Testimony of

Robin D. Beran

Director, Corporate Tax and Assistant Treasurer

Caterpillar Inc.

Before the

Senate Finance Committee

March 11, 1999

Good morning Mr. Chairman and members of the Committee. I am
Robin Beran, Director of Corporate Tax and Assistant Treasurer
for Caterpillar Inc. I have global responsibility for
Caterpillar's tax planning and compliance. It's a pleasure to
be here and to have the opportunity to talk with you about
international taxation.

For those of you not entirely familiar with Caterpillar Inc.,
let me begin with some facts about the company. We are the
world's largest manufacturer of construction and mining
equipment, natural gas and diesel engines and industrial
turbines. We also hope to become a leading manufacturer of
agricultural equipment -- and have taken a number of steps to
establish that distinction.

We design and manufacture machines in countries worldwide for
use by customers in highway and building construction, mining,
quarrying, agriculture, forestry and waste management. Our
engines power our own machines, are sold to other manufacturers
to power their products and are the heart of electric power
generation systems which provide both primary and emergency
power. Our products are distributed and supported around the
globe by a world-class network of almost 200 independently owned
dealers.

More than 35 years ago, Caterpillar and Mitsubishi Heavy
Industries Ltd. formed a 50/50 joint venture in Japan. The
joint venture today is the No. 2 maker of construction and
mining equipment in Japan -- behind only our largest worldwide
competitor.

We also own and operate subsidiaries that handle financing,
insurance, leasing programs, countertrade and logistics for
Caterpillar divisions and other companies. We employ 65,000
people worldwide and posted sales last year of nearly $21
billion. Of that $21 billion, $6 billion were exports from the
U.S. We expect sales to grow to over $30 billion in the next
decade.

How well we achieve that goal at Caterpillar depends to a great
extent on our ability to compete freely and fairly in the global
marketplace. Caterpillar is particularly committed to free
trade -- in a large part because of our unique competitive
position. We are globally successful and globally competitive
primarily from a U.S. manufacturing base -- and although we
expect sales outside the United States to grow more rapidly than
our U.S. sales, the majority of our manufacturing assets, some
70 percent, are -- and are going to remain -- in the U.S as long
as we have access to world markets from here.

Our facilities are capital intensive and high tech. It doesn't
make economic sense to duplicate manufacturing operations for
many of our products -- and from a political-risk standpoint, in
our opinion, the U.S. remains the best place to invest.

We are one of this nation's largest net exporters -- we believe
Number 2 only after Boeing. By the year 2010, we expect that 75
percent of our total sales will be into countries outside the
United States -- and that our U.S. exports will reach $10
billion. We've estimated that our total exports last year
supported about 45,000 jobs in the United States -- 15,000 at
Caterpillar U.S. plants and nearly 30,000 jobs at U.S. Cat
suppliers. And because we plan to continue to operate primarily
from a U.S. base, we have the potential to provide thousands
more export-related jobs for American workers in the future --
but, again, only if we can compete freely and effectively in the
world marketplace. That's a big "if" -- and, unfortunately,
it's one that seems to get bigger every day -- growing in direct
proportion to increasing protectionist sentiments.

As far back as 30 years ago, we warned in our annual report
that trade barriers could stifle companies like Caterpillar
which would otherwise compete effectively in world markets --
and we emphasized that free trade is the driving force behind
economic growth. The world has come a long way since then --
eliminating major barriers through GATT and NAFTA. But there
are still those who believe that protectionism is a good policy.

In reality, though, protectionism denies access to new markets,
thus eliminating opportunity for increased exports -- and
creation of jobs in the U.S. In the words of U.S. Secretary of
State Madeleine Albright, "Protectionism is an economic poison
pill. We cannot expect to gain access to new markets elsewhere
if we put a padlock on our own." I couldn't agree more.

While the U.S. has taken many steps to reduce trade barriers,
unfortunately, many of our tax policies are still dated. Tax
policies implemented in the 1960's -- and continually expanded
in the years since -- don't reflect the current competitive
environment facing companies like Caterpillar. Now, there have
been a few recent changes that are helpful ... including the
wise decision to include active finance company income in the
deferral rules ... that help keep companies like ours in the
competitive arena. I might add, for planning purposes ... we
would certainly appreciate a permanent extension of that
provision.

