for you or the people in the company's tax department. is that correct? >> in part that's true. we also had significasignifica nt contact with individuals in the operations department of caterpillar. it was dependent very much on the understanding of the operations in the business and contact with them is critical. >> now prior to the tax consulting engagement

caterpillar had been reporting most of the income from the sale of its replacement parts outside of the u.s. on its u.s. tax return. is that correct? >> that is correct. >> that is when it sold parts to caterpillar's non-u.s. dealers. is that correct? >> yes. >> 85% or more of its non-u.s. income is included on caterpillar's u.s. tax return. is that correct? >> that is correct. >> after caterpillar executed csarl transaction starting in 1999 is the correct that caterpillar basically reversed those percentages and allocated 15% or less of the non-u.s. parts and come to itself in the united states and 85% or more to csarl in switzerland which had an effective tax rate between four and 6%. is that correct? >> that's correct. in terms of their arrangement that caterpillar had with respect to his relationship with

caterpillar csarl that was in fact a business arrangement that included a license for more than just the parts activities themselves and included the entire business activities undertaken by caterpillar csarl which included their manufacturing machines in france and belgium as well. >> all right but the basic, in terms of the profits of on the parts themselves there was a shift between the 85/152 -- just the parts. >> that is correct. >> take a look at exhibit seven.

[inaudible conversations] >> yes, i have a senator. >> all right. in 1998 -- before we get to the fact that you were hired in 1998 by caterpillar through its tax advisor met dermot willen embrey to review caterpillar's operations to recommend ways to lower caterpillar's overall tax payments. is that correct by the way? >> yes, that is correct. >> is it. >> is a notch or that pwc had an

ongoing program called g. top global tax program to reduce corporate taxes? is that true? >> yes. >> pw ce approached a number of corporations to talk them about the g. top program. is that correct? >> that is correct. >> so that the caterpillar tax strategy was the result of that pwc g. top effort. is that correct? >> it follow that presentation. >> the tax consults pwc conducted a review of caterpillar's operations in the 1998 gave caterpillar a list of 49 possible ways to lower its taxes one of which was the swiss tax strategies that involve assigning of non-u.s. parts profits to a swiss affiliate and that's exhibit seven. is that correct? >> this exhibit seven is from

that report and is part of that original investigation. >> was this the strategy that was adopted finally? and very simplified form. >> if you take a look at the top of that exhibit this is 4618. the purpose was to get cat incorporated out of the chain. that's the top headline. re-characterize marketing company income to achieve u.s. tax deferral. did you read that line? that was its purpose. >> that's correct. >> the description of the idea was to remove caterpillar inc. from the chain of title passage for purchased finish parts. from the u.s. or foreign sources sold to foreign marketers. the foreign marketers would buy and sell two unrelated markets of this was the description of

the idea. your own description. >> this is a pwc document. >> to remove from the chain of title to purchase parts. the benefits and lemonades sub character of foreign marketers profits and purchased finish parts sales and a relatively simple re-invoicing requirements the reimbursing requirement. do you read those words there? did i read those words correct? >> i would also reflects senator that in light of this was done at the beginning of the project in terms of providing ideas in response to caterpillar's tax department with respect to our investigation. i can tell you these invoicing requirements that following the implementation of this, those relatively simple re-invoicing requirements to probably three to four years a very difficult

work by caterpillar system team in order to implement. >> we will also get to the implication in a minute. from 1999 to 2004 pwc was paid about 55 billion to implement this tax strategy? is that correct? >> that is correct. >> is it fair to say that you and mr. williams helped design and implement this strategy from the very beginning in 1999 and mr. bowers worked at the same time that he provided tax advice to the audit while he was working with you. is that correct? >> that is correct senator. >> mr. quinn read the lead partner for pwc tax consulting services on this matter? >> yes i was. >> did mr. williams report to you? >> yes. >> mentioned some of the key

contacts at caterpillar and among them i'm asking you where they robin beran tax director rodney perkins senior tax manager? >> yes among the interaction. >> my first round of time is over. >> thank you mr. chairman. mr. quinn on the earlier panel i was asking the professors the basic relation how does the irs contract with a large multinational corporation i would like to expand that not only to a large corporation like caterpillar but also to large accounting firm like yourselves? can you describe how the irisin treks during -- interacts during the tax year? >> the iras during the entire year is a continued audit as you describe very and maintain it continuous presence on site and actively engage with caterpillar personnel directly in to the extent that we don't have direct

interaction with the irs only through caterpillar and one invited in by caterpillar to assist them in those matters. >> was there any consulting done as you are working with caterpillar to comply with a the law to lower their tax burden? was there any contact by the irs at that time? >> i had no contact with the irs. >> do you know what caterpillar did? >> i do not know that. >> your obviously familiar with enron the firm that used to be called arthur andersen. is that something you would say most cpas or accounting firms are familiar with that situation? >> yes. >> would you happen -- say what happened to arthur andersen was no longer exist because of the enron scandal is that something that in general disciplines the accounting profession? >> absolutely.

and reflection upon this offense it has been in terms of my profession that was a considerable change following that activity. >> can you talk a little bit about tax avoidance versus tax evasion? >> sure. i think the earlier panel described that accurately and correctly that tax evasion is illegal and tax avoidance is appropriate in terms of managing the overall costs associated with your business. as long as it's done within the rules and regulations as provided by the tax authorities. >> so in light of obviously what happened with arthur andersen and enron scandal you are preparing these types of documents and now they are being a congressional senate hearing here. with these concern you if all of a sudden the irs were to deal with this and your interaction? do you think this is basically what accountants do in working with their complaints to comply with the tax code? >> yes, i do. earlier senator you made a

statement to the last panel that if you saw a tax rate of 29% what would be your response to your manager of your federal tax function? at the time we started this project caterpillar's tax rate was 35, 35% effective tax rate and that is exactly what management was asking if service providers. >> that was actually my next question that i was going to ask. how does that relate to other large multinational manufactures and first of all 35 or 36%. where is that in the range of effective tax rates for multinational? >> i would think based upon my study in this area that 35 or 36 wood need not unusual for a manufacturing company which had its sales base all within the u.s.. we take a look at those domestic

companies that don't have extensive international operations and the tax rate between 35 and 39% is very much the rule. >> again that is when all your operations and all your sales are in the u.s.? >> correct. >> what happens if you are multinational and you have 60 or 70% of your going oversees? >> that would depend on how you organize the transaction and affairs because the earlier panel address that fact that many times those operations are subject not only to tax before jurisdiction but because the way it's organized may be subject to u.s. tax at the same time. this document that we just looked at as a good example of that where caterpillar did in fact have extensive amount of international operations but the way the business had been structured in the way the operations department had put in place the relationships it had in moving products to the international markets created a

cost which couldn't be avoided. >> there is nothing wrong with any taxpayer trying to comply with the tax code to try to lower their tax burden, correct? >> that's correct. >> can you talk about the types of tax laws enacted by congress to incentivize manufactures to export privates oversees? can you name some of the tax treatments that this body has an acted to induce that type of behavior that caterpillar was engaged in? >> yes certainly. that history goes back in the times and in fact when i practice in the 1980s the domestic international sales corp. was promoted as an export incentive that was succeeded by the foreign sales corporation which was a tremendous benefit, tremendous benefit for u.s. exporters and u.s. manufactures including caterpillar. >> exactly what did that do? >> at incentivize companies to do manufacturing in the united states and gave them the

opportunity with respect to the end, earned on those transactions to reduce their effective tax rate as much as 5% so rather than 35% on the income it would be closer to 30%. >> i had an earlier discussion with the previous panel that if we tried to change the tax law to try to capture more of those were the income on foreign sales what would a large multi-corporation at least consider doing? >> i think exactly what he suggested. it would move operations offshore and it would move those functions in those jobs to foreign locations outside of united states. the differential in tax rate is so great that you couldn't ignore that as a steward of the corporate assets. >> are you aware of other businesses may be that your clients have done exactly that? >> they have in fact, yes. >> can you give any examples. it's probably not the appropriate place to do that.

