Caterpillar, the American Giant specialized in machinery and equipment manufacturing, has been negotiating with the US Inland Revenue Service(IRS) since last March when the officers raided Caterpillar’s offices and warehouses in Illinois. Now it could face a tax bill of 2 billion dollars from the IRS.
The US tax reform could have some potential impact on the case, in particular with the decreased corporate tax rate of 21%, the one-time low tax of 15.5% on repatriated foreign earnings, and 8% on real estate and other illiquid assets. The consequence of the case could be an indication on tax arrangement of US multinationals with global operation, which has sparked attention.
The equipment giant was accused of tax and accounting fraud last March in a report drafted by the federal government. The IRS blames Caterpillar for circumventing its tax liability concerning the operation between 2007 to 2014 and reducing its effective tax rate to 4%-6%, significantly lower than the recently amended rate of 21%. This is achieved by a set of complex arrangements involving a Swiss subsidiary, while the company affirms the validity of its practice which is widely employed among US multinationals. In the centre of the controversy lies the long-term transfer pricing method used by the company and the arrangement to process sales in lower-tax regime.
With the fast growth of China’s economy and the continuous improvement of the comprehensive strength of domestic enterprises, as well as the implementation of the “One Belt, One Road” policy, an increasing amount of Chinese enterprises are beginning to expand their global footprint and establish their presence in Europe.
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