the United States are driven by CSARL today. 

Senator LEVIN. OK. My understanding, Ms. Lagacy, is that a 

dealer cannot be added or dropped from the Caterpillar network or 

significantly change its territory without permission from Caterpillar executives in the United States. Is that correct? 

Ms. LAGACY. We have 178 dealers around the world, and I do not 

know that for a fact. That seems reasonable to me, but I do not 

know that for a fact. Or we have very little attrition—— 

Senator LEVIN. Do either of these other two witnesses know 

whether that is true? 

Mr. BERAN. I do not. 
84 

Senator LEVIN. OK. 

Mr. PERKINS. Neither do I. 

Senator LEVIN. OK. 

Ms. LAGACY. We have very little attrition in our dealer network 

around the world, so that would not happen frequently. 

Senator LEVIN. Well, that I know, but I am just saying it is my 

understanding that a dealer cannot be added or dropped from the 

Caterpillar network or significantly change its territory without 

permission from Caterpillar executives in the United States, and 

you have no reason not to believe that. Is that—— 

Ms. LAGACY. I have no reason not to believe that. I do not know 

it for—— 

Senator LEVIN. But that is what was told to us by Caterpillar. 

Ms. LAGACY. OK. 

Senator LEVIN. Now, in February, Caterpillar launched a major 

effort to toughen oversight of its dealers around the world. Are you 

familiar with that, Ms. Lagacy? 

Ms. LAGACY. Yes. I believe you are referring to our across-thetable initiative. 

Senator LEVIN. Well, I am not sure of the name of it, but let us 

keep going. 

Ms. LAGACY. OK. 

Senator LEVIN. It required ‘‘underperforming dealers’’ to submit 

by the end of 2014 a plan for improving their sales. Is that the 

same initiative? 

Ms. LAGACY. You said it was launched in February of this year? 

Yes. 

Senator LEVIN. Does that sound like what you just—— 

Ms. LAGACY. Yes, it does sound like that. 

Senator LEVIN. OK. 

Ms. LAGACY. Yes. 

Senator LEVIN. Now, the plan has to be submitted to and approved by Caterpillar in the United States. Is that correct? 

Ms. LAGACY. I do not know—— 

Senator LEVIN. You do not know for sure? 

Ms. LAGACY. I actually do not know that. 

Senator LEVIN. Well, then let me tell you that it does, and if it 

is not true, you can correct for the record what I am saying. OK? 

Ms. LAGACY. OK. 

Senator LEVIN. It has to be approved by Stuart Levenick. Who 

is he? 

Ms. LAGACY. He is one of our group presidents. 

Senator LEVIN. Is he the group president of Caterpillar’s customer and dealer support? 

Ms. LAGACY. Yes. 

Senator LEVIN. He works out of Illinois? 

Ms. LAGACY. He does. 

Senator LEVIN. So dealers whose plans are approved then have 

3 years to meet their sales targets, or they may be dropped from 

the network. Is that correct? 

Ms. LAGACY. I do not know all the specifics of the program. The 

intention of the program is benchmarking amongst our dealers and 

looking at the dealers that are the highest performing around the 
85 

world in a number of different elements and helping to improve the 

performance of all of our dealers around the network. 

Senator LEVIN. Right. And those dealers then have to get their 

plan approved or they have to meet the sales, as I understand it, 

targets or they may be dropped. Is that true or not? 

Ms. LAGACY. I do not know. Stu Levenick’s organization does include the distribution groups that are headquartered—one vice 

president in Geneva, one vice president in Singapore, and one vice 

president in the United States. And they have the distribution 

services responsibilities which will be coordinating the work with 

each of the dealers. I do not have all the details on that program. 

Senator LEVIN. But he is head of the whole thing, right? 

Ms. LAGACY. They report to Stu Levenick, those three distribution—— 

Senator LEVIN. Right, and he is in Illinois, right? 

Ms. LAGACY. Yes, he is. 

Senator LEVIN. OK. So it is being run out of the United States. 