>> prefer not to. >> thank you mr. chairman. >> senator paul. >> thank you. i buy with to take my time to apologize to caterpillar for this proceeding. i think rather than having an inquisition we should probably bring caterpillar here to give them an award. they have been in business for over 100 years. it's not easy to stay in business and not easy to stay in business but to keep the business employing 52,000 employees for over 100 years is a remarkable achievement and wish to be complementing caterpillar and perhaps give them a word. caterpillar not only employs 50,000 people that pay $600 million in taxes every year so really we have got the wrong people on trial here. the tax code needs to be on trial here. it would be malpractice for pricewaterhousecoopers to give advice to caterpillar saying we are not going to tell you how to minimize your taxes but here is how to maximize your

taxes. you probably could be sued for giving bad advice on how to not maximize -- we have to understand the legal behavior to minimize your taxes is really your responsibility if you have stockholders. you have to do that. it is a requirement that you try to minimize your costs so rather than chastising caterpillar we should be complemented them. it is a big error not to know where the problem is here. the problem is around the tax code. money is sent to go where it's welcome so money is going oversees. people for decades have been lamenting the loss of american jobs overseas. why? because it's a tax code. we have the highest corporate tax rate in the world. canada is now dumped 15% c. kinsey how we are pushing people and pushing people and then we bring them forward for ridicule to swear an oath and to pry into every nook and cranny of their legal tax behavior.

it's insulting to american business and it shouldn't occur. we should be doing the opposite. we should be giving an award to american business that creates 52,000 jobs. there are some policy matters and we could address. what if we lowered the group rotting come tax? we are at 35 give or take throwing the state rate. if we want to encourage profit earned overseas to come home why don't we have a low repatriation tax, 5% repatriation tax. when we did in 2005, 20 or $30 billion in revenue and hundreds of billions of dollars in income came back to the country to create jobs. why don't we do that? instead of vilifying people for legal behavior. my guess is that mike question ultimately would be do you have a legal responsibility to offer to companies that ask you for a device? are you legally responsible for offering advice that would minimize their tax cost?

if you weren't to not tell a company about a legal option to reduce their taxes could they company potentially sue you for not giving you complete advice? >> senator that is our professional proposition to our clients and their expectations when they come to us we have an expertise in understanding the tax laws that holds the regulations and we can help them understand that so they can take a look at their bona fide business transactions and understand what the tax cost is associated with those. so yes that is the client expectations of what we are bringing them and even if it weren't legal it would be from the standpoint of professionalism it they would be less than what was expected. >> thank you. >> are you done senator paul? senator portman. >> thank you mr. chairman and i

appreciate your being here. we have another panel coming up and i would like to talk with them as well but to me the problem here is not caterpillar. it's broke in tax code and i think this is not just an important matter. i think it's an urgent matter. in response to the question mr. johnson asked earlier you indicated that some of your other clients are moving some of their operations overseas. it's happening as we sit here today and it's a fiduciary responsibility if you are publicly. company as was said earlier to look where you can maximize your profits to the stakeholders. i'm very concerned about it. in my own state of ohio we have companies that have left her state to be domiciled somewhere else because the tax laws. one company merged with the company half its size to take advantage of the rates in ireland and we lost one of our fortune 500 companies to ireland. i met beer drinker. if you want to try to find american beer good luck.

luckily i like sam adams and england. every other company is four and zero and when i asked people why including the folks who purchase these companies they tell me it's the tax code. this is a big deal. it's not just a loss of jobs although that happens. it's also the loss corporate headquarters which has a tangible effect on all of our communities including a lot of the good work better companies do here for the non-profits and to help make a better way of life for everyone in those communities. this is not just an important matter but it's an urgent matter and i think you for holding this hearing. we have a broken code, not just the highest rate among all of the developed countries now which is not a number you want to have now that japan has lowered their rate. we are number one but the fact that we have international tax code system that is so noncompetitive and so

complicated that it is driving jobs and investment capital overseas of our oecd partners almost all of them have gone to the territorial system. if you could talk about that for second i would appreciated and mr. quinn you would be the right person. what impact is this having on your clients as they look at what their options are going forward because of the u.s. tax law being so antiquated and inefficient and noncompetitive? what impact does it have on them and specifically if you could address not just the rape of the just the rape of the fact that we have a worldwide tax system that makes it difficult for them to be able to do business overseas and easier for them to move those businesses overseas. >> eight is the issue at the forefront of many decisions and many conversations that are taking place within corporate tax departments throughout the population us-based multinational companies. this debate around how the u.s. is assigning tax earnings is one

of critical importance as u.s. companies continue to grow and stand offshore. that cost becomes an increasingly larger proportion of their overall cost structure for their business in their ability to compete with foreign companies. we have as you said we are one of the few if not the last remaining country which still taxes worldwide earnings. it does employ a territorial system and that is a considerable competitive disadvantage when companies are trying to compete against companies that don't have the same tax burden even in the u.s. that a u.s. based mnc might have great senator a lot of the debate that i hear in the discussions that take place among my clients a lot of it has to do with rate as well. it's not just the basis of taxation but the rate that applies and i think there was questioning earlier about what is the right rate with this type of activity activity or that would cause this type of

activity to go away? if u.s. corporations were established and could be subject to a rate of tax at 20% or less there would probably be very little incentive to continue moving business activities outside of the united states. if you think about the opportunity now and expressed in percentage terms the opportunity to move from 35% tax rate to a 10% tax rate is a 25 percentage point improvement. that's material. when you start talking about 20% tax rate moving to a temper sent tax rate that's only 10 percentage points and when you look at the cost of the relative benefits of becomes much more of a push so i think companies might be looking at those sites of that question both the basis of taxation in terms of its territorial, need for a territorial system as well as the tax rate that would apply. their feeling is that it might actually a lower tax rate being more income into the tax net.

>> i think that's very likely and in fact he would see a lot of repatriation of the $2 trillion tied up overseas. you are going to bring it back at the high rates of the two are combined. let me make the obvious point which is we have done this before. in the 1980s we looked at her tax code and said let's end up with the rate that is below the average to be competitive. this was an a in 1986 tax reform act and we took the rate as you recall dented 34% taking that was giving us below the average. to give below the average now we would have to include her state corporate rate. as you indicate somewhere in the low 20s probably. 25 is the rate that some of us talk about but you need to get at least to that which is probably right in the middle. since 1980s isn't it true that every other one of our competitors around the world all the other countries have reformed their code. everyone of them has except us. we are the ones left on the sidelines and those reforms include as you indicate going to

a system of taxation that is territorial but also going -- lowering the rates and that combination of people who pay their income taxes when the earnings occur and lower rate has made his noncompetitive. i think the united states frankly has waited way too long to make these reforms while every other country in the world that we compete with has moved ahead and gotten a more competitive tax system. that is why it's urgent that we act now and by the way on the international -- since the 1960s we have not changed as all the developed countries have adjusted. so i hope you can be in a position in the next few years to be able to tell your clients there's a new tax code that encourages you to stay in america and create jobs here. that is why we have pwc think you want to stay here in america

and take advantage of a better environment for success. thank you mr. chairman. >> thank you very much senator portman. first of all we have got to reform our tax code. it's a long overdue and congress has been dawdling on this subject for a long time. you can argue with the corporate tax rate is currently. the gao says the effective tax rate is 13% but in any event the use of all these tax loopholes many of which give incentives to shift your profits to tax havens not air operations, your profits to tax havens is totally unacceptable. you ought to close those tax loopholes and not wait for total reform of the tax code because that could be an endless wait. we cannot tolerate the loss of our taxable revenue the way it is currently lost to uncle sam which is the use of these tax

loopholes which are unjustified and which are exploited and pushed over the limit at times and we have had hearing after hearing which shows that. i don't think we ought to accept it. of course this company is a terrific company. of course it pays taxes. that's not the question. the question is whether or not it is properly avoided paying $300 million a year in taxes which is what is tax saving is now is a result of this strategy. that is the question. we are happy to pay $600 million in taxes. should it have paid $900 million? that's a question. that's a heck of a lot of money but that's the issue. we are not going to be distracted by the fact that this is one terrific american company that is not the issue. the issue is is there a tax, with their attack strategy here which is put in place which is

justified under the current tax code? change the code, i'm all for it but the question we are going to come back to now and not be distracted by the argument about whether or not this is a great company. it is. or whether or not it pays a lot of taxes. it does. or whether not the effective tax rate in this company is 15% and whether we have to change the tax code they'd let me get back the subject of the hearing. obviously you can structure a business to minimize taxes but would you agree with me mr. quinn that when you send profits to a related party in a tax haven that transaction must be an arm's length standard? do you agree with that? >> absolutely senator. >> no matter how much you pay in taxes. >> when you talk about the arm's length standard but that requires is an understanding of what functions exist offshore and risks have been accepted offshore and what properties

existed offshore. >> got it must mean -- meet that standard. >> to align with those -- that must be met. is that correct? and must you need a business purpose standard? >> in order to support the transfer pricing result you want to make sure that when you take a look at the functions and the risks and the property that has been evaluated that it does in fact make sense within a business and how it's been operated. >> take a look at exhibit 33 if you would.

