NEW YORK (Bloomberg) Caterpillar Inc. used offshore subsidiaries in Bermuda and Switzerland to avoid about $2 billion in US taxes from 2000 to 2009, boosting its earnings through a “tax and financial statement fraud”, according to a Caterpillar executive’s lawsuit.The company, the world’s largest construction-equipment maker, sold and shipped spare parts globally from an Illinois warehouse while improperly attributing at least $5.6 billion of profits from those sales to a unit in Geneva, according to the suit filed by Daniel Schlicksup. He was a global tax strategy manager for Caterpillar from 2005 to 2008.Schlicksup, 49, sued in US District Court in Peoria, Illinois, in 2009, claiming he was moved to a job that limits his career opportunities because he complained to superiors that the “Swiss Structure” ran afoul of US tax rules.He’s seeking a court order to give him back his old job and prevent any retaliation. He also seeks stock options that he claims were wrongly withheld as well as legal fees and punitive damages.His lawsuit, which calls the structure a “tax dodge”, followed a request for job protection he filed with the US Department of Labour under provisions of the Sarbanes-Oxley Act, court records show. The law bars retaliation against corporate whistleblowers. Schlicksup declined to comment for this story.His attorney, Dan O’Day, His attorney, Dan O’Day, declined to say whether Schlicksup has taken his concerns to the Internal Revenue Service.Caterpillar spokesman Jim Dugan said the company has engaged in no wrongdoing, and its attorneys said in a court filing that Schlicksup’s transfer wasn’t a demotion. Dugan declined to comment on the suit’s specific allegations, saying Caterpillar “complies with applicable tax laws and regulations”.It could be difficult to prove the company underpaid US taxes, said Reuven Avi-Yonah, director of the international tax law programme at the University of Michigan Law School in Ann Arbor. IRS officials have had only mixed success recovering large settlements in corporate income-tax cases, and “$2 billion would be an extraordinarily large recovery,” said Edward Kleinbard, a law professor at the University of Southern California in Los Angeles and a former corporate tax attorney at Cleary Gottlieb Steen & Hamilton LLP.Peoria-based Caterpillar, which reported year over year earnings growth exceeding 250 percent in each of the last two quarters, is among several US multinationals asking Congress to end US corporate income taxes on profits earned abroad. The company had $3.7 billion of pretax income last year on $42.6 billion in revenue, 68 percent of which came from offshore.“What we are asking for is a level playing field when we compete with foreign competitors,” said Edward Rapp, the company’s chief financial officer, in testimony to a congressional committee May 12.Caterpillar’s Swiss strategy, as described in depositions and exhibits attached to Schlicksup’s lawsuit, reflects one way US corporations reduce their actual tax rates. Aided by lower taxes overseas, the company had an overall effective tax rate of about 26 percent on about $27 billion of pretax income from 2000 through 2009, based on data compiled by Bloomberg from the company’s disclosures. The top federal corporate income tax rate in the US is 35 percent.US multinationals including Google also report overall effective tax rates that are lower than the US rate partly because of the effect of their overseas operations. Google’s overall effective rate for 2007 through 2009 was about 25 percent, based on disclosures in its annual reports. Its overseas tax rate for the period was 2.4 percent.Caterpillar’s Swiss income is subject to a 10 percent tax rate, according to a legal document filed in the case and provided to Bloomberg News by O’Day, Schlicksup’s attorney. While the combined federal, state and local tax rate in Geneva is about 24 percent, companies frequently receive exemptions, according to the Geneva Economic Development Office.The company said in the document that one purpose of the Swiss structure is to lower its taxes. It also agreed that “Caterpillar pays more tax to Switzerland and less tax to the United States than it would have without” the strategy, according to the document.Around 1999, the US parent company transferred the role of “global purchaser” of spare parts from third-party manufacturers from itself to the Swiss unit, according to a memo prepared in 2006 by PricewaterhouseCoopers LLP, the New York-based accounting firm that designed the strategy.The Geneva subsidiary, Caterpillar SARL, or CSARL, had no spare-parts employees and did no work to sell or ship the parts, Schlicksup claims in the lawsuit. The parts are shipped to dealers around the globe from a warehouse in Morton, Illinois, about 10 miles southeast of Caterpillar’s Peoria headquarters, according to the lawsuit, which also describes the spare-parts business as the company’s most profitable line.“In order to shift profit to Switzerland, Caterpillar pretended to shift the management and control of a large portion of its most profitable business segment to Switzerland, but in reality the management and control of this business remains in the United States,” Schlicksup said in an 88-page declaration he filed as part of the suit.