he gave his colleague in the irs i.t. shop, the name of a third party vendor that he used honorary occasions to recover information but irs i.t. staff has kultded with outside experts at hp. do you know if irs officials consulted with i.t. experts a second time in 2011 to recover ms. learner's e-mails? >> i do not know. >> okay and finally, i want to touch on something that the gentle lady from wyoming mentioned. she just said that her constituents are going to take matter into their own hand. and

building with a handgun, according to fox news he cally. knowing that there are over 4,000 staffers and interns at risk here on theç house side o the capital and are and recalling the horrible gabby giffords strategy and the loss of zimmerman, i would ask that members refrain from making statements that could even possible approximately be misconstrued by the public as an invitation to do anything like that. it's obvious that representative lomas meant no such thing and i think it behooves all of us to be careful about the way we phrase things because there are people out there ready and able to misconstrue things. with that, mr. chairman, i yield back. >> gentleman yields back and the chair recognizes the gentleman from georgia, mr. collins. >> thank you, mr. chair, appreciate it. here we go again. i told the story last time.

i wish i could sit here and say what was not plausible then has gotten a little more plausible? it seems not to have gotten any more plausible. we still continue and people ask why we're continuing to do this and it looks like something new comes out all the time. one request will say this and then another request, it was asked earlier, i had to leave and come back and it said, how much, you know, paperwork that you've put to the committee and how many hours are being worked on? to restore trust. whether it's between two people or government and the people that they serve, it should really be of no limit to restore the trust, especially with the irs. to tell me you a million

documents and your hours are -- because of the issues that have been raised and the lack of trust on both sides, democrats and republicans in my district who are appalled at this and they want it solved. they want the real answers and they don't want to keep reading that something new has come up. i think that is an issue of trust that has to be maintained here. and frankly, the plausibility story is just, again, getting to the level of unbelievable in a lot of ways. but i do have some questions. because we talk about the louis learner e-mails. the committee has asked for other e-mails. holleypath e-mails response sifr to the committee's request from august 2nd, 2013 to february 14, 2014, have you gathered all of those e-mails? >> we provided all of the e-mails with regard to the

determination process. and that we would select 83 custodians. >> are those the same 83 that a quarter of snare hard drives crashed? >> i don't know. >> we could have more that crashed? >> we could have more or we could have less. i don't know until we find out. >> does that not bog it will mind? of a small number, one about a quarter and we can argue back and forth, a quarter, not a quarter, but there may be others? in that subset? that deals with the areas we're asking for? >> yes. that's a perfect example of had we been able to complete the investigation of what happened to the custodian we could help you. the reason we decide to continue to find out how many louis learner e-mails we had if we hadn't people would talk about there were no --

>> let me ask the question. we're getting away from learner. i asked you about holley. >> be my point is that we -- to the extent we can provide the full story, your point, it's a lot easier to know and you can disagree about it but it's a lot better to know what the total picture is so when can you get the cust stoed you because the ig is doing that we don't know what if answer is so it may be ten or 20 or five or 25? i don't know. and at this point we're not able to investigate that. we're hoping the ig when he completes his investigation would include the custodians as well. >> that's the problem with doing this in drabs and every day having a press release about some aspect of a interview. >> thank you for saying drips and drabs. that's what it seems like this investigation has been. every day we get drips and drabs and the people are tired of it. this congress is tired of it and this is the problem we have. i'm going to assume from your question. i'm an attorney as well, that's

a no? after all your said, you not gathered all the e-mails or you don't know. >> our first ply ority with this committee in march was we defined all of louis learner's e-mails? >> so the question, william wilkins, same question, yes or no. >> same answer. you got all of his e-mails responsive to the investigation that started all of this. >> but no to all? >> you have all of his. >> no. >> all is all. we had this conversation three months ago? >> as i said in march we're happy to keep working with you to figure out your next priority. thanks to the system we can't produce it all at once. we produced a lot of stuff. and it takes us a long time. part of the background in the june 13th public report was to try to explain why with our system it stakes so long to produce this stuff. we should not have to spend $18

million. we should have a better system. no doubt about that. >> i don't disagree. the question i have though, is, that we need them and the clarification issue and we have not got that. >> i want to go ban to something asked earlier. i any friend from south carolina said that we confirmed and you said, i don't know who told me. nees awe lot of information where you don't know who told you. it hit me as i was sitting here. maybe there were multiple people in the room and you're not sure who said it first? or who told you first? i want to know who was in the room when you were told we confirmed all of that? and surely you're very bright

individual, you would know at least, who was in the room? >> i have 12 meetings a day on average. >> i do as well. >> i know most of the ones in the meeting especially when it's senior staff o of something of this this nature. i can't tell you in any meeting who was in the room but i can tell you who was likely in the room and that's the people working on production with the staff. my counselor was in the room. probably my chief of staff was in the room. but i can't tell you and i don't recall ba it wasn't significant at the time who was else was in the room. we were reviewing the document. >> it was significant at the time that you may have lost the e-mail? that wasn't a significant meet something. >> your question was whether we could confirm. >> but you're dealing with a bigger issue. is that not significant? >> this entire issue is significant. but i'm running an agency that has to deal with filing seasons. we have overseas volunteer disclosure programs. we have voluntary tax return programs we're putting out. simplifying for small, charitable organizations.

>> i understand that. that's a great diversion to what we're asking right here. i get that the irs has other issues but i also get the american people it's not just that they don't like the irs because they have to send their money in. now it's an issue of both partyline, irregardless, they're not sure about the irs because they don't trust the irs anymore. when that's an issue everything should be focused on that and this is a question that makes it completely implausible. i appreciate what you said on dri drips and drabs because that's the problem we have now. >> can i make one point that's clear? nobody has a greater interest of getting you all the information you need and getting closure on this than i do and the people at the irs. if we could conclude one of these six investigations, find out what the determination of facts are and the recommendations are, we're delighted to take those recommendations. we accepted all of the inspector general recommendations.

the last thing in the world that benefits us is to have this go on any longer than necessary so whatever we can do as fast as we can produce documents, the relevance of the 960,000 pages, it's takes a lot of time to get it all done in our system. >> that's one thing we'll agree upon is that the end result so that we can move on and the people can restore the trust in a government agency in which they need to have trust if they don't have now. i yield back. >> the gentleman's time is expired. i'll recognize the gentleman from california for five minutes. >> commissioner, we have a history. you constantly talk about this agreement and so on. were you aware that we

considered that the irs was stonewalling us and giving us information we didn't want and giving us into an order we didn't like in the months of may, june and july of 2013? >> i was not aware of that. >> we have a number of letters implying that. the false narrative that continues to be used at times. he which is learner became an extreme person of interest because she made statements fifth, that she broke no rules or regulations. she additionally authenticated earlier testimony and statements, again, after she took the fifth, then she went back on the record.

so under oath she made a number of statements as we began investigating and we became very active participant in washington of targeting conservatives in addition to evaluating her history, we became very aware that she did not like conservatives and she had that sort of predisposition plus her public speech made it very clear that on batch of the president, quote, they, want us to fix this. and certainly, the president had been the out going spokesperson against citizens united. that we had every reason to focus our investigation as her -- on her in the system, of deliberately targeting the conservatives for their values. therefore, i issued if the ranking member were here, you call it unilateral pursuant to the committee rules i issued the subpoena and made it clear that our first priority was to have all of louis learner's i males. that was the priority. were you aware of that?