i am trying to figure out what the annual parts benefit was from the structure. the strategy that was put in place. you have exhibit 33? >> i do. that is the district court document. >> no. did i say 43? oh sorry. >> the pwc document. >> and it's entitled if you look at number three it's got a markup 2449 at the bottom, january 2010, slide 19. number three worldwide parts management in geneva. do you see that? take a look at the bottom line.

the ww worldwide parts manager structure provides further substance to preserve annual parts benefit of three and of million dollars. do you see that? >> i do. >> so that is the tax benefit that is result of this tax strategy. is that correct? >> that is accurate. >> okay. now take a look at exhibit six if you would mr. quinn. >> pwc document global tax case for. >> if you take a look at number

caterpillar the bottom 4646, do you see that? this was the document that laid out 30 to tax strategies for caterpillar pwc. >> yes. >> page loads a strategy for caterpillar. do you see that? you would develop the strategy we believe will be a tax optimization for caterpillar and this can be summarized as follows. summarized as follows. migrating come from the u.s. to lower tax jurisdictions. do you see that? and you see below that global income migration? >> yes, i do. >> on that strategy is there any reference there at all to hiring new people are moving people are changing operations? >> it can only be- >> i'm sure that but do you see it anywhere on this document?

>> it's not in this document senator. >> wasn't on any document at the time that they would have to move people? >> yes it certainly would have been. >> how many people would they have had to have moved? if they had less than 100 people working in parts. >> if i can ask what particular part of your position might be in. >> and switzerland. >> in switzerland as it relates to the overall business? >> the parts business. they have less than 100 before and they have less than 100 after. >> our view in the time we put this together is the substance that exists with the parts is a the marketing organization and those thousands of individuals managed out of the organization based in switzerland. now that comprises the marketing company outside of the united states for caterpillar products and replacing parts associated with those are the substance which creates the demand for those products.

they have nurtured the dealer relationships. they have created the field population upon which the demand is created for replacement parts and that the video as well as reflected the integrated nature that is taking place with the business while selling parts as well as machines. going back to my opening statement where this is in fact an integrated activity. >> we understand. did anybody have to move? >> in order to support the parts planning? >> is result of this document that you were planning. how many have to move? >> eight dozen. >> out of thousands. >> senator that is because. >> whatever the cause is if you can answer the question that would be a dozen out of thousands. i'm just asking you a direct question. out of 1000. >> to support the structure of the substance that was our game place a dozen.

>> is so that structure was already in place which then led to the shift 15% of profits going to switzerland and 85% of the profits going to switzerland. >> no, senator. >> you want to use 70% instead of 85%? >> i'm on to argue with the senator. i will argue with what creates income shift and that can only result as a result of the measurement of what has been played taking place in terms of the functions where this take place the risks where those are accepted in the profit that exists in the company and our valuation of that without context of this planning was we looked at substance and we looked at economic substance that we used rules provided to us in caselaw as well as the internal revenue code and its underlying regulations that say in order to evaluate that appropriateness with income shift first we have to look at what functions exist what risks

are in place and what property exists and then we aligned the income at that. we never shift income. >> well the allocation of profits was shifted. following all that assessment. >> allocations are profits changed as a result of that. >> that. >> change and was shifted from approximately 15% from switzerland to 85%. is that true? based on your assessment. >> we did you- >> with respect to the parts business. after your assessment the allocation of profits shifted from 15% to approximately 85%. is that true? >> that is correct. >> it was just your assessment and he looked at the whole operation in your judgment they would have already existed justified the shift to profits from 15% to 85% to switzerland.

>> absolutely does. >> thank you. senator johnson. >> thank you mr. chairman. i want to make a quick point and ask one question. you stipulated that he is caterpillar is one triptych american company and that is not what this hearing is about. i would ask exactly what this hearing is about. senator portman mentioned are concerned about our tax cut is we actually want to maintain caterpillar as an american company and far too many american businesses are choosing not to remain american company and far too few global manufacturers are willing to relocate here in america to create those types of jobs. let's face it. when you have canada with the top tax rate of 15% and if you are german manufacturer wanted to come here to take advantage of the world's largest market take advantage of relatively received price energy prices are you going to locate your manufacturing facility from north america to toronto at 15%

or 35? this hearing is about what to need to do in america to make america an attractive place for global business investment business expansion and job creation? i just disagree in terms of this hearing. i think the purpose of this hearing is exactly that. lets keep american companies american. let's try to incentivize investment and global companies into america. we are not doing a very good job that way. mr. quinn i hear the term all the time and it's like fingernails on a chalk board talking about tax loopholes. is there such a term in the tax code as a tax loophole exits a political term, correct? >> that's correct. >> can you define some tax loopholes for me? what are we talking about when politicians use the words tax loopholes? >> generally there are incentives deliver it with place in the tax code. >> just give us a couple of good examples of where it makes some

sense to create an incentive in the tax code to incentivize manufactures are drilling or just give us a couple examples that might actually work. >> we talked about some earlier. of course the hearing here one was the old rules which existed around ford sales corporations. i think i was characterized many times appropriate as a loophole created for corporations that exported products. more recently we talked about the homeland repatriation act for companies had an opportunity to bring earnings back into the u.s. had at a 5% effective tax rate. this was back in the early 2000 and that as well was viewed as a loophole. >> what is it also safe to say a lot of times people typify timing differences as a loophole? in other words it's true that corporations account are things differently. there is book accounting and tax accounting. a lot of it has to do with the

timing difference. for example if you have this machine and you know it's going to wear out in five years but according to gaba con it will depreciate over five years for tax accounting made to incentivize investments in plant equipment might grant you with tenure depreciation schedule. correct? >> right. >> what about oil drilling is pretty risky venture. i am hearing all the subsidies for big oil. can you speak about what those subsidies really are and are those loopholes or all at those incentives the tax code had people the incentive to risk their capital to drill oil? >> as someone her reviews the tax code regularly in the stands the legislative process around it i know those are incentives and many of those are put in their deliberate leap to incent activity. >> specifically can you talk to some of these tightening issue specifically? how oil companies have to

account for their risk capital and their investment? i know it's a little off the subject but it's exactly on point because what we are talking about is how do you comply with the tax code that has been written by congress that is trying to incentivize behavior and by the way i would like to scrap the current tax code. i would like to raise revenue we need and stop economically and socially injured during the tax code but that is the system we have right now. companies take advantage of it and respond to those, correct? >> that is correct and in terms of an example you are looking for that would apply not to just oil companies at this particular facts in this case study the u.s. system with respect to foreign earnings works that way as well. when we think about the deferral opportunity that exists for foreign earnings that is in effect a timing issue and a timing issue could be affected through paying a dividend to the u.s. company at which time the income becomes taxable or it can happen a result of the

application subpart f which takes a look at certain classes of thing comes and says despite the he didn't return that cash to the u.s. the income is going to be immediately taxable. that is an example of the deferral strategy and is also one where there are deliberate actions taken by congress and the treasury department and including placing regulations in the area to respond to none business issues. >> when i took tax law in college one of the tenants of tax law really was the ability to pay. most americans assume that when a corporation or business spends money they get to deduct it. that's not the case, right? >> that is correct, absolutely. >> so many cases businesses invest money and they pay out the cash. they are spending the money. they are forced to capitalize and then they have to amortize and it appreciates overlong.

lack of time. >> sometimes is not even amortize. sometimes it's held up on the tax balance sheet forever. >> lets say you have $100 you decide to invest $100 in capital equipment, let's say a million so you invest a million. if you make a profit that year where's the money going to come from to pay the tax? >> you spend it -- you will have to borrow it. >> you will have to borrow its correct? i that's not in incentivize incorporated from the standpoint of having people risk their capital. i think it's extremely important for people to understand how our tax code operates the incentives that congress has written into law the disincentive nature of high tax rates of forcing businesses to capitalize, cash that is spent not being able to recover that for years. that is not a loophole. that's economically very disincentive icing and harmful to job creation. thank you mr. chairman.