That is the top of it, that is the responsibility for it. It is not run 

by CSARL, is it? 

Ms. LAGACY. Well, but keep in mind—— 

Senator LEVIN. I know CSARL is part of it. You just told us. I 

am just simply—— 

Ms. LAGACY. Yes, but the—— 

Senator LEVIN. I know CSARL is part of it and so are the other 

distribution companies—I am just asking you, the head of this effort, the driver of this effort, the one who is going to decide whether or not a dealer stays in or is not going to be allowed to stay in 

is Mr. Levenick in Illinois. Is that correct? 

Ms. LAGACY. Mr. Levenick will hold his vice presidents accountable—— 

Senator LEVIN. I am sure he will. 

Ms. LAGACY [continuing]. To work with the dealers in their region, so those vice presidents have that accountability and responsibility, and, yes, they do work for Stu Levenick. 

Senator LEVIN. OK. They do not work for CSARL. The head of 

CSARL is not the guy who makes the decision, right? It is Mr. 

Levenick? 

Ms. LAGACY. Again, working—— 

Senator LEVIN. OK. That is OK? 

Ms. LAGACY. OK. 

Senator LEVIN. Are the Caterpillar dealers independent outfits? 

Ms. LAGACY. Caterpillar dealers are—they are an independent 

dealer network, yes. 

Senator LEVIN. All right. And who is in charge of the oversight 

efforts? 

Ms. LAGACY. In terms of overall dealer administration, that reports into our distribution groups, of which we have three—one in 

Geneva, one in Singapore, and one in the United States—and their 

employees. 

Senator LEVIN. All right. Prior to the 1999 transaction, Caterpillar U.S. had been buying purchased finished replacement parts, 

mostly from manufacturers here in the United States, transferring 

them to its Swiss affiliate, which then transferred them primarily 

to Caterpillar’s non-U.S. dealers. Is that right? Prior to 1999. 
86 

Ms. LAGACY. Correct. 

Senator LEVIN. Caterpillar reported most of the sales income on 

its U.S. tax return, international parts sales income on its tax return. Is that correct? 

Ms. LAGACY. Mr. Beran. 

Senator LEVIN. Is that right? 

Mr. BERAN. Until? 

Senator LEVIN. Until 1999. 

Mr. BERAN. Caterpillar Inc. would have reported most of it, 

though a significant portion was paid out to the, what we call ‘‘commercial entities’’ that were responsible for manufacturing. Not all 

of those were in CAT Inc. or in the United States. 

Senator LEVIN. Right, but most of that income would have been 

shown on the U.S. tax return. 

Mr. BERAN. I believe most of it was, yes. 

Senator LEVIN. Is it true that until 1999, 85 percent or more of 

its international replacement parts sales income was included on 

Caterpillar’s U.S. tax return and about 15 percent of the income 

was reported as Swiss income? Is that correct? In Switzerland. In 

other words, would not have been reported in the United States. 

Is that correct? 

Mr. BERAN. I do not remember the exact ratio. 

Senator LEVIN. OK. Well, let us assume for the purpose of this 

discussion it was about that. Is that fair enough? 

Mr. BERAN. OK. 

Senator LEVIN. OK. So Caterpillar had a method of keeping track 

of profits for business purposes, something known as ‘‘accountable 

profits.’’ Is that correct? 

Ms. LAGACY. Yes. 

Senator LEVIN. And the accountable profits which Caterpillar 

tracked on its internal management systems allocated income to 

each of the business groups throughout Caterpillar, and incentive 

pay was based on each group’s accountable profits results. 

So far are you with me? Is that true? 

Ms. LAGACY. Yes. 

Senator LEVIN. OK. Prior to the 1999 transaction, the accountable profits on parts sales matched the results for tax purposes. 

About 85 percent of the accountable profits stayed with the business groups in the United States which had designed and built and 

tracked and shipped the parts, while 15 percent, approximately, of 

the accountable profits were allocated to Switzerland in exchange 

for their marketing efforts. Is that correct, Mr. Beran? Roughly, in 

other words, the accountable profits matched the legal entity’s tax 

reporting. Is that correct? 