>> i'm aware of that subpoena? >> were you aware that's our goal? >> you have have eight items on that subpoena and that's on the top. >> therefore, when we interviewed thomas cain. it didn't impact the produbs process. question, did it have any impact on which documents were chose on the review? answer, no. additionally, we discover add that you all met and had a discussion and decided that you wouldn't prioritize any aspect of delivery of louis learner's documents even though she had taken the fifth before this committee and even though she clearly had public statements

and she had been a person who investigation. all of that is undeniable. why in the world should the american people believe that you're cooperating with us when i issue a subpoena and now we have sworn testimony under the penalty of perjury that you didn't make any changes. you continued business as usual, basically, which was delivering us based on, you call it mutually-agreed but they were your criteria primarily, as to search terms, and never disclosed that those search terms were searching but a small portion of what should have been the entire database. do you have an answer for that in. >> i wasn't there. my understanding is there are five other investigations that are now going on and were going

on then. there were a ride range of requests for documents from, ways and means and -- >> did any of them issue binding subpoenas? >> i don't think anyone else had a binding subpoena and my understanding is and i wasn't there. >> after february of 2014, we issued another subpoena h subpoena. did anything change then? >> at that point as i testified before, we began to pull the rest of louis learner's e-mails so we started with the analysis of the e-mails already produced and that's where it was discovered that there were fewer e-mails in the 2011 period. we completed one of the priorities at the time, competing priorities was to complete the production of the determination documents that everybody was interested in. it was kind of a -- i gather, a process by which all of the conflicting questions to try to respond to documents that met as many of thes as possible and most of the requests for certainly, for finance and at the time, ways and means were for documents around the

determination process. that was completed and then, since that time, the full-court press has been to produce all of louis learner's e-mails. so whether in her account or any other account. >> thank you. earlier on i asked you for the discovery process of who was looking for throughout the timeline and your assistant took it in very copious note there is. i want to add one clarification. you have delivered some -- i guess we're looking at an exorbitant number of documents that many people are constantly citing. what we don't understand that i think the committee has an absolute obligation to understand, is in this process of what you looked and where you looked, understanding the sources that these -- this has come from, because we're a committee of oversight reform. we're a committee that has an obligation to see that you spend the american people's money

properly. it appears from this side of the desk, as though the process is very fragmented. that, in fact, you're looking sort of under cookie jars to use an expression of my youth, that you're providing large amounts of data from certain periods that based on you said in many cases, you sent us hugely redundant e-mails. same e-mails come in multiple places. understanding that so we can figure out how to prevent it in the future is important. because this is not the last time anding with agree to that

as corporate america receives countless sups for document production so much so that they develop software explicitly to do these kinds of searches and retention policies for that reason. can we have your agreement can we give you -- we'll find out how that happens? >> you're right. we looked in the logical places and i understand we looked under every cookie jar. we were dedicated to making sure that we found every existing louis learner e-mail on her account or anybody else's so that we would be able to say these are all of the louis learner e-mails that we have and that led to 67,000. >> and i will make so separate in the investigate that was important and ongoing, the

question of efficiency and the cost effect of fragmented data and the cost effect of having individual drives like this, that people have, notebooks that been taken offline. all the other things that i suspect are one of the reasons that this has become so expensive and difficult that meeting is not exactly on course with this investigation but it is separately a question from a standpoint of the management of the 82 billion worth of funds that government spends to see if, in fact, policy changes with o&b and others, should be instituted and funding allocated so that this kind of fragmentation doesn't happen in the future? as one person that worked in private america to another, that's something that you're briefing can be informal, off the record, doesn't have to be definitive, but our committee has to have an understanding so we can be part of policy formation because what i know

about how corporate america does it and what i'm beginning to glean you have to do are very different. they are very different. >> i asked that question some time ago. that we should not have to spend $18 million in this amount of time responding to documented e-mail requests. i think if we could get two birds with one stone, we could have that briefing that would answer questions about how this discovery process went and what are the problems with that going forward. it's my understanding that there's been a tremendous amount of effort made to make sure that we found every document responsive to the committee. it is a lengthy process, again, the june 13th report starts out trying to explain to all of the investigators what the process is and why it is so difficult. i agree with you, going forward it would him us all if we had a

more efficient system to preserve documented e-mails. >> that concludes our hearing today. i thank you, mr. commissioner and the hearing is adjourned. all this wook american history tv in prime fooim has been looking at watergate, 40 years later. tonight at. >> caller:, we begin with the cbs news special report in august 8th, 1974, leading into the president nixon's address to the nation. that's followed by president nixon's address to the nation announcing his resignation.

the middle east, the bloodiest and most dangerous and most unstable region in the world is in flames. from tripoli, across the horn of africa, all the way to the mediterranean. in syria, a blood-thirsty dictator that this president drew a red line and said if he crossed it he would pay.

and then retreated. that dictator has slaughtered 160,000 of his own innocent civilians. while this administration set in the cheap seats and watched it happened. dath lick priests have been beheeded by al qaeda, terrorists that are seeking to overthrow that administration. in egypt, the muslim brotherhood took power immediately began to destabilize the cyanide peninsula turning it into the wild west and it's been replaced by a military regime. in iraq, isis, an al qaeda affiliate, presides over a radical muslim and it stretches from the syrian border all the way to the outask skirts of bag and over 60,000 christians in

iraq. the last remaining christians left in that country have literally had to flee for their lives. and these terrorists are mocking the entire free world and essentially, spitting on the graves of americans who gave their lives to liberate that country and this administration couldn't do anything other than send 300 military advisers. >> see more from the annual western conservative summitt tonight beginning at 8:00 p.m. eastern on c-span.

according to a report, caterpillar has shifted 8 billion in profits through switzerland to avoid $2.4 billion in taxes. this is 1:40. >> here's our second panel of witnesses, thomas quinn a at

price waterhouse coopers in chicago. steven williams, the managing director at price waterhouse cooper in mcclain, virginia, and jooirms bowers, a tax partner at price waterhouse coopers in dallas, texas. we appreciate all of you being with us today. we look forward to your testimony. all witnesses who testify are required to be sworn so i ask you to stand and raise your right hands. [ all parties sworn ] we'll be using the timing system today which means that about a minute before the red light comes on you'll see a light change from green to yellow and give you an opportunity to conclude your

remarks. your written testimony, of course, will be printed in the record in its entirety. and we would ask that you -- your oral testimony be ten minutes or less. and we understand, mr. quinn, that you're going to be presenting the price waterhouse cooper's statement. >> good morning, chairman levin, ranking member mccain and members of the subcommittee. i'll make some brief oral remarks but ask my written statement be placed in the record. >> it will. >> my name is thomas quinn. i'm a cpa and a partner at price waterhouse coopers. i began bhooi career in 1984 and have been advising companies with respect to their federal income tax obligations for over 30 years. i'm joined by james bowers, who is also a cpa and partner in the pwc tax practice. having joined pwc in 1976, mr.

bowers has been advising clients with respect to their tax obligations for over 37 years. i'm also joined by steven williams, the managing director with pwc, mr. williams is a economists and holds a mass master's degree with a cops trags in international economics and be with us since 1982 and specialized in transfer pricing for 28 years. i understand that today's hearing relates to the tax imapproximately qualification of a business reorganization that caterpillar inc. began almost 15 years ago. i was one of the partners who provided taxed vice to caterpillar and it's outside law firm in connection with that matter. mr. bowers is a tax partner who assisted pwc's audit team of the tax aspects of their financial statements. mr. will yaems provided caterpillar with assistance regarding transfer pricing rules. at the outset, let me say that

on behalf of pwc, we recognize the long-standing interest of the subcommittee in corporate tax issues and the importance of those issues. in that spirit, pwc has cooperated fully with the subcommittee throughout the inquiry and is will iingly accepted your invitation to testify here this morning. before addressing our engagement with caterpillar allow me to provide an overview of their tax practice. pwc is the leading provider of tax services worldwide in terms of the size and scope of tax practice and we believe in terms of our reputation. we strife i to combine our specialized tax knowledge in national and local jurisdictio s s with a deep understanding of our clients business and in order to assist them with their tax compliance obligations across the globe. in working with multinational businesses we routinely evaluate issues of international taxation which can be particularly complex. caterpillar is one of the

world's largest manufacturers of construction, mining equipment, diesel and natural gas engines and industrial gas turbines. caterpillar and it's subsidiary sell more than 300 different types of products to customers and 180 countries from facilities on six continents. caterpillar and its subsidiaries sell machines and the replacement sales. machine sales lead to part sales and part sales support and encourage machine sales. there is no separate parts' business. it is an integrated activity organized around caterpillar's product groups and it's designed to maximize value to its customer as and caterpillar's profit. the field population of machines. that demand is then fulfilled through its logistic's