>> thank you very much senator johnson. senator portman. >> mr. chairman thanks very much and i just had a couple of questions to follow up on how the international code specifically as it relates to caliper log. you talk early about the vacuous companies are competing globally at a disadvantage given the fact that we have a relatively high rate and we are taxing on a worldwide basis rather than a territorial basis meaning if you have active income earned abroad its tax that u.s. rates. what does that do to accompany caterpillar as an example that any u.s. company that wants to take advantage of the international marketplace and that wants to be competitive in terms of acquisitions as they come up? 80% of the purchasing power is outside of united states in 90% of the consumers are outside of the united states. we want that purchasing power to create more jobs here. >> that's correct.

>> with regard to caterpillar in particular do you have many -- any ideas how many other us-based employees are dependent on some extent on their international sales and the revenue is about 60% overseas. how many people who work here out of 50,000 people have their jobs because caterpillar does business overseas? >> i don't know the exact number but i would expect it's a large portion to support the export nature of the business. >> yes acid 2000 a testimony that some of your colleagues gave 14 years ago saying export supported caterpillar jobs here and 30,000 u.s. supplier jobs here. >> i wouldn't find that an reasonable. that number is going to be a lot vigor now that they have them plays here and internationally. we are talking about u.s. jobs giving u.s. companies access to foreign markets. that's something we want to

encourage because that creates more jobs here in america. again if there's an acquisition that comes up let's say there's a company that becomes available and the competitors are a german company a french company a brazilian company a chinese company or a korean company and caterpillar is in the mix what is the relative advantage raced on the tax loss for those acquisitions? >> what they will be looking at whenever an acquisition is made is what is the earnings opportunity in the future and that earnings opportunity will be viewed on an after-tax basis so they will take a look at the tax costs associated with the earnings in that business as well. i'm sure the example he gave earlier of the company took a similar approach to it the hard economics looking at what is that after-tax cost working as a corn-based multinational

company. >> the companies in ohio are not just sadly competitive disadvantage locally. other companies can pay a premium because of those after-tax profits that they're looking at. in other words we are having two notches compete head-to-head but shrinking as american companies relative to what we should be because of our tax code because other companies can come and for domicile somewhere else in say hey i will pay you a premium so we are not expanding as we should be and therefore not taking advantage of these international opportunities. who are cats biggest foreign competitors? do you know? >> certainly, to which is the japanese-based company. >> volvo which is a swedish company and some chinese companies are competitors. >> from korea as well. >> samsung and others. >> volvo is the top competitor in europe and come out to a

nation and the chinese are growing their market share. volvo is in sweden where the topic is 22% so it's -- which would be the state and federal. based on the financial statements cats effective rate was 20.5% last year. do you want to know of volvos effective tax rate was last year? do you have a guest? >> the low 20s? >> 20%. so 28 .5% for cat and volvo is competitor acts 20% so it sounds to me caterpillar spent lots of money coming up with attack strategy last year that didn't even allow it close to achieving tax parity with its primary rival in europe. is that accurate? >> that is accurate. >> that's reality and i would also say there's a big issue as to the ability to deploy

resources to its most efficient use so it's not just the fact that the volvo is a lower rate but the fact that because they work on a territorial basis for that global basis they can move capital to where they needed which is a huge advantage and come off too has the same thing so the japanese have a 905% exemption rate as you know meaning they allow the companies to do business in the united states would bring those profits back to deploy them in japan or elsewhere without any tax penalty. look i know the chairman is raising some specific points about our current code but this cries out for reform. if we don't we will continue to see an erosion of u.s. jobs, u.s. capital going overseas and the lack of investment in this country and the inability for companies to expand as they should be able to for the reasons we stated earlier that they are not as competitive on acquisitions. i appreciate you all being here

today and i hope again in the next few years you will be in a position to tell your clients that the u.s. has a competitive tax structure and let's stay right here and build your jobs and investments in united states of america. thank you mr. chairman. >> i have to agree with senator portman about the need for the tax code to be totally profound profound -- reform but now let's talk about the tax strategy which caterpillar used to save $300 million a year. and that's ongoing. would caterpillar have offered this deal to anybody but a related company? what they have offered this license to anybody but a related company? >> that is what we were asked to opine on.

>> in your judgment. youtube a lot of this for decades. >> there are some recent. >> i'm just asking a simple straightforward question. caterpillar has created this very strong company, 90 years to build up. it turns over to itself and a tax haven. 85% of the future profits some parts. okay? it doesn't get any pay for it. doesn't get any compensation or any consideration for it. let me just finish. >> i'm sorry. >> the deal is on future parts you over there my wholly-owned subsidiary you are going to get 85% of the profits on these parts and i'm going to get -- i'm going to keep 15%. i'm asking just a very simple question based on your

experience. is there any way and have been that caterpillar would transfer its rights to those profits to a company that wasn't related to itself? that's all i'm asking. i'm not asking but it has to and is asking in your experience. no conversation, no consideration. it loses 85% of the profits that it's received and continues to operate the company. it has to continue under the agreement. the same operations in illinois so it keeps doing the same thing it has always done in turning over 85% of parts profits worldwide and gets nothing. no consideration for it. yes or no. >> is a hypothetical would caterpillar would look at is exactly what you are expressing. >> my question is what it offer that to a nonrelated company?

>> i don't know. >> sure you know. sure you know. you have been doing this for a long time. i'm asking a straight question. do you not think it's incredible to believe that caterpillar would hand over 85% of its worldwide profits on parts, keep 15% continue to operate in illinois the way it always has and never ever arose around the world where it does and give no consideration for that transfer? do you think that in any way they would offer that? >> for the nonrelated rules that we are required to use are ones that did in fact value the compensation that caterpillar received. >> i'm just asking you is there anyway in your experience that caterpillar would make this deal with the number laid a company? this was a deal made with itself to shift profits that you say are legitimate. i don't but that's beside the point at the moment. that's not my question. my question is is there anyway

that they did make this deal with a nonrelated company? that is my question. >> i'm sorry. i can't answer that. >> you can't or you won't? >> you have an opinion on that don't you after all a few years of experience? >> i see companies that dispose business operations all the time. caterpillar has done it within their logistics organization. >> 85% of the profits were shifted to a related company in switzerland. the tax savings are $300 million a year as a result of that strategy. that is why it was done. you have conceded that. everybody has conceded that. that is why it was done. that is why you sold it to them. >> senator and focused on the question of value that you are asking as well. >> i'm asking a simple question. i am asking a simple question i'm asking you to give us an

honest answer. >> were the economics of that deal appropriate? yes they were. >> i'm asking a question. >> i can't answer without that qualification. it would have to be based upon their believing they are receiving a return in exchange for that. >> would any rational company believes they are getting a return handing over. >> if in fact they were being relieved of all the risk associated with that? if they were relieved that the capital? >> they continue to operate the company in illinois. it's the same operations. no people have shifted. 5000 people, a dozen people have to shift. 5000 people work for caterpillar. less than 100 people work imports in switzerland. nothing changes, maybe 12 people move. i'm just asking you for an honest answer. is there any rational company that would give up 85% up ongoing profits in the business

that has been highly profitable put together over 70 years, highly profitable company? is there any way that this with the sold, given away no consideration? 85% of the profits on the ongoing parts business hand it over. >> my answer is yes under the economic circumstances which caterpillar accepted. >> i'm just asking you what they accept it with an unrelated company and arm's length standard? i'm asking you in the real world would a company do that? and just asking with simple straightforward question. >> senator in the world world that is a hypothetical based upon an economic analysis. >> okay. take a look if you would mr. williams exited for a.

