If gov’t dislikes ‘tax avoidance,’ change the law

Bill Knight column for Mon., Tues. or Wed., March 13, 14 or 15

In the classic movie “Casablanca,” French Captain Louis Renault is ordered by occupying Nazis to close down Rick’s Café Americain and contrives an excuse, saying, “I'm shocked – shocked – to find that gambling is going on in here!” as a dealer hands the collaborator his own winnings.

The federal government seems similarly hypocritical as the Senate and a host of agencies look at Caterpillar and hundreds of other multinational corporations based in the United States when they exploit laws and loopholes approved by Congress.

Caterpillar failed to pay taxes on billions of dollars of profits brought home mostly from a Swiss subsidiary, CSARL, thereby failing to follow U.S. financial reporting rules and tax laws, according to a report commissioned by the federal government disclosed by the New York Times last week. That might explain the March 2 raid on Cat’s World Headquarters in Peoria, plus offices in East Peoria and Morton, where agents from the Internal Revenue Service, the Federal Deposit Insurance Corporation, and the Commerce Department took part.

However, the practice isn’t unusual. About $2.5 trillion has been held offshore in about 10,000 tax-haven subsidiaries by more than 350 of Fortune-500 companies, according to another report, “Offshore Shell Games 2016,” from the Public Interest Research Group, the Institute on Taxation and Economic Policy, and Citizens for Tax Justice. Companies such as Apple and General Motors, Proctor & Gamble and Wal-Mart did so, as well as 33 companies based in Illinois, including Allstate, ADM, Boeing, Exelon, McDonald’s, Motorola Solutions, Navistar, Sears Holdings, State Farm and Walgreens, says the 58-page report, which notes that among Illinois companies, Cat has the third highest amount of profits held offshore.

Cat has held $17 billion in 69 tax-haven subsidiaries in Bermuda, the British Virgin Islands, Cayman Islands, Channel Islands, Costa Rica, Hong Kong, Ireland, Luxembourg, Netherlands, Panama and Singapore as well as Switzerland, “Offshore Shell Games 2016” reports.

The government’s interest in Cat’s situation dates to 2014, when a U.S. Senate subcommittee concluded that it cut some $2.4 billion in taxes over about 13 years. PricewaterhouseCoopers (PwC), the corporation’s auditor, reportedly helped set up the process in 1999, when almost $8 billion in profits started being moved overseas, writes Dartmouth College accounting professor Leslie Robinson in the government report.

There’s a disconnect when it’s standard practice for multinational corporations to operate differently that individuals or smaller companies.

“Corporate lobbyists and their congressional allies have riddled the U.S. tax code with loopholes and exceptions that enable tax attorneys and corporate accountants to book U.S. earned profits to subsidiaries located in offshore tax haven countries with minimal or no taxes,” “Offshore Shell Games 2016” states.

U.S. companies owe corporate income taxes at a rate of 35 percent on profits earned around the world. However, they’re permitted to defer taxes owed on profits generated offshore until they bring those earnings back to the States, known as repatriation. Once they do, they generally owe federal income taxes, with credit for any income taxes they paid overseas.

“Many U.S. companies game this system by using loopholes that allow them to disguise profits earned in the U.S. as ‘foreign’ profits earned by subsidiaries in a tax haven,” the independent report says.

Cat’s defended the strategy as lawful, but the IRS is already seeking $2 billion in taxes and penalties, which Cat is appealing, and no charges have been filed by the U.S. Attorney for the Central District of Illinois.

But inside the company, some objected to the practice. Daniel Schlicksup in 2009 filed suit and accused Caterpillar of breaking the law and misleading stockholders. (The case was reportedly settled out of court.) And last month, shareholder Judy Pill sued, accusing Cat of violating its “fiduciary duties.”

Lawyers say corporations’ fiduciary responsibilities include Obedience to officers and directors’ duties, Loyalty to the corporation and its shareholder, Diligence in acting in the interests of the corporation, Disclosure to shareholders, officers and directors, and Fair dealing in good faith and honesty.

Robinson’s report says Cat engaged in tax and accounting fraud.

“I believe that the company’s noncompliance with these rules was deliberate and primarily with the intention of maintaining a higher share price,” she writes. “These actions were fraudulent rather than negligent.”

Congress could restores fairness by ending incentives to shift profits and jobs offshore, increasing transparency, and closing loopholes.

“Corporate tax avoidance is not inevitable,” the independent report says. “Congress could act tomorrow. By failing to take action, our elected officials tacitly approve the fact that when corporations don’t pay what they owe, ordinary Americans inevitably must make up the difference.”