Mr. Chairman, I salute you for your recent comments about
preserving two very important features of our current tax code
that are under attack, both domestically and abroad. The Export
Source Rule and the Foreign Sales Corporation provisions are
critically important to U.S. exporters. I also thank you for
your support in eliminating unnecessary complexity in the
international provisions of the tax code. We struggle with this
complexity every single day.

I have a rather unique perspective on this complexity. In the
last five years, my staff and I have managed Caterpillar's
acquisition of 20 other companies, the formation of 17 joint
ventures and establishment of numerous alliances with other
global firms. In all these transactions, there is a common
thread -- especially from the foreign participants -- and that
is disbelief as to the complexity of the U.S. tax reporting
requirements. Keep in mind, these are astute business men and
women, from substantial non-U.S. entities who are amazed at the
level of detail required for U.S. tax purposes. This surprise
is reinforced by accountants in our foreign subsidiaries when
first introduced to the U.S. tax requirements

Perhaps some clarification is needed. While I previously
mentioned most of Caterpillar's assets are in the U.S., we also
invest in foreign operations. There's no real secret why that
happens.

When a company grows as fast as we have and acquires new
technologies, it's a safe bet not all that technology was
developed in the U.S. Global companies operate globally. We
service customers where they need us. Since the fastest growing
markets for infrastructure-related equipment are outside the
U.S., you'll find us there. But there are real benefits to U.S.
foreign investment. I'll offer two recent examples.

In 1985 Caterpillar acquired the design for Articulated Trucks
from The Brown Group in England. At the same time, an agreement
was made with The Brown Group to manufacture ATs for
Caterpillar. You've got scale models of the ATs in front of
you. This innovative design helped Caterpillar provide
solutions that customers wanted. In 1996, we purchased The
Brown Group of companies outright, and now own both the design
and the manufacturing capacity. An interesting note here --
once Caterpillar obtained design rights, we were able to supply
components to the Brown Group from our family of U.S.-based
suppliers. And this story gets better ...

Now, Cat is investing in a brand new facility in Texas to
manufacture these ATs for the Western Hemisphere market. We
will use U.S. labor, U.S. suppliers and U.S. logistics for this
enhancement to our product line. Again, had we not made the
original investment in England, we wouldn't be introducing U.S.
production for these vehicles.

Another recent foreign investment that spurred U.S. investment
is Cat's association with Claas of Germany, a leading
manufacturer of combines. Caterpillar and Claas agreed on joint
ventures to manufacture and market Claas combines in the U.S.
and Cat Agricultural Tractors in Europe. Caterpillar Claas
America is now a 50/50 joint venture that will begin production
of state-of-the-art high-capacity combine harvesters in Nebraska
. The same principle is involved here. Had we not made the
foreign investment, we wouldn't be adding to our U.S. production.

But the point is, U.S.-based multinational companies face many
additional burdens -- due primarily to the complexity of our tax
laws-- that most of our foreign competition does not. If we are
to maintain our philosophy of "build it here and sell it there",
we need a modern tax policy that is consistent with our global
focus. U.S. tax rules must allow us to be competitive bidders
when opportunities arise rather than placing us at an immediate
disadvantage.

I'm not sure if you want to get into the details here this
morning, but true simplification in the international area of
our Code would require major revisions to the foreign tax credit
provisions ... including the various "baskets" that have been
woven into the system ... also, adopting GAAP accounting for
determining Earnings and Profits; treating the European Union as
one entity and somehow pulling together the various
sanctions-related (boycott provisions) mandates and trying to
make some sense of them all.

I doubt if any one individual with responsibility for Corporate
Tax Policy can keep track of all this. So we, in turn invest a
lot of time and effort in tax staff, software and consultants to
aid us in tracking and complying with the hellishly complex
rules we must follow. Rules that have been referred to as
"simplifying the process". I submit, they haven't.

Several members of this Committee have been instrumental in
proposing and helping to enact some simplification to our
international tax system. I understand those efforts will
continue this year. Let's keep our eyes on the long-term
benefits to the U.S. economy from globally competitive
companies, recognizing and responding to the tax-related
challenges of new technologies ...and new markets. By working
together, we can assure future generations of Americans an
opportunity to participate in world markets -- instead of
apologizing for lost opportunities.