>> yes sir, have that. this is a document from 1994 pricewaterhouse look at the intangibles for audit -- all of caterpillar including a swiss marketing company which is csarl's assessor. here is what twc described as the relative roles of caterpillar and its marketing companies in developing the dealer network three at this includes the marketing company. cat inc. has the largest role with regard to marketing dealer deployment development. do you see that they are? >> it's on page 685. >> do you see that on page 685? cat inc. has the largest role

with regard to marketing developments since. it is the largest single market. if the originator of the basic marketing systems concepts and continues to be involved with the development and oversight of worldwide marketing programs and approaches and then it says the marketing companies and that includes csarl also have major responsibility for market development. in fact it is their primary responsibilities to do that. okay? sub cat inc. in the description of pricewaterhouse has the largest role 1994 with regard to marketing dealer development. is that true? >> what i said there was the dealer network was developed first concept united states in the 1920s, 1930s. it originated it and that is what sustain continued to be involved in the oversight

however xhosa and other marketing companies employ those concepts develop those concepts expanded the dealer network and had the daily interaction with dealers over the rest of the world. >> where do you see that? >> not implied. where do you see that? >> that's my knowledge of the company. >> i'm reading from document. where do you see that? now let's go back to this document. cat inc., this is what you said in 1994. it has largest role with regard to marketing dealer development. okay and that it gives three reasons. the marketing companies also have a major responsibility but the largest role you said in 1994 was caterpillar. was that true? ..

>> that's my understanding, yes. >> was it true when you said the

same thing in 1997? >> senator, we used the same language in the reports as updated each year. >> and did you believe it was true? >> i used that language in 1997. >> it's a straightforward question. did you believe it was true when you wrote it? >> based on the facts at that time, yes, i believed that. >> senator mccain. i thank the witnesses, again. your job is to advise companies and corporations how they can maximize their profits in keeping with the existing tax code as it is written; is that true? >> that's true, particularly with respect to the operation. >> so this was structuring, obviously, developing increased profits for cat pillar; right?

>> i believe the increased profits lamplegly vied the opportunity for them to expand their markets using a different base. >> to this day, do you believe that there's any violation of the tax code as it was written then? i don't know how much it's changed since that you were completely in compliance with existing law and regulations? >> yes, that's my belief. it's my firmest belief. >> thank you, mr. chairman. >> senator johnson. >> thank you. mr. williams, in the 1990s, they signed 13% profit of marketing companiesing identifying evacuation ever --

having value, which everybody can see, not a lot of value, but that was before the 1999 tax strategy was implemented. look what catpillar did after the strategy was implement. look at 2001. please look at exhibit 13. >> you have it? >> yes, sir, i have that page. >> thank you. this is a 2001 economic analysis

prepared by pwc valuing the marketing intangibles of caterpillar americas. you've been out -- this is a miami based u.s. company that was transferring assets. receiverring as cat pillar's marketing company, did you work on this analysis? >> yes, i participated in this analysis. >> okay. pwc describes the responsibilities virtually identical, and they include signing contracts with independent dealers in the region, purchasing products and parts from the united states parent, reselling to the dealer, helping with logistics support, main taping minor parts inventories, helping dealers identify performance issues, providing dealers with marketing information and sales training,

helping them with financing and conducting monitoring and oversight activities. to ensure compliance with teachers by the terms of dealers service agreements. that's all from this document. now, on pages four, they list the marketing intangibles. they consistent of the relationship with caterpillars growing concern value and any other markets-related intangibles. sound familiar? because thee are the same. on page six, mr. williams, take

a look the descriptions of all marketing tangibles. these assets have only limited economic life, could be effectively reproduced by a new startup company, a sufficient investment in time resources. therefore, we conclude that the intangible assets transferred have very limited economic

value, and this value is mostly related to its asemilled work force in place. was that true? >> that was the analysis we'd wrote, and i'd like to explain it. >> finish the sentence. >> sorry, sir? >> that we wrote and i want to expand on it. >> is it true? i know you want to expand on it now in front of this hearing. i understand that. i'm asking, is that true when you wrote it? that's what i'm asking. >> that was the understanding we had at the time. i think it was, as you pointed out, it was partially inconsistent with the other language we said. the reason for that is these were different ang sis under different times and looking at different assets and different values. >> i see. they are not basically the same intangibles? were they basically the same

intangibles? >> these were looking at intangibles that were inside the united states and do not include intangibles outside the ice. >> when you describe the intangibles, pretty much the same, were they not? >> they created intangibles outside the u.s., and many of field and service reps were also outside the united states working with the dealers who were outside the united states. >> i understand. these are basically the same intangibles, were they not? that you previously described. >> i think they -- >> are they basically the same. >> no, they are not basically the same. >> they are different intangibles? >> these are the intangibles without the activity of the individuals who deploy those intangibles, and the activities are performed by the notary public-u.s. employees. >> this was the marketing company for latin america, canada, and caribbean? >> that's correct. >> and these are the intangibles

that they had? these are the -- is that correct? you identify these intangibles. >> these are the identified intangibles. >> and you -- we can compare them one for one. i've already done that to the best i think accurately, but nonetheless, my question is, when you said that those intangibles, reading it again, those intangibles i read have limited economic value, and this value is mostly related to the assembled workplace intangibles, i'm just asking, is that mostly true? >> not totally, completely -- >> no, don't refer to somebody else. you wrote this thing. >> all right. >> so what you're saying it was true, but incomplete? >> as i said, i would prefer to expand on it by talking about the assets had offshore with its

employees. >> i'm sure you would, but this is the assessment you made at the time. is that correct? >> that's the a seesment i made at the time. >> i think if he offers further explanations, it would be helpful. >> no, someone else can ask you, but i'm asking what was said at the time of the intangibles. in 1999, you attributed huge value to similar intangibles. okay, you can say they are not similar. let the record speak for itself. we read them. you can -- determine reading them side by side whether those intangibles, given huge value relative to the value begin no value when it came to transferring season tangles from the american company, okay? i'm just -- >> using tangibles in absent of the services that support them. it's a completely different

context, senator. >> anyone reading the two documents set aside. he said, mr. williams, that it was incomplete. was it incomplete? was it incomplete? >> he didn't have the opportunity -- >> no, was this assessment incomplete? >> this assessment is complete with respect @ asset it is evaluating. it is not evaluating the same asset you referred to from the earlier report. >> in other words, this does not list all intangibles? >> it's two different basis. this is looking at the tapingble itself and it's separate and apart from the services that might support those. when we look at the earlier report, it was clear that's trying to evaluate the income potential and income being generated by caterpillar's, and in that case, it adds to the asset and service itself. it's comparing apples and

oranges. >> both were intangibles; right? >> there's an intangible plus its enabling service. >> listed as intangibles. is that correct? >> when the transfer was made, they were both intangibles? is that correct? >> no. >> that's not correct? we'll let the record speak for itself. now, if you would turn to exhibit 12, mr. williams, this is now 2007.

you see that? >> yes, i have that, sir. that is a -- is that not an e-mail from you to a mr. matthews? >> yes, it is, sir.

