Caterpillar Inc. (NYSE: CAT)

Caterpillar Inc. | $CAT Stock | Shares Head Lower On Alleged Tax & Accounting Fraud

Caterpillar On the Spot Over Tax and Accounting Fraud

On March 8, 2017, caterpillar offices at Peoria, Illinois were raided by federal law enforcement officials. It was in the wake of alleged tax evasion allegation in which the heavy equipment maker is accused of wiring at least $7.6 billion into the United States without taxation. The funds are reported to have originated from its offshore subsidiary in Switzerland.

The funds were reportedly disguised as loans. Since the money is used to fund the corporate’s profit making activities and is sourced overseas from its businesses, it is believed to be eligible for taxation. The accounting and tax fraud claims sent a slight tumult to the corporation’s shares at S & P 500, dropping by 1.4% in just three months according to the report compiled by FactSet.

How they let out the “CAT”

Caterpillar Inc. had previously been under scrutiny by the senate committee on allegations of liaising with Pricewaterhouse Cooper to establish tax reducing mechanisms and transferring its income between United States and its affiliate in Switzerland, according to a 2014 Senate’s statement. The maneuver is believed to have helped the firm cut its tax obligations by $2.4 billion in just a decade.

In February 2017, IRS (Internal Revenue Services) reportedly contracted Tuck Business School of Dartmouth College’s professor, Leslie Robinson to comment on the corporate’s financial reports. She wrote a report which was authorized by federal government and shared with The New York Times, pointing out that Caterpillar had brought to the States an estimated $7.6 billion disguised as loans.

After examining documents presented to her by FDIC (Federal Deposit Insurance Corporate) and analyzing financial and banking data, Robinson noticed that the funds were well beyond the $2.5 billion of earnings the company had reported to be tax free overseas and fit to be transferred to U.S. Despite the loans being eligible for federal taxation, they were never revealed. She believed the noncompliance maneuver was “fraudulent” and “deliberate” and was aimed at keeping the company’s share price up.

Companies are required to pay tax on income that is channeled to U.S from overseas. Robinson however, failed to highlight the legal exemption that relieves tax on short term provisory loans made by oversea affiliates. It is not yet clear if Caterpillar took advantage of this tax incentive.

“The transaction was compliant”

The officials at Caterpillar believed that the inquiry by investigators was aimed at its Swiss affiliate’s tax reports made since 2014. They maintained that the dealings of CSARL, its Switzerland subsidiary, was within American legal framework and all profits made were taxed overseas where taxation is below the 35% rating proposed in U.S. The IRS is, however, claiming a $2 billion in tax on profits made by CSARL on certain equipment up to the latest filing in 2016. Caterpillar has vowed to “vigorously contest” the claimed tax and penalties accrued over the years.

Concerning the Robinson’s report, Corrie Scott, the spokeswoman for Caterpillar, refused to comment beyond saying that the company had not been given a copy of the document. No formal investigation has been leveled on the company yet.

CAT Technicals


Looking at the daily chart above you will notice that $CAT has been under some selling pressure ever since the have been under investigation. There will be some support around$90,  $89.40 and at the 200-day moving average currently sitting at $86.84. Those have all been key pivot levels in the past on the daily chart. We should see some resistance at $92.50 and where the 50-day moving average is currently sitting at $95.11.



As you can see in the 5-minute chart above, shares had a strong downtrend day with decent sell-side volume before getting a light bounce at the end of day. I would remain cautious if you are trading the bounce as it could just be a relief rally before the next leg down.

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