organization. what pillar caterpillar's demand is around the world. in the late 1990's sales out side the united states accounted for more than 50% of consolidated sales. today, more than 65% of sales are outside of the united states. to meet that demand, caterpillar's established subsidiaries outside of the united states to market its products and provide product support abroad. caterpillar also has expanded subsidiary manufacturing facilities worldwide to meet global demand for its products. today the caterpillar group manufactures products in more than 20 ycountries and they hav transformed itself from a u.s.-based manufacturer of machines and parts for sale to u.s. dealers, into a global manufacture of products and parts for dealers around the world. in 1998, as the globalization of caterpillar's business continued

to evolved, they engaged mcdermott. to develop our advice pwc tax professionals first engaged in extensive study of caterpillar's organization and its global operating foot print. spending considerable time at caterpillar's operating facilitition all over the world. we observed this business organization as it existed in 1998, failed to capture the evolution of the true economics of the business. and subjected the current and subjected to current u.s. income taxation income earned from the sale of products to foreign customers largely as a part of the subpart f rules. working with caterpillar's operation's group its tax department and mcdermott, we analyzed alternatives that would better align the true economics of the business with caterpillar's operations and possibly, affect its global effective income tax rate. after reviewing the information provided by mcdermott and pwc

and in light of the evolution of its global operating footprint, caterpillar decided to undertake a significant reorganization of its foreign operations. considering the growth of its foreign operations, caterpillar determined that it made business sense to centralize within one company the manufacture and distribution of products outside the united states. through caterpillar overseas, caterpillar already had a substantial business presence in switzerland. with hundreds of personnel based on a multistory facility in geneva including a number of key corporate stooik executives. caterpillar overseas transferred its assets and operations to caterpillar sorrow a company based in swriitzerland and they took over operations across the globe to handle sales of machines and parts outside of the united states. caterpillar inc. continued to handle sales of parts and

machines in the u.s. from its outset they carried the business and market risk and received the profit or losses from being the owner and seller of the machines and purchasing finished replacement parts in the international markets. caterpillar purchased the finished parts directly from third-party suppliers and sold finished parts directly to third-party dealers. because of the sales no longer involved, the related party transaction between caterpillar and its foreign affiliates or between foreign affiliates themselves, they were subject to the fundamental u.s. tax rule that foreign business income is not taxed until the income is remitted to caterpillar in the united states. the reorganization culminated and it had significant operating, legal and economic effects and resulted in significant tax savings. after the global business reorganization, caterpillar

inc.'s role was a service provider in exchange for a service fee. caterpillar licensed its right to caterpillar to make mention to purchase and distribute replacement parts and to uss caterpillar technology and trade mark on those products for sale outside the united states in exchange for a license fee. because they were related companies, these payments were subject to irs transfer pricing rules. pwc tested these prices annually, note only under the best method as required under u.s. law but also under each of the other relevant transfer pricing methods prescribed by the treasury regulations. each analysis in the arm's length nature of caterpillar's related party pricing. in addition to providing these tax services, pwc has been auditing kalt pillar's financial statements for many years. we've been asked foe address the

applicable auditor independence rules. the delivery of tax kwulting services to clients subject to applicable safeguards has long been permitted by the rules of the s.e.c., the pcaob and the aicpa. pwc's tax and audit service to caterpillar complied with these independent standards. pwc assessed its independence on a quarterly and yearly basis and disclosed to caterpillar's audit kwom any relationship that bore on our independence. pwc's provision of tax services to caterpillar as our audit client was entirely appropriate. chairman levin, and members of the subcommittee, thank you for the opportunity to testify about pwc's tax services with respect to caterpillar. we firmly believed then and firmly believe today the tax service wes provided and the positions that caterpillar took in that regard complied with the law and were entirely appropriate. like wise, we believe that our

tax and audit engagement satisfied both the letter and spirit of the independence rules that govern our practice. we'd be happy to answer any questions you may have. thank you so much. what h we understand you're giving the statement or all three? >> that's correct. >> thank you forring with here and cooperating with our subcommittee. mr. quinn, i gather you were the lead partner for pwc tax consulting. did mr. williams then report to you at the time? >> that's correct. >> and mr. bowers was in the auditing shop, is that correct? >> yes, that's correct. >> now, let me correct that -- >> senator, mr. bow sers a tax partner who assisted the audit practice to audit the statements of caterpillar. >> and who the key contacts from caterpillar, between for you are the people in the company's tax

department, is that correct? >> in part, senator, that's true. we also had significant contact with individuals in the operation's department of caterpillar. the tax strategy that was developed was dependent very much on the understanding of the operation's of the business and contact with them was critical. >> okay. prior to the tax consulting engagement, cat millar 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's correct. >> that's when it sold parts to caterpillar's nonu.s. dealers, is that correct. >> yes. >> so that was included on caterpillar's u.s. tax return, is that correct? >> that's correct. >> after caterpillar executed the transaction, starting in 1999, is it correct that caterpillar basically reversed those percentages and allocated

15% or less of the nonu.s. parts income to its itself in the united states or 85% or more to the caterpillar in switzerland which has an effective tax rate of somewhere between 4 and 6%, is that correct? >> that's correct. in terms of the arrangement that caterpillar had with respect to its relationship with caterpillar, it was a business arrangement that included a license for more than just the parts activities themselves. it included the entire business activities undertaken by caterpillar sorrow where i included their manufacturing machines in france and belgium as well. >> but the basic in terms of the profits on the parts themselves, there was a shift between 8515 to basically 15 and 85, is that correct? >> yes. >> okay. if you take a look at exhibit .,

yes, i have that, senator. >> all right.

in 1998, before we get to the fact that you were hired in 1998 by caterpillar through its tax adviser mcdermott, will and emory, to review caterpillar's operations to recommend ways to lower caterpillar's overall tax payments, is that correct, by the way? >> yes, that's correct. >> you had, is it not true that pwc had an ongoing program called g top global tax opt mags program to reduce corporate taxes? is that true? >> yes, correct. >> and pwc approached a number of u.s. corporationtion to talk to them about the g top program? is that correct? >> that's correct. >> so that your tax strategy -- caterpillar's tax strategy was the result of a]pwc g-top effort? it followed that presentation? >> it followed that presentation, yes.

conducted a revooi they gave caterpillar a list of 49 recharacterize the marketing company income to achieve u.s. tax defer ral. you read that line?

>> yes. that was its purpose? >> right. >> that's correct. >> and the dedescription of the idea was to remove caterpillar inc. from the chain of title pass for purchased finished parts? from u.s. or foreign sources sold to foreign marketers. the foreign marketers would buy and sell to unrelated parties. so this was the description of the idea? >> yes. >> this is a pwc document. >> that's correct. to remove from the chain of title for purchase parts. the benefits eliminate subpart character of foreign marketers profits on purchase finished parts sales and a relatively simple reinvoicing requirement. a re-invoicing requirement. you read those words there? >> i do. >> did i read them correctly? >> i would also reflect on those, senator, that in light of -- this was done at the

beginning of the project in terms of providing ideas and response to caterpillar's tax department with respect to our investigation. i can temperature you reading these words relatively simple invoicing requirements that following the implementation of this, this -- those relatively simple re-invoicing requirements took probably three to four years of very difficult work by caterpillar's system's team in order to implement. >> we'll get to the implementation in a minute. from 1999 to 2004, pwc was paid about, what, $55 million to implement this tax strategy, is that correct? >> that's correct. >> >> is it fair to say that you and mr. williams helped to design and implement this strategy from the very beginning in 1999 and that mr. bowers

worked at the same time that he provided tax advice to the audit team? he was working with you, is that correct? that's correct, senator. >> and mr. quinn, were you the lead partner for pwc tax consulting services on this matter? >> yes, i was. >> and did mr. williams report to you? >> yes. >> and you mentioned some of the key contacts at caterpillar and among them were -- i'm asking you, were they robin baron, the tax director, rodney perkins, senior international tax manager? >> yes. >> we had regular interaction. >> all right. my first round of time is over. senator johnson? >> thank you, mr. chairman. mr. quinn, in the earlier panel i was asking the professors the basic relation. how does the irs interact with a large multinational corporation? i'd like to expand that not only to a large multinational corporation like caterpillar but a large accounting firm like

