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.