Tax Policy, Transfer Pricing, and the Offshoring of Profits

Executives from the manufacturing firm Caterpillar—the world’s largest maker of construction and mining equipment—appeared before the Senate Permanent Committee on Investigations yesterday to defend a strategy that allowed the company to avoid paying $2.4 billion in corporate taxes in the United States. The practice, known as transfer pricing, allowed the company to shift profits from its domestic operations in the United States to a Swiss subsidiary.

Democrats attacked Caterpillar’s practice, which is widely practiced in international businesses. The subcommittee’s chair, Sen. Carl Levin (D-Mich), asserted that “Caterpillar is an American success story that produces phenomenal industrial machines, but it’s also a member of the corporate profit-shifting club that has shifted billions of dollars of profits offshore to avoid paying U.S. taxes…Caterpillar is shifting its parts profits to Switzerland, even though most of its parts operations and work is done right here in the United States. Nothing changed in the real world except Caterpillar’s tax bill.”

Republicans asserted that the root cause of the practice is the relatively high corporate tax rate in the United States. Sen. Rand Paul (R-KY) argued, “We’ve got the wrong people on trial here. The tax code needs to be on trial here.”

For their part, Caterpillar defended the practice, arguing that they had an obligation to shareholders. Julie Lagacy, a Caterpillar vice president, testified that, Caterpillar has followed the law and paid all taxes due.

But the hearing highlights both the archaic nature of the US tax code, and the ways in which corporations operate to move profits to lower-tax countries. Nevertheless, reforming the tax code to address either of these challenges seems unlikely in the current era of divisive party politics in the US Congress.

 

[This post was previously published at the Election Center blog and is reprinted here with permission.]

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