yourselves. can you describe how the irs interacts during the whole tax year? >> the irs is interaction at caterpillar in particular during the entire year is a continuewise audit exercise as you described earlier. they do maintain a continuous presence on site. they actively engage with caterpillar personnel directly. and to the extent that we don't have direct interaction with the irs, only through caterpillar and when invited in by caterpillar to assist them in those matters. >> was there any consulting done as you worked with caterpillar to, obviously, comply with the law but potentially lower their tax burden, was there any contact with the irs between yours u.s. and caterpillar at that point in time? >> i had no contact with the irs. >> do you know whether caterpillar did? >> i do not know that. >> you're obviously familiar with enron and a firm that used

to be called arthur ander son? >> i am. >> and is that something you would say most cma's or accounting firms are pretty familiar with that situation? >> yes. >> would you say that what happened to arthur andersen which no longer exists because of enron, is that something that in general disciplines the accounting profession. >> absolutely. i think in reflection upon those events, it had been in terms of my involvement in the 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, correctly, that tax evasion is illegal. tax avoidance is appropriate in terms of managing your overall costs associated with your business. as long as it's done wl within the rules and regulations as provided by the tax authorities. >> so in light of, obviously, what happened at arthur andersen with the enron scandal, you're

preparing these types of documents now they're being shown in a congressional hearing here. senate hearing. would these concern you if all of the sudden the irs were to take a look at this and your interaction? do you think this is you basically what accountants do in work with their clients to comply with tax code? >> yes, i do. earlier, senator, you made a statement to the last panel about if you saw a tax rate of 29%, what would be your response to the manager of your federal tax function? and at the time that we started this project, caterpillar's tax rate was 35 or 36% effective tax rate. and that's exactly what management was asking the caterpillar tax department and its service providers. >> that was the next question i was going to ask. how does that relate to other large multinational manufacturers? first of all, 35 or 36%, where

is that in the range of effective tabs rates for multinational? >> i would think that based upon my study in this area, that 35 or 36 would be not unusual for a manufacturing company which had its sales base all within the u.s. that is -- when we look at those domestic companies that don't have extensive international operations the tax rate between 35 and 39%, is very much the rule. >> again, that's when all your operations and all your sales are in the u.s.? >> yes, correct. >> what happens, of course with if you're multinational and you have suddenly 65 to 75% of your sales going overseas? >> that would depend on how you would organize those transactions and those affairs because as was, again, in the earlier panel, addressed the fact that many times, those operations are subject not only to tax and n a foreign jurisdiction, but because of athe way they were organized

they may be subject to u.s. tax at the same time. but this document that we just looked at, this exhibit is a good example of that where caterpillar did, in fact, have an sentence 1i6 amount of international operations and theway that the business had been structured, the way that the operations department had put in place the relationships it had in moving product to the international markets, created a cost which could be avoided. >> there's nothing wrong with any taxpayer trying to comply with the tax code and trying to lower their tax burden, is that correct? >> that's correct. >> can you talk a little bit about the types of tax laws that have been enacted by congress to incentivize manufacturers to export product overseas? can you just name some of the tax treatments that this body has actually enacted to induce that exact type of behavior that caterpillar was engaged in? >> yes, that history goes back many years. back when i first started practicing in the 1980s, the

domestic international sales corporation was promoted as an export incentive. that was succeeded by the foreign sales corporation, which was a tremendous benefit -- a tremendous benefit for u.s. exporters. u.s. manufacturers, including caterpillar. >> exactly what did that do? >> it incentivized companies to do manufacturing in the united states. it gave them the opportunity if they -- with respect to the income that was earned on those transactions, it reduced their effective tax rate by as much as 5%. so rather than make 35% of than 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 and capture more of those -- more of the income on foreign sales, what would a large multicorporation at least consider doing? >> i think exactly what you suggested, they would move operations offshore. they would move those functions and those jobs to foreign locations outside of the 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 maybe of other clients that have done exactly that? >> they have in fact, yes. >> do you care to name any examples? probably not the appropriate place to do it. >> prefer not. >> thank you very much, mr. quinn. thank you, mr. chairman. >> senator paul? >> thank you. i'd like to take my time to apologize to caterpillar for this proceeding. i think rather than having an inquisition, we should probably bring caterpillar here and give them an award. they've been in business for over 100 years. it's not easy to stay in business, not easy to start a business, but keep a business employing 52 ,000 people for over 100 years is a remarkable achievement and we should be complimenting caterpillar an

perhaps giving them an award. they pay $600 million in taxes every year. so really, we've got the wrong people on trial here. you know, the tax code needs to be on trial here. it would be malpractice for price water house cooper to give advice to caterpillar saying we're not going to tell you how to minimize your taxes, but here's how to maximize your taxes. you could probably be sued on how not to minimize tax costs. i think we're making a great mistake here. we have to understand that 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 complimenting them. it is a big error not to know where the problem is here. the problem is in the tax code. money is said to go where it's welcome. so money's going overseas. people for decades have been lamenting the loss of american jobs overseas. why?

because it's the tax code. we have the highest corporate tax rate in the world. canada's now down to 15%. so you can see how what we're doing is pushing people and pushing people and pushing people, and then we bring them forward for ridicule and to swear an oath and 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 an american business that creates 52,000 jobs. there are some policy matters that we could address. why don't we lower the corporate income tax? we're at 35%, give or take, throw in the state, 39% rate. why don't we lower the corporate income tax if we want businesses to stay here? 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 it in 2005, $20 billion, $30 billion in revenue and hundreds of billions of

dollars in income aim bacame ba the country to create jobs. why don't we do that, instead of vilifying people for legal behavior? i guess my question ultimately would be, is, do you have a legal responsibility to offer to companies that ask you for advice? are you legally responsible for offering advice that would minimize their tax costs? if you were to not tell a company about a legal option to reduce their taxes, could a company potentially sue you for not giving you complete advice? >> i think, senator, that is our professional proposition to our clients and their expectation is when they come to us, we have an expertise in understanding the tax law, the rules, the regulations and them understand that so they can take a look at their bona fide business transactions and understand what the tax cost is associated with these. so yes, that is the client's expectation of what we're bringing them. even if it weren't legal, it would be from the standpoint of professionalism.

i think it would be less than what was expected. >> thank you. >> are you done, senator paul? sure. okay. senator portman? >> thank you, mr. chairman. i appreciate you all being here. i know we have another panel coming up, i'd like to have an opportunity to talk with them as well. to me, the problem here is not caterpillar. it's a broken tax code. 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 some of your other clients are moving some of their operations overseas. it's happening as we sit here today. it's a fiduciary responsibility if you're a publicly traded company, as was said earlier, to look where you can maximize your profits, for the stakeholders. and i'm very concerned about it. in my own state of ohio, we have

companies that have left our state to be domiciled somewhere else because of the tax laws. one company merged with a company one-quarter its size in ireland to take advantage of the lower rates in ireland, and their headquarters is now not in cleveland, ohio, but we lost one of our fortune 500 companies to ireland. i'm a beer drinker. if you want to try to find an american beer, good luck. yuengling. they have 1% market share each. every other beer company is foreign owned. when i ask people why, including the folks who purchased these companies, they tell me it's the tax code. and this is a big deal. it's not just the loss of jobs, although that happens, it's also the loss of headquarters, which has an impact to all of our communities, including a lot of good work that our companies do here for the non-profit and help to make a better way of life for everybody in those communities. this is not just an important

matter, it's an urgent matter. for that, i thank the chairman for this hearing. i hope it will shine the light on the fact we have a broken code, not just the highest rate among all the developed countries now which is not a number one you want to have now that japan has lowered their rate. we're number one. but the fact that we have an international tax code system that is so noncompetitive and so complicated, that it is driving jobs, investment, capital overseas of our oecd partners, the other developed countries, all of them have gone to a territorial system. if you could talk to that for a second, mr. quinn, you may be the right person, but you all decide. 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, inefficient and noncompetitive? what impacts does it have on them, specifically you could address not just the rate, but the fact 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? >> yes, that -- it is the issue that's at the forefront of many decisions and many conversations that are taking place within corporate tax departments throughout the population of u.s.-based multinational companies. this debate around how the u.s. has decided to tax foreign earnings is one that's of critical importance, as u.s. companies continue to grow and expand offshore, that cost becomes an increasingly larger portion of the overall cost structure for their business, and 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 doesn't employ a territorial system. 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