>> okay. you were talking about seasoro that they spent decades building up the dealer network around the world, which is what a marketing company does, spent decade building the brand name through ticessing, and then you say this -- advertising, and then you say this. you say that -- see above the

second or third paragraphs above them? >> yes, sir. >> says there's a caveat, and in 2001, this is what you said. we said in another transaction transaction -- that's -- >> i believe, yes. >> that there is no significant marketing intangibles other than the work force in place. >> no significant u.s. marketing intangibles. >> it does not say u.s.. it says no specific marketing intangibles. >> it does not include the word u.s., but marketing entangles were a part of efforts overshore. >> then what's the caveat? >> the caveat was that i was recognizing that there was -- >> there was an inconsistency

here. >> i was recognizing that in two different transactions under different circumstances and different approaches, different assets being valued, that there was a different cop collusion. >> is that what you said here? what's the caveat? why do you have to say "caveat"? is there an apparent inconsistency you're worried about? >> because of the transactions. that was what i was advising the staff that if we had to reconcile those different approaches. >> you, yourself, saw there was an apparent inconsistent at that time? >> i used the word "apparent," yes, sir. >> okay. now -- you take a look -- you

were responding to an e-mail from mr. williams. look at exhibit 46, please. >> it's an internal e-mail. i have that. >> i'd like both you and mr. williams to look at this e-mail engs change between the two of you regarding what you both seem to see as a problem regarding the ability to justify perceiving the lion's share of the nonu.s. parts, profits in switzerland. the first e-mail mr. williams,

you wrote, in the last sentence, quote, just curious, say they decide to -- most pms, part managers, stay in the u.s.? how do we retain the part profit if the u.s. entrepreneurs claim both machine and part profits? >> the pm there refers to product managers. >> sorry if i said part, i met product. do you have a concern whether the product managers located in the united states might claim parts profits related to the parts they designed? >> sir, my point was related to -- >> can i just ask you the question directly? did you have a concern here about whether product managers located in the united states might claim the parts profits related to the parts that they designed. was that a concern of yours?

>> concern was relocating managers from switzerland back to the u.s.. i was concerned by taking those entrepreneurial functions out of switses land and located back to the u.s., that would give me a concern. >> was it -- >> over -- >> the answer then is no to my question? >> there was a concern, yes, sir. about the relocation. >> no, i'm saying that they might claim the parts profits. that's what i'm asking. whether or not part -- excuse me, product manager -- i'm going to ask you again. was there are a concern that product managers relocated in the united states might claim the parts profit related to the parts they designed? yes or no. >> no. i was concerned about the relocation of the individuals from switzerland back to the u.s.. >> all right. now, you responded to mr. williams in the next e-mail. "product managers of the u.s. will put some pressure on the

parts profit model." these guys have all -- are really bought into the idea that pm is king concept. we're going to have to create a story that will put some distance between them and parts. to retape the benefit. get ready to do some dancing." >> is there a question? >> yeah. what do you mean, you're going to have to tell a story and do some dancing? let me ask this question, was it not a fact that product managers who designed parts here in the united states normally get the profits related to those parts,

but that you were going to have to justify sending most of the parts profits to switzerland where they have few products managers, is that not the case? >> this was -- >> answer yes or no to that. >> i'm not sure -- could you repeat the question, please? >> yeah. was it a fact that product managers who design parts here in the united states normally get the profit related to those parts, but that you were going to have to justify sending most of the parts profits to switzerland where nay have few product managers. >> no, that's not the intention of the statement. >> what do you mean by "dancing"? >> senator, that was very poor choice of words that this was the first time i'd had knowledge of a restructuring in the caterpillar's proposal in 2008, which would change some of the

sub jsh substance put in place backing the organization that began in 1999. my concern here was that, in fact, that would change some of the circumstances that we relied upon in terms of our economic analysis, and that we needed to make sure that management understood the consequences, the tax consequences of their actions. >> mr. williams, this says "say they decide that most part managers stay in the united states," suspect that inconsistent with what you said about parts managers moving to the united states? >> you mean product managers? >> pluck managers, i'm sorry. i'll say it again. mr. williams, this says "say they decide that most product managers someday in the united states." now, that's inconsistent with what you just said which was about product managers moving to the united states. >> there were product managers in geneva who were supervising

important products outside the united states. this reorganization announced at the end of 2008 to take effect in 2009, would have relocated product managers to the u.s., and taking with them the significant entrepreneurial responsibilities. that was our concern. >> did decide most part managers stay in the united states, not move to the united states, stay in the united states. is that not your memo? >> the word says "stay". out of the -- >> yeah. >> out of the 15 or 20 product managers, they were proposing that all of them be in the united states. that means the word "stay." >> your concern was if they move to the united states. that's not what the concern was in this memo. >> we -- >> why did you use the word "stay" rather than "move"? >> we knew what the existing location of them was in the recommendation which was to have

them all in the united states, so that's what we mean by "stay." >> you were worried about moves to the united states; is that right? >> moving and staying in the u.s., no longer having those positions in switzerland, staying in the u.s. instead. >> did you just say that the concern was that they would move in the united states, isn't that what you testified? >> i said to you "stay" -- i said to you "move" -- >> to the united states. >> yeah. >> it says stay. >> at that time, there were several important product managers in switzerland. the point with accident stay" is 2009 and the future. the reorganization would have put and stayed everyone in the u.s., and we were concerned about that reorganization enits effect on the tax benefits. we were -- needed to assess corporate tax to explain to the executive office the tax effect of their proposed

reorganization. >> mr. williams, you responded, "what the heck, we'll be retired when this comes up on audit." >> yes, sir, that was also an inappropriate use of words and attempt at humor. my point -- >> is that humor that chris resolves it? >> no, that is not humor, sir. >> humorous to them? >> no, that would not be humorous to them. >> mr. bowers, you were op the audit team. did you know they had to figure out a story? that they had these views, that they were going to do dances, they had plans to be retired when the issue came to a head, were you aware of that on the audit team? >> mr. chairman, i was not -- i was not aware. >> mr. bowers, did you know they taxed themselves to take int consistent positions regarding the value of marketing intangibles?

>> mr. chairman, i believe -- >> were you aware of that apparent inconsistency? >> i don't agree with that inconsistency. >> you don't believe there was an apparent inconsistency? >> that's correct. >> okay. mr. bowers, one of the experts today said he never heard of a company keeping two sets of inventory books using a virtual inventory system separate and apart from the company's general inventory system. one detracts the parts and the other to keep track of invenn story for tax purposes. prior to caterpillar's use of the inventory system, have you heard of a virtual inventory system? >> senator, management, different management books from illegal books are common. >> did you -- i'm not talking about that. i'm asking about inventory systems. had you heard of a virtual inventory system prior to cat

pillar's use of invenn story? had you ever heard of it? >> that particular term, i had not heard of. >> no, put aside that. have you ever heard of a virtual inventory system? >> an inventory system similar to what has been referred to as virtual i have seen before. >> you have? you've seen it? just never heard it described as a virtual one? >> yeah, it's difficult to understand, you know, an inventory is a very physical thing. >> is that what you told the staff, by the way,? asking you specifically, when you heard of a virtual inventory system, you said no, before you saw the system, did you not answer no? >> depends oh the question was asked. >> the way i asked it p p 1234r the virtual inventory system i have not heard of b, but when you think of what the sentence says, an inventory bin is a very real thing.

>> therefore? >> therefore -- >> it's all merged -- >> it's very straight toward to have a bin full of parts. parts belong to one owner; other parts belong to another owner. >> usually identified somewhat? >> why would that be the case? >> they don't need to identify them? >> nope. >> did you have discussions with the audit team or consultant for caterpillar about tax risks associated with this virtual inventory? did you ever have discussions? about tax risks in doing what they were ding? >> i did have conversations about task risks. that's my role to provide assistance and advice to the audit partner. >> did you have concerns? >> not with respect to the inventory system. >> and you never discussed concerns about this inventory system with them? >> e i explained the system to them, and -- >> i'm just asking, did you ever

have concerns about this? >> i did not have concerns about it. >> okay. thank you, all, very much, appreciate your testimony, your cooperation with this committee. ..

>> thank you. a minute before the red light comes on on the timer you will see a light changed from green to yellow, giving you an opportunity to conclude remarks. your written testimony will be printed in the record in its entirety. please let your oral testimony to ten minutes. and i understand that you will be presenting the statement for caterpillar. is that correct? >> yes, i well. >> please proceed.