“Everything is done the same way it was done before except that on paper, now CSARL is doing it, not Cat, while in practice Cat is doing everything,” O’Day said in an interview. While the Swiss unit nominally buys the parts from suppliers, it maintains its inventory in the US unit’s Morton warehouse, where Caterpillar Inc employees ship it and send invoices, he said.Schlicksup’s lawsuit, which is in the evidence-gathering phase, alleges that the Swiss structure is improper because it has no legitimate business purpose beyond cutting Caterpillar’s US tax bills.“They didn’t set up the minimal physical structure to give it economic substance,” O’Day said.Courts have generally sided with taxpayers who use foreign subsidiaries, said Stephen Shay, a professor at Harvard Law School in Cambridge, Massachusetts, and a former assistant US Treasury secretary for international tax matters. “You don’t need much substance in the foreign corporation for it to be accepted under current rules, and frankly that’s a problem,” he said.To survive a challenge, a taxpayer must show that transactions between the subsidiary and its parent were done with the intent of making a profit, whatever the tax consequences, and had realistic potential to create income, said Michigan’s Avi-Yonah.“The sale of parts was clearly profitable, so the question is whether a court would be satisfied with that or ask whether routing the sales via Switzerland had to have its own separate economic substance,” Avi-Yonah said. “I suspect the likely answer is that the transaction satisfies economic substance as a whole, but it’s hard to tell without knowing more facts.”Still, if the inventory is maintained in the US, that would raise questions of whether Caterpillar Inc is deriving taxable income from it, said Avi-Yonah.O’Day said the IRS and tax courts will find that the Swiss subsidiary doesn’t handle the spare parts transactions themselves and thus doesn’t meet the standard.Most cases “will say that even if an entity has substance you will look to see if its transactions have substance,” he said.While the Swiss structure moved income to Geneva, Caterpillar had New York-based accounting firm Ernst & Young LLP devise a complementary “Bermuda strategy” aimed at returning some cash to the US without paying tax on it, according to a November 13, 2006 memo from Pricewaterhouse and internal corporate tax summaries from 2006 and 2007 written by Schlicksup’s then-boss, Robin Beran, Caterpillar’s chief of global taxation. The documents are filed as exhibits to the lawsuit.Under current law, American companies can defer federal income taxes on most overseas earnings as long as the money remains abroad. Foreign income brought to the US is subject to tax at the 35 percent rate with credits for overseas taxes paid. Congress is considering a one-time tax holiday that would reduce the rate to 5.25 percent.Spokesmen for PricewaterhouseCoopers and Ernst & Young said their firms don’t comment on client matters.Caterpillar reported total expenses of $3.68 billion for US federal taxes on $12.3 billion in pretax US profit from 2000 through 2009, an effective rate of 30 percent. It reported $2.97 billion for taxes on $14.4 billion of non-U.S. pretax profits, a rate of 20.6 percent on foreign income.Overall, including US state taxes, Caterpillar reported an effective tax rate for the period of 26 percent, or $6.9 billion on pre-tax profits of $26.8 billion, based on its disclosures.Caterpillar’s U.S. federal income tax return for 2003 reflects far lower numbers: $4,667 in tax on taxable income of $18 million and revenue of $22.8 billion. Dugan, the Caterpillar spokesman, declined to comment on the 2003 return, which was filed as an exhibit to Schlicksup’s complaint.Schlicksup, a lawyer and a certified public accountant with a master’s degree in tax law, tried for two years, beginning in 2007, to persuade senior Caterpillar executives that the Swiss plan might violate US law, according to e-mails filed as evidence in his suit. A Caterpillar employee since 1992, he became concerned after researching the “economic substance” issue in late 2006, he said in a declaration filed with his suit.His bosses, Caterpillar’s general counsel and its chief compliance and ethics officers, rejected his concerns as unfounded, e-mails show.“Dan, I think this really is a non issue,” Beran wrote in a January 19, 2007, e-mail filed in the court case.In subsequent e-mails to various executives, Schlicksup wrote that Caterpillar had not set aside enough cash in the event the IRS disallowed the Swiss strategy. In response, Debra Kuper, the company’s senior corporate counsel, told him that executives had reviewed his concerns. They were “satisfied that the matter was adequately addressed and handled appropriately,” she wrote. “This matter is therefore closed.”Kuper, now vice-president, general counsel and corporate secretary of AGCO Corp. of Duluth, Georgia, declined to comment.Ultimately Schlicksup summarised his concerns in a 15-page May 2008 memo to Rapp and Douglas Oberhelman, now Caterpillar’s CEO. He warned of what he called “serious shareholder fraud” involving overstated income, according to the declaration he filed in court in December 2009.