company might have. senator, a lot of the debate that i hear, 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. i think there was questioning earlier about, well, what's the right rate that would incent this type of activity or cause this activity to go away? a lot of that, i think, if the u.s. corporations were established and could be subject to a rate of tax of 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 express it in percentage terms, the opportunity to move from a 35% tax rate to a 10% tax rate, 25 percentage point improvement, that's material. when you start talking about a 20% tax rate moving to a 10% tax rate, that's only 10 percentage points and it becomes much more -- when you look at the costs and relative benefits, much more of a push. so i think the companies might

be looking at both sides of that question, both the basis of taxation, in terms of its territorial -- need for territorial system as well as the tax rate that would apply. their feeling is you might actually with a lower tax rate bring more income into the u.s. tax net. >> i think that's very likely. in fact, you would see a lot of repatriation, wouldn't you, of the over $2 trillion tied up overseas. you aren't going to bring it back at the high rate. so the two are combined. let me make the obvious point which is we've zone this before, you know? >> yes. >> in the 1980s, we looked at our tax code and said let's end up with a rate below the average. and we took the rate, as you recall, down to 34%, thinking that that was getting us below the average. to get to below the average now, we'd have to be, when you include our state corporate rate, as you indicate, somewhere in the low 20s, probably, 25% is

the rate 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? every one of them has, except us? we're the ones left on the sidelines. and those reforms have included, as you indicate, going into a system of taxation that's more territorial, but also lowering their rates. and that combination of allowing people to pay their income taxes where it's -- where their earnings occur and a lower rate, has made us 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's why it's urgent that we act now. and by the way, on the international side, it's been since the 1960s. so since the 1960s, we have not changed, whereas all of the

other developed countries have adjusted. i hope that you can be in a position in the next few years to be able to tell your clients, you know what, there's a new tax code that actually encourages you to stay in america and create your jobs here. and that's why we at pwc think you ought 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, without doubt, we've got to reform our tax code. it's long overdue. congress has been dawdling on this subject for a long time. you can argue what the corporate tax rate is currently. the gao study says the effective corporate tax rate in the united states is 13%. but in any event, the use of all these tax loopholes, many of which give incentives to shift your profits to tax savings, not

to your operations, your operates to tax savings is totally unacceptable. we ought to close those tax loopholes and not wait for a 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've had hearing after hearing which shows that. and i don't think we ought to accept it. of course this company is a terrific company. that's not the question. of course it pays taxes. that's not the question. the question is whether or not it properly avoided paying $300 million a year in taxes, which is what its tax savings is now, as a result of this strategy. that's the question. we're very happy to pay $600

million a year in taxes. should it pay $900 million? that's the question. that's a heck of a lot of money. but that's the issue. and we're not going to be distracted by the fact that this is one terrific american company. that's not the issue. the issue is, is there a tax -- was there a tax strategy here which was put in place, which is justified under the current tax code? change the code, i'm all for it. but the question -- we're going to come back to it 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 or not the effective tax rate in this country is 13% as distinguished from the statutory tax rate of 30%, and whether we ought to change the tax code. let me get back to 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 that transaction must meet 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, that requires a measurement and understanding of what functions exist offshore, what risks have been accepted offshore. >> but it must meet that standard? >> the exercise is then to align profit with those functions. >> exactly right. regardless of how many taxes you currently pay, or don't pay. that must be met, is that correct? >> absolutely. >> and must you meet a business purpose standard? >> i think what -- in order to support the transfer pricing result, you would want to make sure that when we take a look at the functions and the risks and the property that's been evaluated, that it does in fact make sense within the business and how it's been operated. >> all right. now, take a look at exhibit 33, if you would.

>> i'm trying to figure out what the annual parts benefit was from this structure. this strategy that was put in place. do you have exhibit 33? >> i do. that's a district court document? >> no, it's a caterpillar -- >> did i say 43? oh, sorry. yes, pwc document. >> and it's entitled -- if you look at number 3, it's got a

mark of 2449 at the bottom, january 2010, slide 19. number three worldwide parts management in geneva, do you see that? >> yes, i have it. >> take a look at the bottom line. www worldwide parts management structure provides further substance to preserve annual parts benefit for $300 million, do you see that? >> i do. >> that is the benefit, tax benefit that is a result of this tax strategy, is that correct? >> that's accurate. >> okay. now, take a look at exhibit 6, if you would, mr. quinn.

>> pwc document case for action. >> right. if you take a look at the number of caterpillar at the bottom, 4646, do you see that? this is the document that laid out 32 tax strategies for caterpillar, pwc? >> yes. >> strategy for caterpillar, do you see that? >> yes. >> we developed the strategy we believe will achieve tax optimization of caterpillar. this strategy can be summarized as follows. >> mm-hmm. >> summarized as follows. my great income from the u.s. to lower tax jurisdictions. do you see that? >> yes. >> and do you see below that, global income migration?

>> yes, i do. >> all right. now, on that strategy, is there any reference there at all to hiring new people, or moving people, or changing operations, do you see that anywhere -- >> it can only be the consequence -- >> i understand that. but do you see it anywhere on this document? >> it's not in this document, senator. >> was it 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 to have moved? if they had less than 100 people working in parts, right? >> if i can ask what particular part of the reorganization -- >> in switzerland. >> as it relates to the overall business? >> no, the parts business. they had less than 100 before, and less than 100 after. >> our view now and at the time we put this together is the substance that exists with respect to the parts business is provided through the marketing organization.

that those individuals, those thousands of individuals that are managed out of the organization based in switzerland, now they comprise the marketing company outside the united states for caterpillar products and parts, replacement 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 activity, as well as reflect the integrated nature that's taking place in the business. both selling parts as well as machines, going back to my opening statement in that this is in fact an integrated activity. >> we understand. did anybody have to move? >> in order to support the parts planning? >> no, because of this proposal, which was adopted. did anybody have to move? >> yes. >> how many had to move? >> a dozen. >> out of thousands?

>> senator, that's because -- >> well, whatever the cause is, if you could answer the question, that would be a dozen out of thousands, is that correct? you've just talked about thousands. i'm just asking a direct question. >> in terms of people to support the structure of the substance already in place, it was just a dozen. >> so that structure which was already in place -- >> that's correct. >> -- which led from the shift of 15% of the profits going to switzerland to 85% of the profits going to switzerland -- >> no, senator, that -- >> you want to use 70% instead of 85%? >> no. i won't argue with the percentages. i will argue with what creates the income shift, as you call it. and that can only result as a result of the measurement of what's been taking place with respect to the functions, where those exist, the risks, where those have been accepted, and the property, where it exists in the company.

and our evaluation of that within the context of this planning was that when we looked at substance, and when we looked at economic substance that we used rules which had been provided to us in case law as well as the internal revenue code and underlying regulations that say that in order to evaluate that appropriateness of an income shift, first we have to look at what functions exist, what risks are in place, and what property exists. and then we align the income with that. we never shift income. >> well, i'm talking about the allocation of profits was shifted, is that correct? following all that assessment. >> the allocations of profits changed as a result of that. >> was changed, shifted, from approximately 15% to switzerland to 85%, is that true? based on your assessment -- >> again, with respect to the parts business. >> yeah, with respect to the parts business. after your assessment, the

allocation of profits shifted from 15% to approximately 85%, is that true? >> that's correct. >> a few people had to shift. it was just your assessment which looked at the whole operation, and in your judgment, would it already exist of shift the profit from 15% to 85% to switzerland? >> it absolutely does. >> okay. thank you. senator johnson. >> thank you, mr. chairman. i want to make a quick point and ask one question. mr. chairman, you said that you stipulated that, yes, caterpillar's one terrific american company, and that's not what this hearing is about. i think that's exactly what this hearing is about. senator portman mentioned our concern about our uncompetitive tax code 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.

i mean, let's face it, when you've got canada with the top marginal corporate tax rate of 15%, and detroit at 35%, if you're a german manufacturer wanting to come here to take advantage of the world's largest market, take advantage of the reasonably priced energy prices, are you going to locate your manufacturing facility for north america in toronto at 15%, or in detroit at 35%? this hearing is all about what do we need to do in america to make america an attractive place for global business investment, business expansion, job creation. so i disagree in terms of the purpose of this hearing. i think the purpose of this hearing is exactly that. let's keep american companies american. let's try and incentivize investment of global companies into america. we're not doing a very good job that way. mr. quinn, i hear the term all the time, like fingernails on a chalkboard, talking about tax loopholes.