Mr. BERAN. I am not really familiar with the accountable profit 

numbers. 

Senator LEVIN. Is anybody here? 

Ms. LAGACY. The accountable profit system is not intended to be 

the same as what we report legal entity. It is an internal organizational method of helping to drive behavior. So I do not believe that 

we are understanding the relationship you are making. 

Senator LEVIN. Well, is it not true that 85 percent approximately 

of the accountable profits stayed with business groups in the 

United States before 1999? Is that true? 
87 

Ms. LAGACY. I do not know that. 

Senator LEVIN. All right. Now, the 1999 transaction significantly 

changed how profits were allocated for tax purposes. Would you 

agree with that? 

Ms. LAGACY. I would say that it did not change how profits were 

allocated; rather, it correctly identified in 1999 where the profits 

were earned. 

Senator LEVIN. And was that a major change from the way it 

was previously identified? 

Ms. LAGACY. The major change was removing the unnecessary 

middleman in the transaction—— 

Senator LEVIN. I understand. 

Ms. LAGACY [continuing]. Because that work had always been 

done by CSARL. 

Senator LEVIN. Right. 

Ms. LAGACY. So in setting up the—— 

Senator LEVIN. I understand the theory of it, and the ‘‘unnecessary middleman’’ is absurd—to call Caterpillar Inc. an ‘‘unnecessary middleman is utterly absurd. You have heard that from me, 

and I have heard from you your explanation. But in any event, was 

there a major change after 1999? You just described a major 

change. 

Ms. LAGACY. Again, so if I could be clear, the work being done 

in CSARL prior to 1999 and after 1999 was not a major change. 

The change—— 

Senator LEVIN. All right. I am not saying the work was—— 

Ms. LAGACY [continuing]. That came about—— 

Senator LEVIN. Listen to my question, please. I am not saying 

that the work was changed after 1999. It obviously was not. What 

I am asking you is: Did that have an impact on the allocation of— 

did that have an impact on the tax return? 

Ms. LAGACY. Yes, in 1999, with the establishment of the license 

agreement, the royalty, and the service fees, and taking CAT Inc. 

out of the chain, there was an impact on taxes. 

Senator LEVIN. OK. 

Ms. LAGACY. Yes. 

Senator LEVIN. OK. Now, was it understood at the time that that 

transaction was not going to have a negative impact on the U.S. 

division’s accountable profits? Was that understood, Mr. Perkins? 

Let me ask you. 

Mr. PERKINS. Mr. Chairman, there are significant differences between legal entities and business units and accountable profits. I 

cannot answer that question. 

Senator LEVIN. You are saying that you do not know whether or 

not at that time there was an understanding that that transaction 

was not going to have a negative impact on the U.S. division’s accountable profits? 

Mr. PERKINS. Mr. Chairman—— 

Senator LEVIN. You do not know? 

Mr. PERKINS. I do not know. I was a tax person. I was involved—— 

Senator LEVIN. You do not know whether there was any such understanding? 

Mr. PERKINS. I do not know. 
88 

Senator LEVIN. Do you know, Mr. Beran? 

Mr. BERAN. I do not really recall. 

Senator LEVIN. Well, then let me tell you—do you know, Ms. 

Lagacy? 

Ms. LAGACY. I am not aware—— 

Senator LEVIN. Was there an understanding? 

Ms. LAGACY. I am not aware—I mean, generally what I can tell 

you is that the accountable profit system that we use internally to 

drive behavior is a before-tax system, so it typically is not including 

after-tax measurements. 

Senator LEVIN. OK. But it is a way, is it not, of rewarding divisions for their work? 

Ms. LAGACY. It is a way—— 

Senator LEVIN. It affects people’s bonuses, does it not? 

Ms. LAGACY. It is a way of establishing goals and driving business behavior, which ultimately can impact the incentive pay. 

