Caterpillar and crazy tax avoidance contortions

Caterpillar construction equipment sits on the lot of a dealership on October 23, 2013 in Elmhurst, Illinois.

Bloomberg reports that a Senate hearing next month will investigate construction machinery maker Caterpillar on whether it improperly shifted profits abroad to dodge U.S. taxes. Caterpillar isn’t commenting, but often when companies are under fire for avoiding taxes by moving money internationally, they say they pay their share and obey the law. And that’s generally true. Complicated tax laws make it possible for American companies to lower their bills by spreading money around the world.

To make sense of this, you need to understand two things. First, don’t think of these multi-nationals as single companies.

“Whether it’s Apple or General Motors or General Electric, it doesn’t matter,” says Ed Kleinbard, former chief of staff of Congress’s Joint Committee on Taxation and now a University of Southern California law professor. “These in fact are constellations of hundreds of companies located all over the world.”

Second, remember that companies don’t just make money off stuff. They profit from ideas, in the form of patents, copyrights and other types of what are called intangible assets.

Their intangibility makes them easy to move around the world, including to the foreign arm of a company in a tax haven. With the stroke of a pen, piles of money a drug company, for example, might make from its research are off limits to the IRS.

It’s legal, and critics say the tax code that makes it possible advantages large multinational companies over small businesses and ordinary taxpayers. But unless Congress changes the law, American companies will keep paying accountants to take full advantage.

Mark Garrison: If you wanna make sense of this, understand two things. First, don’t think of these multi-nationals as single companies. Ed Kleinbard is the former chief of staff of Congress’s Joint Committee on Taxation.

Ed Kleinbard: Whether it’s Apple or General Motors or General Electric, it doesn’t matter. These in fact are constellations of hundreds of companies located all over the world.

Second, remember, companies don’t just make money off stuff. They profit from ideas.

Kleinbard: What makes a Nike sneaker more valuable than an Acme sneaker? It’s the intangible assets associated with that company. It’s the brand name. It’s the secret sauce. It’s the patents.

An American firm can move those intangible assets to a foreign arm in a tax haven. All with the stroke of a pen. So piles of money a drug company, for example, might make from its research are off limits to the IRS. David Cay Johnston at Syracuse’s law school thinks this is all unfair to small business.

David Cay Johnston: If you own a purely domestic company, and that’s the mom and pop businesses in America, you are not allowed to do this.

Rebecca Wilkins is with Citizens for Tax Justice, which thinks these multi-nationals should pay more. When they say they’re just following the law, that’s not enough for her.

Rebecca Wilkins: They act as if they’re innocent in this whole process and quite the opposite is true. They have lobbied for these tax breaks.

Unless Congress changes the law, American companies will keep paying accountants to take full advantage. In New York, I'm Mark Garrison, for Marketplace.

About the author

Mark Garrison is a reporter for Marketplace and substitute host for the Marketplace Morning Report, based in New York.

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