is there such a term in the tax code as a tax loophole? it's a political term, correct? >> that's correct. >> can you define some tax loopholes for me? what are we talking about when politicians use the term tax loophole? >> generally they are either incentives, which were deliberately placed in the tax code, or they -- >> just give us a couple pretty good examples of where it made some sense to create an incentive in the tax code to incentivize manufacturers, or drilling, or just give us a couple of examples that might actually work. >> well, so we had talked about some earlier. in the course of the hearing here, one was the old rules which existed around foreign sales corporations. i think that was characterized as well many times inappropriately as a loophole that was created for corporations that exported product. more recently, we talked about the homeland repatriation act, where companies had an opportunity to bring earnings back into the u.s. at a 5% effective tax rate. that was back in the early 2000s.

and that, as well, was viewed as a loophole. >> was it also safe to say that a lot of times people typify timing differences as loopholes? in other words, i also -- it's true that corporations account for things differently. there's book accounting, there's tax accounting. a lot of that has to do with timing differences, correct? for example, if you've got a piece of machinery and you know it's going to wear out in five years, according to gap, you depreciate over that five years. tax accounting made to incentivize investments in plant equipment, it might grant you a ten year depreciation schedule, correct? >> correct, yes. >> what about oil drilling? pretty risky venture. i'm hearing all these subsidies for big oil. can you speak a little bit about what those subsidies really are? are those loopholes or incentives written in the tax code to give people the incentive to risk their capital to drill oil?

>> i think as someone who reviews the tax code regularly, and understands the legislative process around it, i know that those are incentives. many are put in there very deliberately. >> can you just -- >> to incent activity. >> can you talk to some of the timing issues, specifically? how oil companies have to account for their risk capital when they're investing? i know it's a little off the subject, but it's exactly on point. because what we're talking about is how do you comply with a tax code that's been written by congress, that is trying to incentivize behavior. and by the way, i'd like to scrap the current tax code, i'd like to just raise the revenue we need and stop economically and socially engineering through the tax code. but that's a system we have right now. companies take advantage of it, and respond to those incentives, correct? >> that's correct. in terms of the example you're looking for, it would apply not only to oil companies, but in

particular facts in hand, in this case study. the u.s. suspect 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 fact the timing issue. and that timing issue can be affected either through paying a dividend back to the u.s. company, at which time that income then becomes immediately taxable. or it can happen as a result of the application of subpart f which takes a look at certain classes of income and says, despite the fact that you didn't return that cash to the u.s., the income is going to be immediately taxable. that's an example of a deferral strategy. it's also one where there's very deliberate actions that have been taken by congress, and by the treasury department, in putting in place regulations in that area to respond to known business issues. >> when i took tax law in college, one of the tenets of tax law was the ability to pay. i think most americans assume that when a corporation or

business spends money, they get to deduct it. that's not the case, right? >> that's correct. absolutely. >> i mean, in so many cases, businesses invest money, they pay out the cash, they may have to borrow it, but they're spending the money -- >> becomes capitalized. >> they're forced to capitalize and then they have to amortize or depreciate that over a long period of time, correct? >> sometimes it's not amortizable. sometimes it's held up on the balance sheet. your tax balance sheet. forever. >> so let's say you have $100 and you decide to invest $100 in capital equipment. let's say $1 million so you invest $1 million. if you make a profit that year, where's the money going to come from to pay the tax? >> you've spent it on the -- you'll borrow it. >> you'll have to borrow it, correct? that's not real incentivizing from the standpoint of -- >> no. >> -- having people risk their capital. so again, i think it's extremely important for people to understand really how our tax code operates.

the incentives that congress has written into the law. the disincenting nature of high tax rates. of forcing businesses to capitalize, cash that's spent, not being able to recover that for years. that's not a loophole, that's actually economically very disincentivizing and harmful in terms of job creation. >> a new question. >> thank you. thank you, mr. chairman. >> thank you very much, senator johnson. senator portman? >> mr. chairman, thanks very much. and i just had a couple questions to follow up on how the international code works, specifically as it relates to caterpillar. you talked earlier about the fact that u.s. companies are competing globally at a disadvantage, given the fact we have a relatively high rate, and because we are taxing on a worldwide basis rather than what they call a territorial basis, meaning if you have active income earned abroad taxed at u.s. rates. what does that do to a company, caterpillar as an example, but 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 in this world is outside the united states, 95% of the consumers are outside the united states. we want our companies to access those consumers that purchasing power in order to create more jobs here, right? >> that's correct. >> and with regard to caterpillar in particular, do you have any idea of how many of their 51,877 u.s. based employees are dependent on some extent on their international sales? i understand their revenue is about 67% overseas. so how many of these people who work here over 50,000 people have their jobs because caterpillar does business overseas? >> i don't know the exact number, senator, but i would expect it's a large portion of those that support the export nature of the business. >> as of 2000, you had some testimony that some of your colleagues gave, 14 years ago, saying that you estimated that export supported 16,000 u.s.

caterpillar jobs here. another 30,000 u.s. supplier jobs here. >> i wouldn't find that unreasonable. >> that number is going to be a lot bigger than that now, since they have more employees and do even more internationally, correct? >> correct. >> we're talking about u.s. jobs here being supported by giving u.s. companies access to foreign markets. that's something we want to encourage, not discourage, because it 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, let's say, are a german company, french company, brazilian company, and chinese company or korean company and caterpillar is in the mix. what's the relative advantage or disadvantage based on the tax laws for those acquisitions? >> what they'll be looking at, whenever an acquisition is made, is what's the earnings opportunity in the future. and that earnings opportunity is going to be viewed on an after-tax basis.

so they'll take a look at the tax costs associated with the earnings in that business as well. i'm sure the example you gave earlier of the company in your state took a similar approach to it. hard economics of looking at what is that after-tax cost of operating as a u.s. based company, or a foreign based multinational company. >> what i'm hearing from the companies in ohio, and i'm sure the same is true in michigan and wisconsin, they're not just at a disadvantage globally, but in terms of the acquisitions, other countries, companies can pay a premium because of those after-tax profits that they're looking at? >> that's correct. >> in other words, we're having to not just compete head-to-head, but we're shrinking as american companies relative to what we should be because of our tax code, because other companies can come in, domiciled somewhere else and say, hey, i'll pay you a premium so that we're not expanding as we should be, and therefore, not taking advantage of the international opportunities that create jobs here in america. who are cat's biggest foreign competitors, do you know? >> certainly kumatsu, a japanese

based company. steve, would you have any others to add? >> volvo, which is a swedish company. now chinese companies are competitors. >> from korea as well. >> korea, samsung, and others. >> volvo is the top competitor in europe, i'm told, by far. kumatsu in asia, and the chinese companies are growing their market share. volvo in sweden where the top rate is 22%. 17 points lower than the combined u.s. corporate rate of 31.1% which would be the state and federal. based on the public financial statements for both companies, cat's rate was 28.5% last year. do you know what volvo's effective tax rate was last year? >> certainly lower than that, i would think. >> do you have a guess? >> low 20s. >> 20%. so 28.5% for cat, volvo, biggest competitor, 20%. it sounds to me like caterpillar spent lots of money coming up

with a tax strategy last year that didn't even allow it to come close to achieving tax parity with its primary rival in europe. is that accurate? >> that's a characterization -- >> you shouldn't feel guilty about it. >> that's accurate. >> that's the reality. i would also say that there's a big issue here as to the ability to deploy resources to its most efficient uses. it's not just the fact that the volvos of the world have a lower rate, but because they work on a territorial basis rather than global basis, they can move it around. to where they need it. the japanese have 95% exemption rate, as you know. meaning they allow their companies to do business in the united states, but to bring the profits back and be able to deploy them in japan or elsewhere without a tax penalty. i know this is about cat today. and i know that the chairman's raising some specific points about our current code. but this all just cries out for

reform. if we don't, we're going to continue to see an erosion of u.s. jobs, u.s. capital going overseas. the lack of investment here in this country. and the inability for u.s. companies to expand as they should be able to for the reasons we stated earlier, that they're not as competitive on these acquisitions. so i really appreciate you all being here today, and i hope that, again, in the next few years you'll be in a position to tell your clients that u.s. now 3 a competitive tax structure and ought to stay here and build your jobs and build your investments in the united states of america. thank you, mr. chairman. >> senator portman, i have to agree with senator portman about the need if the tax code to be totally reformed and 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? >> that wasn't what we were asked to opine on. >> in your judgment, you do an awful lot of this for decades -- >> there is some recent -- >> i'm just asking you the very simple straightforward question. caterpillar created this very, very strong company. 90 years to build it. turns over to its own -- to itself in a tax haven. 85 fk% of the future profits on parts. doesn't get any pay for it. doesn't get any compensation for it, any consideration for it. let me just finish.

