Caterpillar's Fiscal Cliff Fix: 'A Trojan Horse For Massive Tax Breaks'

As Washington tries to balance the federal books and avert the automatic spending cuts and tax increases known as the fiscal cliff, top executives of Caterpillar, the enormous industrial equipment manufacturer, present themselves as champions of a compromise.

The company's chief executive officer, Douglas Oberhelman, sits on the CEO leadership council of "Fix the Debt," a business group now urging Congress and President Barack Obama to strike a deal, in part by raising more tax revenue .

But one means endorsed by the group would actually reduce government tax revenue, experts said. The plan would allow U.S.-based multinational companies, including Caterpillar, to avoid paying taxes at home if they can show they have already paid taxes on that income overseas.

The new system would make it even easier for a multinational company "to shift profits from a high-tax country to tax havens," said Edward Kleinbard, a professor of tax policy at the University of Southern California.

Caterpillar is just one of many Fix the Debt companies publicly preaching a need to raise additional tax revenues while also lobbying to preserve -- or in this case, expand -- favored tax perks. One study , by the progressive Institute for Policy Studies, found that 63 companies advocating for a debt deal would stand to save $134 billion in tax payments if Congress approves a switch to the new system.

The report describes the plan as "a Trojan Horse for massive tax breaks."

The companies argue differently. They say that the new system -- known as the territorial system -- would permit them to bring back revenue currently parked offshore, and that this money reinvested in the economy would boost output across the board. The issue, they say, hinges on basic fairness.

"A territorial tax system provides the opportunity for U.S. companies to compete on a level playing field in foreign markets with our foreign-headquartered competitors," Caterpillar spokesman Jim Dugan said in an email. "The more successful American companies are overseas, the more we export American-made products and services to foreign customers."

In the company's recent meetings in Washington, Caterpillar executives advocated for "a solution to the fiscal cliff that addresses long term challenges facing the country," Dugan said. The company did not push for for tax reform during those meetings, he said.

If a territorial system were adopted, Caterpillar could see a tax savings of $4.5 billion, the Institute for Policy Studies report found.

Under the current tax system, U.S-based companies are on the hook for paying a 35 percent corporate tax on foreign income, but can deduct tax payments made overseas. So, for example, a subsidiary of an American company taxed at a 22 percent in Great Britain would pay an additional 13 percent on that income when repatriated.

In practice, this almost never happens, because multinational companies have hit on an easy way to avoid the U.S. tax: leave the money offshore. As The Huffington Post previously reported , many Fix the Debt companies, including Morgan Stanley and General Electric, have lobbied in support of a permanent extension of a tax loophole -- an indefinite deferral on paying taxes on certain types of income.

Kim Clausing, an economics professor at Reed College, estimated that American companies are holding $1.7 trillion overseas to avoid paying U.S. taxes, costing the treasury $90 billion in missed revenue.

A move to the new system, in the eyes of the multinationals, would be even better than a permanent deferral. "There's a speed limit on how much income shifting you can do under the current system," Clausing said. "It is inconvenient not to be able to bring it back."

Tax experts agreed that the current system isn't fair. The United States has one of the highest corporate tax rates in the world, but the system includes so many loopholes that businesses in the same industry often pay hugely different tax rates.

But the experts said that many American multinationals, rather than victims of a discriminatory scheme that puts them at a disadvantage to foreign competitors, as they claim, are instead experts at avoiding paying taxes both at home and abroad. Moving to a territorial system would simply encourage more U.S. companies to engage in tax system "arbitrage" -- basically, shopping for the lowest possible overseas rate, harming both domestic taxpayers and those in foreign countries, they said.

"A territorial system relies on one key fact: that we know where income is really earned," Kleinbard said. "But the fact is that there is no one source of income for a successful multinational firm."

The most recent, vivid example of a company aggressively working the tax code to its favor involves Google , which according to a Bloomberg report avoided paying $2 billion in worldwide income taxes in 2011 by routing foreign profits through Ireland and the Netherlands to Bermuda.

The company's strategy hinges on its ability to sell technology and patents to foreign affiliates based on low-tax countries. The parts of Google that operate in high-tax countries then must pay a fee to license that technology back. Technically, those taxes are "deferred," and the cash can't be used domestically without paying the U.S. tax.

Google, which has "don't be evil" inscribed in its code of conduct, has also used the Bermuda technique to lower its tax bill in the United Kingdom. Google's filings show it paid just 3.4 million pounds in the U.K. last year -- less than what some soccer clubs pay their benchwarmers -- on $4 billion in sales in that country, despite a profit margin of 33 percent.

Google, which did not respond to a request for comment, has a seat on the tax policy committee of the Silicon Valley Leadership Group , which met with congressional leaders last month to discuss ways to avoid the fiscal cliff. On its website, the committee says one of its aims is to "improve U.S. competitiveness" through "comprehensive tax reform ... lower business tax rates and deferral of foreign income to level the playing field with foreign competitors."

U.K. politicians agree that Google is not playing on a level playing field, but they view the company as the aggressor, not the victim.

"I have had to create drawings for myself to understand how the Google intra-company [tax] system works," said one member of parliament in a recent hearing. A parliamentary committee later described the behavior of Google, and two other U.S.-based companies that also paid little or no taxes in the U.K. -- Starbucks and Amazon -- as "immoral."

A freer-flow of earnings around the globe could also spark an arms race among countries seeking to lower their corporate tax rates in order to capture some of this revenue, some experts said. Rebecca Wilkins, senior counsel at Citizens for Tax Justice, said developed countries will lose this race.

"You can't compete with zero," Wilkins said, of the corporate tax rate countries of countries like the Cayman Islands.

Traditionally, financial services firms, technology companies and pharmaceutical companies have proved the most adept at routing earnings through offshore affiliates. The reason: it is relatively easy for tax lawyers to move technology and drug patents to offshore affiliates, or to shield interest income loaned abroad from taxation.

Brick and mortar retailers traditionally haven't used tax shelters. For that reason, the involvement of Starbucks in the U.K. tax avoidance controversy caught tax experts by surprise. The company sold 400 million pounds worth of coffee and other goods in the U.K. last year, but paid no corporate taxes.

The coffee company avoided paying taxes because it booked a loss. One reason for the loss: royalty payments it made to a Netherlands affiliate for "business processes" and for use of the Starbucks name.

"Starbucks is as low-tech a business as imaginable, but even they find it quite easy to strip out income," said Kleinbard.

A company spokeswoman said Starbucks had no comment on the tax debate. In response to a public outcry, Starbucks recently agreed to pay about 20 million pounds in British corporation tax over the next two years.

"The fact remains that Starbucks has found making a profit in the U.K. to be difficult," said Kris Engskov, managing director of the Starbucks British affiliate in an open letter . "And while Starbucks has complied with all U.K. tax laws, today we are announcing changes that will result in the company paying higher corporation tax in the U.K."