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Spotlight on Apple’s tax strategy as CEO takes hot seat on Capitol Hill

‘We pay all the taxes we owe — every single dollar,’ Tim Cook says. ‘We don’t depend on tax gimmicks.’


 

Jeff Chiu/AP Photo

WASHINGTON – Apple’s CEO is disputing assertions by a Senate panel that the company avoids billions of dollars in U.S. taxes by shifting profits to foreign affiliates.

Tim Cook testified at a hearing Tuesday by the Senate Permanent Subcommittee on Investigations, which released a report Monday attacking Apple’s tax practices.

“We pay all the taxes we owe — every single dollar,” Cook said. “We don’t depend on tax gimmicks.”

Cook, who is more accustomed to commanding a stage in front of investors and techies than facing a congressional committee, took a defensive tone with his opening statement. He punched out words when stressing the 600,000 jobs that the company supports while adding that Apple is the nation’s largest corporate taxpayer. Cook advocated an overhaul of the U.S. tax code.

At the same time, Cook said he was happy to appear in the spotlight of a congressional hearing to be able to give Apple’s side of the story.

“I’m saying it’s who we are as people. … Wherever we are, we’re an American company,” Cook insisted when asked about Apple’s use of affiliate companies in Ireland.

The $6 billion in taxes that Apple says it paid in fiscal 2012 works out to $16 million a day.

The subcommittee’s report estimates that Apple avoided at least $3.5 billion in U.S. federal taxes in 2011 and $9 billion in 2012 by using its tax strategy, and described a complex setup involving Irish subsidiaries as being a key element of this strategy.

But Cook said the Irish subsidiaries don’t reduce the company’s U.S. taxes at all. Rather, they manage cash earned overseas. If that cash were to be repatriated to the U.S., it would be subject to U.S. taxes.

Like other multinationals, Apple choses to keep cash overseas so as not to pay the 35 per cent U.S. corporate tax rate. Apple is holding overseas $102 billion of its total $145 billion in cash.

Cook reaffirmed Apple’s position that given current U.S. tax rates, it has no intention of repatriating its overseas profits to the U.S.

He appeared with Apple CFO Peter Oppenheimer and Head of Tax Operations Phillip Bullock.

Sen. Carl Levin, D-Mich., the panel’s chairman, said Apple’s use of loopholes in the U.S. tax code is unique among multinational corporations.

Apple uses five companies located in Ireland to carry out its tax strategy, according to the report. The companies are located at the same address in Cork, Ireland, and they share members of their boards of directors. While all five companies were incorporated in Ireland, only two of them also have tax residency in that country. That means the other three aren’t legally required to pay taxes in Ireland because they aren’t managed or controlled in that country, in Apple’s view.

The report says Apple capitalizes on a difference between U.S. and Irish rules regarding tax residency. In Ireland, a company must be managed and controlled in the country to be a tax resident. Under U.S. law, a company is a tax resident of the country in which it was established. Therefore, the Apple companies aren’t tax residents of Ireland nor of the U.S., since they weren’t incorporated in the U.S., in Apple’s view.

“Apple is exploiting an absurdity,” Levin said at the start of the hearing.

The spotlight on Apple’s tax strategy comes at a time of fevered debate in Washington over whether and how to raise revenues to help reduce the federal deficit. Many Democrats complain that the government is missing out on billions of dollars because companies are stashing profits abroad and avoiding taxes. Republicans want to cut the corporate tax rate of 35 per cent and ease the tax burden on money that U.S. companies make abroad. They say the move would encourage companies to invest at home.

The subcommittee also has examined the tax strategies of Microsoft Corp., Hewlett-Packard Co. and other multinational companies, finding that they too have avoided billions in U.S. taxes by shifting profits offshore and exploiting weak, ambiguous sections of the tax code. Microsoft has used “aggressive” transactions to shift assets to subsidiaries in Puerto Rico, Ireland and Singapore, in part to avoid taxes. HP has used complex offshore loan transactions worth billions while using the money to run its U.S. operations, according to the panel.

Levin and McCain are proposing legislation to close loopholes in the tax code.

Thanks largely to the iPhone, Apple is one of the world’s most profitable companies. It earned $41.7 billion in calendar year 2012. It’s neck and neck with Exxon Mobil Corp. as the world’s most valuable company.

However, Apple’s Irish subsidiaries date back thirty years, to the time when the Macintosh computer was Apple’s banner product, and its profits were a fraction of 1 per cent of today’s figure.

The tone of the hearing turned tense before the Apple executives appeared, as Sen. Rand Paul, R-Ky., an anti-tax hawk who reflects tea party sentiment, insisted that the subcommittee apologize to Apple for unfair scapegoating.

“If anyone should be on trial here it should be Congress … for creating a bizarre and byzantine tax code,” said Paul. “If you want to assign blame, this committee needs to look in the mirror and see who created that mess.”

Levin countered angrily that no such apology would be forthcoming. “Apple’s a great company, but no company should be able to determine how much it’s going to pay in taxes ….. by using gimmicks,” he said.