>> i'm sorry. >> okay. and the deal is on future parts you over there, my wholly owned subsidiary, you're going to get 85% of the profits on these parts. i'm going to get -- i'm going to keep 15%. i'm asking you just a very simple question based on your experience, is there any way in heaven that caterpillar would transfer its rights to those profits to a company that wasn't related to itself? that's all i'm asking you. i'm not asking you whether it has to. i'm just asking you would in your experience -- no compensation, no consideration. it loses 85% of the profits it had been receiving, it continues to operate the company, it's given -- it has to continue under the agreement the same operations in illinois, so it keeps doing the same thing it's

always done, but it's turning over 85% of the parts profits worldwide and gets nothing, no consideration for it. >> well -- >> yes or no. >> as a hypothetical what caterpillar would look at is exactly what you're expressing -- >> my question is would it make -- would it offer that to a nonrelated company? that's my question. >> i don't know. >> sure you know. >> what i -- >> sure you know. you've been in this business for a long time. i'm asking you a straight question. do you not think it is 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 everywhere else around the world where it does, get no consideration for that transfer. do you think that in any way -- >> they would -- >> -- they would offer that -- >> never do it for no consideration.

the nonrelated rules we were required to use were ones which evaluated the compensation that caterpillar received and determined -- >> i'm just asking you is there any way in your experience that caterpillar would make this deal with a nonrelated company? that was a deal it made with itself to shift profits to -- you say it was legitimate. i don't, but that's beside the point at the moment. that's not my question. my question is, is there any way that they would make this deal with a nonrelated company? that's my question. >> i'm sorry, i can't answer that. i don't know. >> you can't or you won't? you have an opinion on that, don't you? after all your years of experience. >> i see companies that dispose of business operations all the time. caterpillar has done it as well. caterpillar has done it within their logistics organization. >> you know what the deal was here. 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's why it was done. you have conceded that.

everybody has conceded that. that's why it was done. that's why you sold it to them. >> senator, i'm focused on the question of value that you're asking as well -- >> i'm focusing on a simple question. >> value is appropriate. >>, no, no, i'm focusing on a simple question and i'm asking you to give us an honest answer. >> were the economics of that deal appropriate, yes, they would. >> i'm asking you a question -- >> i can't answer it without that qualification. it would have to be based upon their believing that they were receiving a return in exchange for that -- >> it would have to be believed. would any rational company believe they're getting a return -- >> if, in fact, they were being relieved of all the risk associated with that business, if they were relieved of the capital requirements -- >> they're operating the company.

they continue to operate the company in illinois. it's the same operations. no people who shifted. 5,000 people, a dozen people have to shift. 5,000 people work for caterpillar. less than 100 people work in parts 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% of ongoing profits in a business that has been highly profitable, put together over 70 years, highly profitable company. is there any way this would be sold, given away, no consideration, 85% of the profits on the ongoing parts business handed over to -- >> the answer is yes under the economic circumstances which caterpillar accepted. we can't answer -- >> i'm just asking you would they accept that with a nonrelated company, an arm's length transaction? >> yes, that's the standard we have to apply -- >> not the standard. i'm asking you in the real world would a company do that. i'm just asking you a simple, straightforward question. >> it's -- senator, in the real

world, that's a hypothetical that would also still be based upon an economic analysis. >> okay. take a look, if you would, mr. williams, at exhibit 4a. >> yes, sir, i have that. >> this is a document 1994, pricewaterhouse looked at the intangibles for all of caterpillar including its swiss marketing company, win washich predecessor. now, here is what pwc described as the relative role of caterpillar and its marketing companies in developing the dealer network. this includes cosa. a marketing company. cat inc. has the largest role

with regard to market and dealer deployment -- development. see that word there? >> it's on 8685 page. >> do you see that on page 8685? >> yes, i do see it. >> cat inc. has the largest role with regard to market and dealer development since. it has the largest single market. it was the originator of the basic marketing systems and concepts. it continues to be involved with the development and oversight of worldwide marketing programs and approaches, and then it says the markets companies, also have major responsibility for market development. in fact, it is their primary responsibility to do that. okay? so cat, inc., in the description of pricewaterhouse has the largest role 1994 with regard to

market and dealer development. was that true? >> what i said there was that the dealer network was developed first, the concept in the united states in the 1920s, 1930s. it originated it, that's what it says there, and it continued to be involved with the oversight. however, cosa and other marketing companies employed those concepts, developed those concepts, expanded the dealer network and had the daily interaction with dealers all over the rest of the world. >> where do you see that? >> it's implied -- >> not implied, where do you see that? >> that's my knowledge of the company. >> no, where do you see that? i'm reading from a document. >> it does not say that on the page. >> thank you. now, let's go back to this document. cat inc. has -- this is what you said in 1994. it has the largest role with regard to market and dealer development, and then it gives the three reasons.

the marketing companies also have a major responsibility, but the largest role, you said in 1994, was caterpillar. was that true? >> that was the way caterpillar viewed it -- >> was that the way you viewed it? >> that was my understanding at the time. >> all right. so you believe it was true. >> that was what we wrote and i believed that at the time. >> now, then if you take a look at 1995 transfer pricing documentation, exhibit 4b, bates page 8930. caterpillar had the largest role with regard to market and dealer development in 1995, right? was that true? >> that's what it says in this text, yes, sir. >> did you write that text? >> i was certainly involved in -- >> was it true when you wrote it? >> i'm sorry? >> was it true when you wrote it? >> that was how the company viewed it -- >> did you believe it was true when you wrote it?

>> yes. that was how the company viewed it and -- >> did you believe it was true when you wrote it? >> at the time caterpillar -- starting in 1994 changed -- >> i understand all that. i'm just asking you whether that statement was true when you wrote it in 1996. >> that's my understanding, yes. >> now, was it true when you said the same thing in 1997? >> senator, we used much of the same language in these reports as they were updated each year. >> and did you believe it was true? >> i used that language in 1997. >> pretty straightforward question. did you believe it was true when you wrote it? >> based on the facts at the time, yes, i believed that. >> thank you. senator mccain. >> i thank the witnesses again. mr. quinn, your job is to advise companies and corporations how they can maximize their profits

and keeping with the existing tax code as it is written. is that true? >> that's true. particularly with respect to their operations. >> so this was -- this restructuring obviously resulted in increased profits for caterpillar, right? >> i believe the increased profits largely resulted from the expansion of their markets. this provided the opportunity for them to expand their markets using a different base. >> to this day do you believe that there is any violation of the tax code as it was written then, and i don't know how much it's changed since, that you were completely in compliance with existing law and regulations? >> yes, that is my belief.

it's my firmest belief. >> i thank you, mr. chairman. >> thank you, senator mccain. senator johnson. >> no further questions. >> thank you. mr. williams, during the 1990s caterpillar assigned a 13% profit to its marketing companies, so it indicated it viewed them as having some value, which i think everybody concedes, but not a lot of value. that was before the 1999 tax strategy was implemented. so now let's look at what caterpillar did after the tax strategy was implemented. let's look at 2001. would you please look at exhibit 13?

do you have it? >> yes, sir, i have it. yes, sir, i have that. >> thank you. this is a 2001 economic analysis prepared by pwc valuing the marketing intangibles of caterpillar americas. do you pronounce it caco? >> caterpillar always called it that. >> okay. this is a mime ami baseed u.s. company that was transferring its assets. caco had served as caterpillar's marketing company for the dealer network in latin america, caribbean, and canada. did you work on this analysis? >> yes, i participated in this analysis. >> okay.

