WASHINGTON — Since 1999, Caterpillar Inc. has routed most of the profits from its foreign replacement parts business through an affiliate in Switzerland that employs a small fraction of the company's 118,000 workers and has no warehouses.

The strategy, which has saved the Peoria company about $2.4 billion in U.S. taxes, was the focus of a five-hour Senate hearing Tuesday led by Sen. Carl Levin, a Michigan Democrat. He said the ongoing practice lets the company avoid about $300 million a year in taxes.

Levin took the view that high-priced lawyers and accountants helped Caterpillar shift profits to an offshore tax haven at the expense of the American people.

His view was countered by Sen. Rand Paul, R-Ky., a small-government advocate who often rails against the Internal Revenue Service. Paul compared the grilling of company executives to an “inquisition.”

Meanwhile, executives from Caterpillar, one of the country's largest exporters, sought to refute Levin's case, noting, as one did: “We pay the taxes we owe, not more.”

The company, known for its bright yellow machinery, makes construction and mining equipment, generators, engines and other products.

The debate about how aggressive companies may be in reducing their tax burden is playing out across the country, including in Illinois, as governments feeling fiscal strain seek to increase tax revenues.

Levin, a 35-year Senate veteran who is retiring early next year, chairs the Senate subcommittee that held the hearing.

It opened after a monthslong probe of the company's foreign tax strategy, an investigation that included interviews with key players and a review of more than 150,000 pages of documents from Caterpillar and PricewaterhouseCoopers LLP, which simultaneously acted as the firm's auditor and tax consultant.

A Caterpillar official defended its tax practices.

“I want to emphasize, Caterpillar complies with the U.S. tax laws and we pay everything we owe,” said Julie Lagacy, vice president of its finance services division. She said in-house tax professionals at Caterpillar manage tax risk every day.

Levin was emphatic that Caterpillar, on advice from PricewaterhouseCoopers, was exploiting a loophole because it reduced its tax burden by adopting a new tax strategy rather than making concrete changes to its non-U.S. replacement parts business.

The firm had negotiated a special effective tax rate in Switzerland of 4 to 6 percent, below the Swiss statutory tax rate of 8.5 percent, he said.

“Tax avoidance through the use of dubious tax loopholes costs the U.S. Treasury tens of billions each year,” Levin said as the hearing opened. “Caterpillar is an American success story that produces iconic industrial machines. But it is also a member of the corporate profit-shifting club that has transferred billions of dollars offshore to avoid paying U.S. taxes.”

He said Caterpillar's tax-avoidance strategy was proposed, designed and implemented by PricewaterhouseCoopers, which the company paid more than $55 million. Paul said Caterpillar should get an award, not hostile treatment.

“The tax code needs to be on trial here,” he said.

Levin argued that tax avoidance by companies makes it harder for the U.S. to invest in education and infrastructure and to meet its national defense obligations. He also said the practice increases the tax burden on families and businesses “who don't have an army of lawyers and accountants at their disposal.”

Caterpillar, which dates to 1925 and has nearly 52,000 employees in the U.S., not only makes equipment but also sells replacement parts for its products.

A subcommittee report on Caterpillar's offshore tax strategy noted that while the company located its non-U.S. parts business in Switzerland, no parts are manufactured in or shipped from Switzerland.

The company's revenue exceeded $120 billion during the past two years, Levin noted. He said that from 2000 to 2012, the “Swiss tax strategy” shifted $8 billion in profits from Caterpillar U.S. to its Swiss affiliate, thereby cutting the company's U.S. tax bill by $2.4billion in that period.