>> good afternoon, chairman levin, senator mccain. thank you for the average into the job. for the subcommittee today. my name is julie legacy, and i am the vice-president of the finance services division of caterpillar which includes tax and accounting function. on my left is caterpillar's director of global tax and trade robin baron, a 24 year caterpillar employee. on my right is right perkins, who retired in 2009 as one of our international tax managers after 35 years of service debt. we are proud to represent caterpillar before you today. caterpillar is a great american company, and our reputation as one of our -- our reputation is one of our british assets. i want to emphasize, caterpillar complies with u.s. tax laws, and we played -- pay everything that we go. we are proud of what we do. we are proud of the men and women to make it possible, and we are equally proud of our u.s. and american heritage. our average effective tax rate

is 29%. that is one of the highest for a multinational manufacturing company. three percentage points higher than the average effective rate for u.s. corporations. this is particularly high when you consider that more than 65 percent of our sales and revenues are broad. over the last 15 years, we have increased employment in the united states by 35% to nearly 52,000 jobs, and we have more than tripled our exports to $16 billion. caterpillar enjoys a strong legacy and, in fact, my family has a long history with this company. both of my grandfathers worked at caterpillar. during world war to my grandfather stepped up to work in the factory to help build the machines our servicemen rely upon. my father whose career spanned 38 years began as an apprentice and worked his way up to manage one of the factories. along the way he met my mother who worked a dictated caterpillar. all told, three generations of

my family to have more than 140 years of service at caterpillar, and i am a current steward of this tradition. at caterpillar stories like mine are not uncommon. for nearly 90 years caterpillar has helped build the world, including the backbone of modern american. what began with to american investors now employs over 118,000 people worldwide and nearly 52,000 of those people are right here in the united states. when you consider our independent dealer and supplier network, the world wide reach of our company is even greater. at our roots we are an american company. our equipment was there to build the golden gate bridge and create the interstate highway system. caterpillar products, dealers, and employees also show up after tragedy strikes. in oklahoma city at hurricane katrina and ground zero we were joined the first responders in cleaning up, powering up, and

paving the way for recovery. we are proud that many of our products are made in america. along the illinois river in our east urea factory we make the machine on which our company was founded, the tractor, better known as the bulldozer. just down the road in decatur, illinois is the only place in the world army will -- where we make the world's largest mining truck which stands to one-half stories tall and thin carry 400 tons. eight out of ten large mining trucks made indicator are shipped outside of the u.s. there are other examples like this across the country from engines rolling off the line in taxes to the locomotives we are building in indiana toward the exit -- or the excavator's made in georgia. customers depend upon caterpillar's unmatched product, services, solutions, and the reliability of our machines. we grow and build near our customers worldwide not only because it is what they demand, but because remaining globally competitive helps create jobs

right here now. growing where our business is means growing where our customers are located, not just in the united states, but throughout the world. most importantly, while more than 65 percent of our sales and revenue come from outside the u.s., caterpillar remains committed to our manufacturing roots here in america. that is why we continue to invest here at home with 69 manufacturing and logistics facilities and cat dealers from coast to coast. remain globally competitive helps create jobs right here,. in the past 15 years we have increased our u.s. employment by more than 13,000. many of these jobs can from our exports, which last year alone totaled $16 billion. as you may remember, our effort to grow u.s. manufacturing jobs was highlighted by president obama in his 2013 state of the union address. i want to emphasize, again,

caterpillar has fully complied with u.s. tax law. for 2013 we estimate that caterpillar incurred approximately $700 million in income property sales and use taxes to u.s. federal, state, and local governments. additionally our wages accounted for approximately one and three-quarters billion in federal, state, and local employment taxes. with the last eight months caterpillar has responded to several subcommittee questionnaires another affirmation requests. producing dozens of pages of documents on voluntarily permitted and facilitated 11 separate subcommittee staff interviews of current and former personnel and has cooperated in every way possible with the subcommittee's inquiry. we understand that the chairman and its staff are interested in one aspect of our company's business, sales outside of the u.s. caterpillar's philosophy is that our business structure drives our tax structure.

we do not invent artificial tax structures. when we identify options that align with our business structure comply with the tax laws and generate tax savings, we pursue those opportunities. the restructuring of caterpillar was one of those of virginities. decades ago caterpillar had the vision to see new opportunities worldwide that would drive our business growth in the u.s. and globally so caterpillar established a subsidiary in geneva, switzerland that would be responsible for putting in place a robust network of employees, independent dealers command suppliers for. that subsidiary is now known as pissarro. by the 1990's and had thousands of people supporting the business and almost 500 employees in geneva, switzerland alone. it is a vital business subsidiary responsible for manufacturing, marketing, and selling machines dimensions

command parts outside of the united states. the geneva entity has held -- held this responsibility since 1960. the 1999 restructuring further refined this role. one result of this restructuring was that a streamlined the process and began buying parts directly from u.s. suppliers. prior to the restructuring caterpillar acted as an unnecessary middleman buying these parts from independent suppliers and selling them with the then sold them to dealers outside the u.s. a prudent, lawful business planning required us to eliminate the unnecessary middleman from the transaction flow. we cannot remain competitive, we cannot create jobs, and we cannot increase exports by incurring unnecessary expenses. americans pay the taxes that they go but not more. as an american company we pay the taxes that we go, not more.

in planning and implementing of implementing the restructuring caterpillar appropriately relied on advice of two of the world's leading tax advisory firms, price waterhouse coopers, a leading big four u.s. and international accounting firm and the law firm mcdermott will and emory renowned for its international tax practice. both firms provided the advice that the changes are appropriate under the tax loss in both stand behind that advice. this advice was consistent with the experience and judgment of caterpillar tax department. caterpillar in house tax professionals and outside advisers manage to tax risk every day, and we remain convinced that the restructuring and subsequent transaction comply with the tax law. csarl purchases and sales of parts of more than sufficient business of this to be respected for tax purposes. the 1999 restructuring of parts purchases and sales did not in any way violate generally applicable judicial doctrine is

in the tax area. an independent expert, professor john stein is of the new york university school of law confirms this conclusion. he had provided airport to the subcommittee staff on march 10th, 2014. csarl pays and arms length royalty for all tangible properties including intellectual property made available by caterpillar, inc. to a csarl as well as ongoing services for all activities performed by caterpillar, inc. fur csarl. so even with respect to parts that are sold to dealers located outside of the united states commits a portion of the resulting income is subject to current basic u.s. tax. the direct purchase of its parts inventory reflects nothing more than the standard business operations and tax planning that any prudent business would employ in conducting its operations and complying with u.s. tax laws.

in closing, i would like to emphasize again that caterpillar is a great american company, and iconic company might say, a publicly listed since 1929. we have steadily grown by working our business model day in and day out. caterpillar does a significant amount of business around the world, creates jobs, invests in the communities where we do business, and there is one of the highest effective tax rates for manufacturing company. caterpillar complies with its legal obligation with respect to payment of taxes. we are happy to answer your questions. thank you. >> ms. legacy, my first question is of view. were you involved in the implementation of the csarl transaction in 1999? >> no, i was not. >> ms. perkins, at the time of the 1999 csarl transaction you were working for caterpillar,

serving as its tax department's main point of contact. is that correct? >> mr. chairman, that is correct. >> and mr. robin beran, you wore mr. perkins i believe -- what was your role in 1999? >> i was and then the head of the tax department. >> okay. and you work directly under the csarl transaction? >> i was involved with this formulation. yes. the implementation. people did much more work and i. >> so you were involved in the formulation? >> would you look at seven please?