pwc describes caco's responsibilities. they're virtually identical to the function of csarl. they include signing contracts with independent dealers. in the region. purchasing products and parts from the united states parent, reselling them to the dealers. helping with logistic support. maintaining minor parts inventories. helping dealers identify performance issues. providing dealers with marketing information and sales training. helping them with financing and conducting monito#hliysr oversight activities. to ensure compliance by dealers with the terms of dealers sales and service agreements. that's all from this document. now, on pages 4, pwc lists the marketing intangibles at caco. they consist of caco's relationship with caterpillar's

independent dealers, its training programs, its order tracking software, various procedures and manuals, market brochures, its website, its goodwill and its going concern value and any other marketing related intangibles. sounds familiar because these are the same as csarl's. then on page 6, mr. williams, take a look at the description of all these marketing intangibles. see at the bottom, functional analysis conclusions? >> i have that. >> based on our analysis of the intangible assets transferred we conclude that they are

routine. and common to most distribution and marketing companies. these assets have only limited economic life. could be effectively reproduced by a new startup company with sufficient investment and time resources. therefore, we conclude that the intangible assets transferred have very little economic -- very limited economic value, and this value is mostly related to its assembled workforce in place. was that true? >> that was the analysis we wrote and i'd like to explain -- >> finish that sentence, if you would. >> i'm sorry, sir? >> would you finish the sentence. this was the analysis that -- >> this was the analysis we wrote and i would like to expand on it. >> was it true is what i'm asking you. i know you'd like to expand on it now in front of this hearing. i understand that. i'm just asking you was that

true when you wrote it? that's all i'm asking. >> that was an understanding we had at the time. i think it was -- as you pointed out that it was partially inconsistent with some of the other language we said. the reason for that is these were different analyses under different times and actually looking at different assets and different values. >> i see. these are not basically those same intangibles? >> these were looking at -- >> were they basically the same intangibles? >> they were looking at the intangibles inside the united states, not the intangibles out the united states. >> but when you describe the intangibles they're pretty much the same. were they not? >> they created a lot of intangibles outside of the u.s. and many of caco's field and service reps were outside the united states working with the dealers who were outside the united states. >> i understand but these are basically the same intangibles, were they not, that you had previously described as csarl's

intangibles? >> i think they're -- >> they're not basically the same. >> they're different intangibles. the ones i just read are different? >> these are the intangibles without the activities of the individuals who deploy the intangibles. the activities are performed by the non-u.s. employees. >> this was the marketing company for latin america, canada, and the caribbean? >> that's correct. >> and these were the intangibles that they had? and these -- is that correct? you identify these intangibles. >> these were the identified intangibles, yes. >> okay. and we can compare them one for one. i have already done that to the best, i think accurately, but nonetheless, my question is, when you said that those intangibles -- and i'll read it to you again. those intangibles i read have very limited economic value, and this value is mostly related to its assembled workforce in place. i'm just asking you this

question, was that true? >> i think that is not totally complete. tom would -- >> no, no, don't refer to somebody else. you wrote this thing. so what you're saying is it was true but incomplete? >> as i said, i would prefer to expand on it by talking about the assets that caco 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 assessment i made at the time. >> all right. >> senator, i think i could offer some further explanation that might be helpful to you. >> no, i think the explanation -- someone else if they want can ask you for it but i'm asking what was said at the time about these intangibles and in 1999 you attributed huge value to similar intangibles. okay. you can say they're not similar. we'll let the record speak for itself. we've read them and you can --

we'll have someone else determine reading them side by side whether those intangibles which were given huge value relative to csarl's value but given no value when it came to transferring these intangibles from the american company. i'm just -- >> reviews those intangibles absent of the services that support them. it's a completely different context, senator. >> all right. okay. we'll let anyone reading those two documents decide. he said, mr. williams, it was incomplete. was it incomplete? mr. quinn, was it incomplete? >> he didn't have the opportunity to -- >> no, was this assessment incomplete? >> this assessment is complete with respect to the asset it is evaluating. it is not evaluating the same asset that you're referring to from the earlier report. >> in other words, this doesn't list all the intangibles that csarl had. >> it's two different bases.

it's looking at the intangible asset, itself, and the way the rules and regulations require we value an asset is 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 the income being generated by caterpillar sarl. it adds to the asset, the service itself. so it's comparing apples and oranges. >> both were intangibles, right? in both cases. >> no. in one case you had an intangible and in the second case you had an intangible plus its enabling service. >> but both were listed as intangibles, is that correct? when the transfer was made, they were both intangible, 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. do you see that, mr. williams, sir? >> yes, i do.

that is a -- is that not an e-mail from you to a mr. matthews? >> yes, it is, sir. you were talking about csaro, that they spent decades building um around the world, which is

what a marketing company does, spent decades building brand names through advertising. and then you say this. you say that you see the second or third paragraph from the bottom? >> yes, sir. >> it says there's a caveat. in 2001, it says, we said in another transaction that there

is no other intangible work force in place. >> no significant u.s. marketing intangibles. >> it doesn't say u.s. it says no significant market g intangibles. >> they were part of ceaco's efforts offshore. >> well, what's the caveat? >> the caveat was that i was recognize i recognizing that in two different transactions, under different circumstances and different approaches, different assets being valued, there was a different conclusion. >> well, what's the caveat? why do you have to say a caveat? is there not an apparent inc inconsistency that you're worried about? >> the differences 234 the transactions.

that was what i was advising my staff? that we needed to reconcile those different approaches. >> so you -- you, yourself, saw that there was an apparent inconsistency at that time. >> i'd use the word apparent, yes, sir. >> now, you take a look, mr. quinn, you were responding to an e-mail of mr. williams. take a look at exhibit 46, please.

that's >> that's an internal e-mail. i have that. >> i'd like both you and mr. williams to look at this e-mail exchange between the two of you, regarding what you both seem to see as a problem regarding csaro's ability to justify, receiving the lion's share of the non-u.s. parts profits in switzerland. and the first e-mail, mr. williams, you wrote to mr. quinn in the last sentence. quote, just curious, say they decide most p.m.'s part managers stay in u.s. how do we retain csaro's part profit if those u.s. entrepreneurs claim both machine and parts profit? >> if i can, sir, the p.m. there refers to product managers. >> did i say parts 1234 i'm sorry. i meant product manager.

did you have a concern, mr. williams, about whether the product managers located in the united states might claim the parts profits related to the part that is they design snd. >> sir, my point was related to -- >> could i ask you this question just directly? did you have a concern here about whether productcated 2 ed might claim the parts process related to the parts they design? was that a concern of your sns. >> i was concerned that by taking those entrepreneurial functions out of switzerland and relocating back to the u.s., that would give me a concern. the answer 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 -- excuse me,

product managers, i'm going to ask you again. was there a concern that product managers located in the united states might claim the parts profits related to the parts that they designed? yes or no. >> no, i was concerned about the relocation of the individuals from switzerland back to the u.s. >> now, mr. quinn, you responded to mr. williams in the next e-mail, product managers of the u.s. will put some pressure on these guys have really bought into the idea that p.m. is king concept. we're going to have to create a story that will put some distance between them and parts. to retain the benefit. get ready to do some dancing.÷um

mr. quifn? was it not a fact that product managers normally get the products related to those parts? and that you were going to have to justify sending most of the parts profits to switzerland where they have few product managers. is that not the case? is the answer yes or no to that? >> i'm not sure. could you repeat the question, please? >> yeah. was it the fact that product managers who design 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 product managers? no, that's not the intention of this statement -- >> what did you mean by dancing, then? >> senator, that was a very poor choice of words. but this was, in fact, the first time i had knowledge of restructuring the caterpillar's proposing in 2008 which would change some of the substance that was put in place back in 2 early reorganization that began in 1999. my concern here is in fact, that would change some of the circumstances that we rely upon in terms of our economic analysis and that we needed to you said that management understood the tax consequences of their actions. >> and mr. williams, this says say they decide that most parts

managers stay in the united states, isn't that inconsistent with what you just said about parts managers moving the united states? >> do you mean product managers? >> product managers. i'm sorry. let me say it again. mr. williams, this says say they decide that most product managers stay in the united states. that's inconsistent with what you just said. would have relocated those product managers to the u.s. and taking with them the significant entrepreneurial opportunities. that was our concern. >> say they decide that 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.