Caterpillar : An American Success Story

The problem that Deere faces is how they can successfully move to the middle of the perceptual map to be respected as a manufacturer of both small tractors and large tractors. There are several observations that can be made regarding the positioning of the competitors. The first observation is both International Harvester and Case are competing in both the large and small tractor market. It is evident that International Harvester experience financial difficulties perhaps as a result of not having a singular focus. Another observation is that Caterpillar’s decision to “reposition” itself from a small manufacturer to a large manufacturer could easily be explained by Paretti’s 80/20 rule. Caterpillar enjoyed an extensive dealer network, and their dealer sales ranged from $12 million to $70 million, versus Deere’s $1 million to $16 million in sales per dealer. By tapping into Paretti’s 80/20 principle, Deere could enjoy increased margins from the sale of parts alone.

The US machinery market was valued at $54.1B in 2012 and is expected to increase to $76.4B in 2017. This would be an increase of 41.3% over a five year period. During the period of 2008-2012, the US machinery market realized a 4.2% compound growth rate. The construction machinery segment was the market’s most lucrative in 2012, with $32.1B in total revenues and accounting for 59.3% of the US market’s overall value. The

However, the companies only have to pay the U.S. tax for foreign revenues once they bring the profits back to the United States. As a result of these current tax laws, U.S. companies that seek to avoid high corporate tax rates hold their foreign earned profits overseas. “It just makes no sense to pay a substantial tax on it,” said Joseph Kennedy, a senior fellow at the Information Technology and Innovation Foundation (Rubin, R.). It is far too easy for an IT corporation to create a patent in a foreign country and direct revenue to a corporation within that country, thus avoiding the much higher U.S. tax rates. According to Joint Committee on Taxation estimates, the lost revenue is increasing over time as corporations find even more creative ways to make their U.S. profits look like offshore income (Richards, K., & Craig, J.). As result, multinational American corporations have as much as $2 trillion held in overseas subsidiaries and if brought into the United States with the current tax laws, the federal government could benefit by nearly $50 billion per year.

Throughout years large American industrial companies have been running away from U.S. taxes, but there has been a new change. Companies such as Apple and Google have been affected by a change foreign countries are going through collecting higher taxes than before. It seems as if no longer can these companies get away with paying low taxes. This is happening because the European Commission have passed an order to collect high taxes. One example is Ireland who was ordered to collect fourteen billion dollars from Apple, which brought a surprise to this company. Companies have run out of places to run and pay one percent or less of taxes in foreign places, instead of paying back home.

The main objective of many companies is to minimize their tax obligations. Jeffers (2014) discussed the reason of why companies adopt tax inversion strategies. The researcher indicated that the income maximization is a major reason of companies attempting to reduce their tax liability (pp. 100-101). Tax inversion strategies provide companies an advantage to lower income tax rate. Today, U.S. corporations renounce its U.S. citizenship and move to low-tax countries. Companies that reincorporate oversees are not obligated to pay U.S. taxes on earning income (p. 99). Many countries implement tax competition strategies to attract and retain businesses. Well-known companies, such as Exxon Mobil, Hewlett Packard, Tyco, General Electric, PepsiCo, etc. take benefits of tax shelter opportunities overseas (p. 102). Other benefits of the jurisdiction abroad are flexible banking laws and simplified litigation processes.

9. The Internet company Google managed to avoid $2 billion in international income taxes in 2011 by moving a hefty sum of its revenues to subsidiaries in Bermuda, according to CNBC, which cited a report by Bloomberg.[1] The search giant reportedly stashed $9.8 billion in revenues to its shell company in Bermuda — which doesn't have a corporate income tax — last year allowing the company to shave its overall tax rate by almost 50 percent. Google's Bermuda move was disclosed in a Nov. 21 filing by a subsidiary in the Netherlands. While the company's move to shift funds to the country was legal, it could spur the growing global criticism of corporate tax

