Federal law enforcement authorities raided three central Illinois Caterpillar Inc. facilities on Thursday, including the machinery manufacturer’s corporate headquarters in Peoria.
In a brief statement, Caterpillar speculated that the surprise raid was to execute a search-and-seizure warrant for “documents and electronic information” likely related to an ongoing tax investigation focused on its Swiss operations. Caterpillar received a grand jury subpoena from the U.S. District Court for the Central District of Illinois for financial material concerning its non-U.S. subsidiaries in January 2015.
The exact reason for the raid has yet to be confirmed, however.
“Caterpillar is cooperating with law enforcement,” the company statement read.
In its latest 10-K filing with the Securities and Exchange Commission, Caterpillar reported that the Internal Revenue Service was seeking to tax in the United States profits earned from certain parts transactions by Switzerland-based subsidiary CSARL. The IRS is pushing for about $2 billion in tax penalties, despite Caterpillar claims the Swiss transactions “complied with applicable tax laws and did not violate judicial doctrines.”
A 2009 wrongful termination lawsuit brought by Daniel Schlicksup reveals more details.
In his complaint, Schlicksup — an employee who had worked on Caterpillar’s tax strategy — alleged that for years the company used a “Swiss structure” to shift profits to offshore companies and avoid billions in U.S. taxes. That structure involved “many shell corporations with no business operations” and a similar “Bermuda structure” to return profits to the United States, Schlicksup alleged.
Caterpillar shares fell 4.6 percent immediately following news of the raid.
In its fourth-quarter earnings release, Caterpillar reported sales and revenues of $38.5 billion in 2016, an 18 percent decrease from 2015 and lower than expected.
Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also makes farm and ranch equipment.
Highlights from Caterpillar’s 10-K financial filing
In January 2015, we received a Revenue Agent’s Report (RAR) from the IRS indicating the end of the field examination of our U.S. income tax returns for 2007 to 2009 including the impact of a loss carryback to 2005. The IRS field examination for 2010 to 2012 that began in 2015 is expected to be completed in 2017. In November 2016, we received notices of proposed adjustments from the IRS for the 2010 to 2012 exam. In both these audits, the IRS has proposed to tax in the United States profits earned from certain parts transactions by CSARL, based on the IRS examination team’s application of the “substance-over-form” or “assignment-of-income” judicial doctrines. We are vigorously contesting the proposed increases to tax and penalties for these years of approximately $2 billion. We believe that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. We have filed U.S. income tax returns on this same basis for years after 2012. Based on the information currently available, we do not anticipate a significant increase or decrease to our unrecognized tax benefits for this matter within the next 12 months. We currently believe the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.