Senator LEVIN. And rewards. ‘‘Incentive pay,’’ that is good 

enough. 

Ms. LAGACY. Yes, it is an accountable system to drive the organization. 

Senator LEVIN. OK. And is it not true that the U.S. business divisions kept about the same proportion of that accountable parts 

profits after the CSARL transaction? 

Ms. LAGACY. I do not know that. 

Senator LEVIN. Do you know, Mr. Perkins? 

Mr. PERKINS. As I said earlier, as a tax person, I focused on—— 

Senator LEVIN. No, I am just saying, do you know? 

Mr. PERKINS. I do not know. 

Senator LEVIN. Do you know? 

Mr. BERAN. No. The accountable system was really independent 

of the legal entities reporting. 

Senator LEVIN. I am just asking you the question whether or not 

you are aware of the fact that the U.S. business divisions kept the 

same percentage of accountable parts profits after the transaction 

as they had before the transaction. They got about the same 

amount. Are you not aware of that? Did you not tell our staff that? 

Ms. LAGACY. I think that, again, part of the confusion—— 

Senator LEVIN. No, no, no. Mr. Beran. Excuse me. Mr. Beran, did 

you not tell our staff that? 

Mr. BERAN. We were not directly impacting the accountable system, so I do not know exactly what—— 

Senator LEVIN. That is a pretty good answer, that this, whatever 

we want to call it, but that transaction, that CSARL transaction 

and license, did not affect the accountable profits issue. Is that—— 

Mr. BERAN. The accountable system was not aligned with international tax law. It was—— 

Senator LEVIN. I understand. 

Mr. BERAN [continuing]. To drive behavior. So—— 

Senator LEVIN. Of course it was. I am just asking you a question. 

It was not impacted by that major change in how the taxes were 

going to be paid. Is that correct? 

Mr. BERAN. Not to my knowledge. 

Senator LEVIN. OK. Mr. Perkins, while you were working on the 

CSARL structure in 1999, was it your understanding that it was 
89 

not supposed to change the operational functioning of the parts 

business in any significant way, just the invoicing system? Was 

that your understanding? 

Mr. PERKINS. The invoicing system with respect to unrelated 

suppliers to CSARL did—— 

Senator LEVIN. Except for the invoicing system, my question to 

you is: While you were working on the CSARL structure, was it 

your understanding that it was not supposed to change the operational functioning of the parts business in any significant way? 

With that exception of invoicing, was that your understanding? 

Mr. PERKINS. No. There were significant changes, both legal, accounting, as well as tax. Legal externally in terms of the contractual relationships—— 

Senator LEVIN. I am not saying legal. I am talking about operational functioning. My question to you has to do with the operational functioning. Was it your understanding that there was not 

going to be any significant change in the operational functioning of 

the parts business? That is my question. 

Mr. PERKINS. Physical goods moved the same way after the restructuring as it did prior to the restructuring. 

Senator LEVIN. Thank you. 

[Pause.] 

Well, there has been plenty of talk here today of suggesting that 

by enforcing the current tax laws, that somehow or other we are 

going to endanger American manufacturing. Well, I am as enthusiastic a supporter of American manufacturing as there is. At least 

there is no one who is more enthusiastic. But if Caterpillar has 

ideas for how our tax code can better support manufacturers, I am 

all ears. So is everybody else. It is pretty obvious that everyone on 

this Subcommittee would be very welcoming of such suggestions. 

I am a strong supporter of R&D tax credits. I am a strong supporter of advanced manufacturing tax credits. I am a strong supporter of accelerated depreciation and energy efficiency tax credits 

and other tax policies that help American manufacturing. So I support tax policies that help Caterpillar and other manufacturers 

compete around the world. 

What I do not support is making this a competition to see who 

has the most creative tax lawyers. I do not support tax loopholes 

that other manufacturers either are not positioned to exploit or 

refuse to exploit. We need more policies to support manufacturing, 

but that is not what we have here at this investigation. 