this is the way in which he w.c. recommended that caterpillar could reduce its taxes. it is one page for the document. here is what it says. purpose, read characterize marketing company in come. we characterize marketing company in come to achieve u.s. tax deferral. and then if you look further down as you point out it was caterpillar -- as you said,

ms. legacy, taken out of the chain as an unnecessary middleman. we will get to that in the minister just tell unnecessary it was. the direct purchase wind in geneva promise suppliers is that correct so far? >> yes, sir. >> mr. perkins, is that correct? >> estimated. >> was it the caterpillar tax department that came up with the idea to remove caterpillar, inc. from that title chain are was that be w.c. idea? >> mr. chairman, i can respond to that. the original idea, the genesis

of that was within the tax department and predated the p.w. see proposed changes by at least a half-dozen years. >> okay. take a look at exit 32, if you would. this is a -- by the way, before we leave to 07i will repeat it again. one of the benefits and costs of this change in the title was a relatively simple reenforcing requirement. in other words, the parts never went to switzerland. is that correct? >> the parts would be distributed all over the world. >> with did not go to switzerland. >> many of them went to one of the -- well, they went to a the

warehouses at csarl overseas. >> and how many of the warehouses are there in switzerland? >> none in switzerland. >> how many in the united states ? >> i don't know the exact number it varies. >> says san sound about right? >> in the range. in the range. >> now let's get to exit 32. february 2011, deposition of sally styles under ralph. to any of you know who's selling styles is? that me ask you, is she the caterpillar tractor of global tax? do you know? >> she is the director of global tax operations now. >> says she is now the director of global tax. here is what she said in her deposition.

question, exhibit 32. is it fair to say that the driving force behind csarl was the tax department and not a business unit? cancer is yes. was that correct? >> senator, the context is that the tax department has to continually adapts to the way the business is run. that is so we were doing. >> i understand. was her statement direct -- correct? the tax department was the driving force? >> at the point in time we were aligning our tax reporting with the way that the business was wrong, yes, we have to propose that. >> i'm not arguing with you. i'm just asking whether or not the tax department was the driving force behind csarl, the csarl transaction? that's all i'm asking. >> yes.

>> okay now, according to information which be w.c. has provided us from 1999-2003, caterpillar paid $55 million to design, develop, and implement the service tax strategy involving csarl which caterpillar called the global value enhancement or below program. does that match what you know? >> i believe that is in the range. >> mr. perkins, does that match your understanding? >> yes, it does. >> all right. from the beginning that decision to use csarl and direct caterpillar's nine u.s. profits to switzerland was to shift profits to a low-tax jurisdiction. is that correct? >> senator, as i said, it was to

a line the profit recognition where the business was being run and managed. that tax purpose, shift profits for tax purposes to of low-tax jurisdiction. we had to get the profits where there weren't. >> i'm asking you -- >> it was not a shift. was to get them to where they weren't. i mean, may change the location, but the shift was to go to the -- or the point was to get them to where they weren't. >> take a look at page 4619 in the exhibit seven.

[inaudible conversations] >> do you have that page? >> yes. >> the head of the page can increase profits associated with marketing, u.s. tax deferral, do you see that? >> yes. >> and the benefits cost where it says migrates profit from cat into low tax marketing companies do you see that? >> yes. >> okay. >> was that accurate? was that a benefit? >> yes, it's a benefit to our earned income and the tax jurisdiction.

>> all right. >> senator, could i add -- >> i'm not. let me just finish. to migrate the profits from cat into a low-cost marketing company. is that what it says? >> yes. >> and this was the plan and you put in place? is that correct? >> that is be w.c. choice of terms to my guess. >> is? >> pricewaterhousecoopers. >> it is their choice of boarding. >> yes. >> fair enough. that is what your company bought . >> senator, could i add please. >> i just want, first, mr. robin beran. >> we pay them for their services, yes. >> you but their plan, their strategy. do you want at something? >> again, keep in mind that csarl and its predecessor company or in business since 1960. at the time of the realignment we have approximately 500 employees and our geneva office,

but perhaps more importantly thousands of employees outside of the united states doing the work to help solve parts. >> short. those employees were all caterpillar employees. were they not? >> caterpillar employees -- >> how many employees as caterpillar have? >> in 1999? >> at the moment the you just talked. >> i don't know the exact number of total caterpillar -- >> how many employees did csarl have? >> csarl have thousands of employees. we have 500 employees at that time in geneva, switzerland, but many other employees around the world. csarl is not just in geneva. it is an effort that markets and as manufacturing, outside of the united states. >> and another 400 are so in singapore, but all of the employees around the oral the and and and now working for caterpillar or caterpillars own companies. is that not correct?

>> csarl -- >> take a look get your own members, employees and total number of caterpillar employees around the world are in the -- >> we have 118,000 employees around the world today, 52,000 of those employees are in the united states. more than half of our plan is outside of the united states. >> of course, but that is caterpillar offshore employees. is that not true? >> no. >> let me give you numbers. you and tell me where we are wrong. these numbers come at a letter from the subcommittee. total caterpillar employees globally, one under 18,000. caterpillar u.s. employees to the 2000. caterpillar offshore employees including c -- csarl 66,000. now let's get down to csarl. csarl employees global 682.

csarl employees switzerland 400. is that wrong? that is the letter that came into the subcommittee from you. >> there are also employees that i believe you have not included their from singapore and some other areas. >> we give you that total caterpillar employees. how many of the wonder 18,000 employees would you attribute to singapore? >> i don't have those exact numbers. again, if i could get that document i can research that and check that please. >> okay. we will give you this document. >> abcaeight. >> thank you.

again, those nine u.s. employees we talked about are working for entities that report out to csarl. >> they are. use a report to csarl, but they are caterpillar employees to my not? >> i don't understand the distinction you're making there exactly. >> do they get a check from csarl? >> there are definitely employees of csarl, many employees outside the united states supporting the work of csarl. >> well, we are going to let it your chart, give your chart. according to what we take off of your document csarl employees globally are 6802. is that ron? >> i don't recognize that number i would like to review the charts. >> see you know how many employees csarl as in switzerland? >> in 1999 there were about 500. >> so at least in switzerland there are 500 csarl employees. we think there are 400 now, but

we won't argue over 100. >> i think that's -- >> and the total number of caterpillar u.s. employees are 52,000. is that correct? >> yes. >> the total number of employees globally according to your letter, 8300, does that sound right? >> again, it depends upon how you define parts. we cannot have a parts business or identify that. i don't agree that those are all the employees working on parts. no.

>> will you take a look at 50 be ? i'm afraid i have gone over my time. i will stop here because i have gone over my time. just take a look. answer number ten. the question was, with regard to emplacement parts business for each year from 1999 until 2012 please provide the following, the percentage of your company's worldwide head counts and payroll assigned to the purchased finished replacement parts business and located in the u.s., the percentage assigned to that business located in switzerland. your answer is you do not have employees assigned terribly oppressed business, however

there are organizations throughout the enterprise the support purchase, storage, movement, and sales of replacement parts. the chart below we have identified this is participating in these activities and provide u.s.-based and non-u.s. based headcount statistics for the years 2006, 12, and here is what you say, parts distribution. parts pricing. parts marketing. so on that chart you identify certain number of employees related to parts distribution command you show u.s. ad account, u.s. ad account, total u.s. ad account 30619, nine u.s. ad account hourly, nine u.s. ad account management, and then your total non-u.s. headcount 2027. and then you identify geneva first -- 45 lives down. you have -- this is all parts, parts, parts, parts, parts. for in geneva, six more in

geneva and you have parts marketing support. then you show nine u.s. head count. so these are your numbers. so that chart that i read are your numbers. that means for 900 -- 4900 parts related employees and the united states, 66 in geneva. those are the totals from this chart. senator mccain. >> senator, can i comment on that reference in our earlier question? they're is a line here for a total non u.s. head count of 2027. and then with purchasing and non @booktv another u.s. head count. and there are some in geneva. does appear to be thousands of employees outside the united states. >> of course. that is what we said. we believe those are all not csarl employees but caterpillar

employees. and treat themselves as caterpillar employees. senator mccain. >> thank you, mr. chairman. the united states corporate tax rate is 35%. but i understand that the effective tax rate at caterpillar was 29% which is 3 percent higher than the average effective tax rate for u.s. corporations. how does that happen? does that include the overseas subsidiary and come? >> yes. senator mccain, that does include. it is a rate that is an average rate on our global business. and so our overall average effective tax rate is 29%. that does include our global business. ..