However, the introduction of such a law becomes increasingly difficult when the companies being questioned are some of the largest and wealthiest in the world. In order to truly understand the stature of these companies, one would need to look into some of the statistics regarding them. Remarkably, according to Al Jazeera America “the largest 500 U.S. companies would owe an estimated $620 billion in U.S. taxes” if they had to declare all their overseas stockpiles, of around $2.1 trillion (“Al Jazeera America”). In addition, it found that “three-quarters of the 500 biggest companies utilize tax havens”. The top three offenders included Apple, General Electric and Microsoft. In many cases according to the report, the money is not being utilized to improve foreign economies. By this they mean to say that, U.S. businesses were not using their overseas profit to build factories and employ individuals. Instead, the overseas profit was a result of accounting tricks purposely implemented to benefit the business alone. To put all of this in perspective, the United States is losing billions of dollars to foreign economies. These taxes are being introduced into countries such as Ireland and Luxembourg. In other words the money that should be invested in the United States of America on public services, is being

Toromont, is a corporate group that owns Eastern Canada’s largest Caterpillar dealer as well as owning CIMCO, a refrigeration group. Toromont is a crucial part of the Eastern areas of Canada to develop the country, if construction machinery is needed the only way any order can be purchased is through them. Caterpillar is a dealer for Quebec, Western Labrador and Maritime provinces.

From the Consolidated Income statement it is evident that John Deere had a Provision of Tax of $1423.6 (million) and this from a consolidated group income of $4222.8 (million).

Many large corporations are not paying their fair share of taxes, including what is legally required of them. They use tax breaks, loop holes, and so on. Many corporations pay no federal income taxes at all, stashing their cash in off shore tax havens around the world… causing us to lose over $100 billion a year in revenue.

Americans may ponder the thought of struggling economy barely gaining momentum while corporations have witnessed some of the largest quarterly profits ever recorded. The driving force behind the extreme profits gained by many corporations is simply put as tax inversion. Tax inversion is nothing more than an American firm combining with a foreign firm in a country with beneficial and lucrative tax laws (Financial Times, 2014). The American headquarters will now be moved to the new foreign firm where they will enjoy the lower taxes and evade the taxation of the United States government (Financial Times, 2014). More and more American firms have been taking advantage of inversion while still being able to enjoy sales in the American market.

By doing producing in countries with more relaxed taxes, the companies are keeping more of their profits.

The American Jobs Creation Act of 2004 decreased the tax liability for foreign earnings repatriated into the United States. This one time decrease lowered the maximum tax rate for overseas profit from 35 percent to 5.25 percent. However, due to foreign tax credits, the average tax rate corporations actually paid was 3.7 percent. The largest two types of corporations to repatriate their foreign earnings were the pharmaceutical and technology sectors. According to a news article written by Lynnley Browning in 2008, “the tax break gave each company claiming it an average $370 million in tax deductions” (Browning 2008). During 2004 the number of United States Corporations with foreign subsidiaries totaled around 9700. As stated above only 843 corporations participated in the Repatriation Tax Holiday. Of these 843, over 30 percent of total repatriation is accounted for by the pharmaceutical manufacturers alone. On average these 29 pharmaceutical manufacturers each claimed a tax deduction on overseas profits of $3 billion.

Caterpillar, Inc is a U.S. based company that develops and manufactures machinery, engines, and financial products. The firm’s net worth is more than 74 billion dollars. The company’s headquarters is currently located in Peoria, Illinois. Jim Umpleby was recently elected as the Chief Executive Officer of Caterpillar, Inc. in early 2017. Previously, Jim had been serving as the company’s Vice president from 2010 to 2013 and as group president from 2013 to 2016. During March of 2017, the company was being investigated by the federal government for tax fraud and its offshore tax practices. According to an article in the New York Times, for over thirteen years the firm had moved their taxable income into a Swiss Bank to avoid any tax responsibilities

2007 was the fifth straight year of record sales and revenues and the fourth consecutive year of record profit. Sales and revenues were $44.958 billion, up 8 percent from 2006, and profit per share was $5.37, up 4 percent from 2006. Cat also reported record fourth-quarter sales and revenues of $12.144 billion, 10 percent higher than the fourth quarter of 2006, and profit per share of $1.50, up 14 percent from a year ago. The broad global footprint has enabled Cat to benefit from strong economic growth outside the US, as global markets for mining, energy and infrastructure development are booming.