Caterpillar’s Swiss strategy is not the result of conscious policymaking to support American manufacturing. It is just simply a tax 

loophole, actual or perceived. And allowing it to continue is unfair 

to other companies, to American families who do not have an army 

of lawyers and accountants at their disposal. 

So I cannot support what is going on here. I know Caterpillar is 

an American success story, and they have every right to be proud 

of that success. It is an American company. Its headquarters are 

here. Most of its executives are here. Most of its parts are made 

here. Most of its parts are stored here. Most of its parts are 

shipped from here. Most of its parts, forecasting, inventory management, and logistics are handled here. 
90 

But since 1999, most of its international parts profits go to Switzerland. And the contrast between Caterpillar U.S. and Swiss parts 

operations is dramatic. Switzerland does not manufacture any Caterpillar parts. The United States manufactures 70 percent of the 

parts sold abroad. Switzerland does not have a single parts warehouse. The U.S. stores one and a half billion parts. Only 65 Swiss 

employees handle parts versus 5,000 in the United States. Caterpillar’s Swiss operation does not have the personnel, does not 

have the infrastructure or expertise to run a global parts business. 

They have a role, obviously, in promoting parts and in working 

with dealers, but they do not have the personnel, the infrastructure, or the expertise to run a global parts business. 

Now, everyone knows what happened here. The documents could 

not be clearer. It is a tax deal. Caterpillar used to pay taxes on almost all of its parts profits. That was before 1999. In 1999, Caterpillar transferred a license to its wholly owned subsidiary CSARL, 

which allowed it to sell Caterpillar parts, more Caterpillar parts 

overseas in more places. It got back a royalty equal to 15 percent 

of the parts profits, which meant the other 85 percent stayed in 

Switzerland, where, by the way, Caterpillar had negotiated a special low tax rate of 4 to 6 percent. The usual Swiss tax rate is 8.5 

percent. Caterpillar used the licensing agreement to shift profits of 

$8 billion to Switzerland while avoiding U.S. taxes of $2.4 billion 

and counting. That is an ongoing number. It is about $300 million 

a year now in tax avoidance that is going to Switzerland instead 

of here. 

Caterpillar was not compensated for turning over its parts business to CSARL—no compensation. Even though it had spent 75 

years developing the business and allowed CSARL to use its patented parts, supplier base, state-of-the-art parts tracking, forecasting, ordering and management systems it got paid less than 

nothing, by the way, since it traded $1 of profits to CSARL for 15 

cents in return. And at the same time, Caterpillar kept doing all 

of the work—that is what it was doing, that was the deal—and it 

continued to bear economic risk, all of the economic risk. As the 

parent corporation, it is a consolidated return. 

No reasonable business would have transferred its crown jewels 

to an unrelated party for less than nothing, keep doing all the work 

and continuing to bear the economic risk. It is clear that the Caterpillar licensing transaction fails the arm’s-length standard. It also 

fails the economic substance test because it had no business purpose other than tax avoidance. It started as a tax strategy, and 

Caterpillar paid over $55 million to Pricewaterhouse to design and 

to implement it. 

Yet Caterpillar asserts it acted in compliance with U.S. tax laws, 

and that issue is up to someone else to decide. But if Caterpillar 

is right, our laws need even more strengthening than I think they 

do. The IRS has to step up its enforcement to stop the multinational offshore profit shifting and needs to start requiring transfer pricing agreements that disclose and justify the profit splits between U.S. parents and their tax haven subsidiaries. It needs to 

clarify that the economic substance law applies to transfer pricing 

agreements, and Congress needs to pass the Stop Tax Haven Abuse 
91 

Act, which I and others have introduced, to shut down the existing 

offshore tax loopholes. 

Thanks to all of our panelists, and again our thanks to Caterpillar and to Pricewaterhouse for their cooperation with the Subcommittee. We stand adjourned. 

[Whereupon, at 2:31 p.m., the Subcommittee was adjourned.] 

(93) 

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Æ