And Sen. John McCain of Arizona, the subcommittee’s senior Republican, condemned Paul’s remarks as “offensive” for accusing Levin of bullying Apple executives.

Irish Prime Minister Enda Kenny on Tuesday denied the assertion in the subcommittee’s report that Apple had negotiated an Irish corporate tax rate of less than 2 per cent. All companies pay the standard rate of 12.5 per cent on profits from Irish operations, the prime minister said.

“Reports of lower effective tax rates appear to arrive at their figures by running together the profits earned by group companies in Ireland and in other jurisdictions,” Kenny said.

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Associated Press writer Shawn Pogatchnik in Dublin contributed to this report.


 
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Spotlight on Apple’s tax strategy as CEO takes hot seat on Capitol Hill

  1. Interesting that Al Gore sits on the board at Apple. The same Al Gore who likes to encourage us in the west to pay more taxes to prevent “Global Warming”. Meanwhile he’s collecting a $125,000/hr paycheck from a company that pays no corporate taxes and is one of the largest contributors to pollution in China. Oh, and he sold his TV channel to a country that’s financed entirely by oil. I guess it’s only OK to profit from oil if you’re Al “The Internet” Gore.

    Al Gore couldn’t possibly be more of a blatant hypocrite. And typical of those on the left, they give him a pass because he invented the internet and saved the world with a fucking power point presentation.

  2. When looking at this whole issue, its worth understanding some history and background. The current system of tax treaties and international structuring arose from a desire by many national governments to try and maximize the tax revenue they collect. They did this by recognizing that there are constantly situations where an international corporation may be obligated to pay tax on the same revenue but numerous times. Of course, this would result in no net revenue and the corporation going bankrupt. Therefore in order to attract the good or service to their jurisdiction; try to get as much tax revenue as possible; and try to encourage the corporation to set up some of its physical structure and work force in their jurisdictions, countries like the US, UK and Ireland set up tax treaties between themselves and other countries. It is key to understanding this underlying motivation for the current system. This system arose not out of some noble desire to relieve taxpayers of the “unfairness” of double taxation or even at the bequest of the lobbyists of those taxpayers. It came out of a logical self-interest of various governments.

    With this background in mind, let’s look at the Apple situation and compare it to Google and Starbucks (which are also under fire in the international media for their tax planning).

    -Many US politicians and citizens want these three companies to pay US tax on its WORLDWIDE income, including income earned from foreign customers. They argue that while this may not be legally correct, it is MORALLY correct because all three companies were a) Founded, IPOed and has their headquarters in the US; AND b) The citizens of the US are suffering in a financial downturn and “deserve” this money;

    -Many foreign politicians and citizens want these companies to pay more tax on the revenue generated from customers in their country. They argue that while this may not be legally correct, it is MORALLY correct because a) The company is deriving income from tax resident individuals and corporations; AND b) The citizens of these countries are suffering in a financial downturn and “deserve” this money;

    -All three companies want to maximize their net revenues (“gross revenues” minus “expenses including tax” equals “net revenue”). Each company used the tax treaty network and international structuring regime to minimize their global tax burden. As part of this structure they may have to set up operations in places like Ireland; or assigned intellectual property rights to places like the Netherlands. However there are important differences between these companies;

    -Starbucks needs to respond to this “Moral but not legal” obligation demand because a) it has physical facilities in the foreign country which could be picketed or damaged reducing sales; and b) There are many competitors in these countries who could easily service customer needs and decrease gross revenues. As a result, it is logical that Starbucks may consider paying more tax in the foreign country or the US than legally obligated in order to maintain gross revenues and thereby maximize net revenue.

    -Google is different in that a) it does not have or need physical facilities in a given country to deliver its service; b) With all due respect to other search engines, it is not really realistically worried today about losing customers to its competitors. Therefore, the current controversy is unlikely to significantly reduce people from using its products and services. As a result, it is logical that they will not consider paying more tax anywhere than legally obligated;

    -Apple derives gross revenues from various products (hardware and software) which has competitors. Some of the sales of their products and services derive from physical retail outlets and some does not. the question of whether Apple products (with their hardware and software integrated) is unique enough to avoid a drop in revenues.

    The end result is that the US or foreign country push to have Google pay more tax to their country is probably doomed to failure UNLESS the US or the foreign company can show that Google did not properly operate the tax structure they set up. Whether the Reuters uncovered “UK sales team” is sufficient to undermine the Google UK tax structure is a legal question, not one that will be settled in Parliament or the courts of public opinion. As a tax lawyer, I can tell you that the Reuters revelations about UK employees is interesting enough to warrant further investigation but hardly a slam dunk that Google was offside. Investigation and adjudication will tell. If Google is currently tax-compliant then you have to look at the practical levers to force Google to pay more tax than they are legally obligated.

    Starbucks sells a standard physical commodity which is readily available from other competitors and is clearly subject to pressure. “Search” is not a standard physical commodity today and whether through perception or reality, it is a far and away market leader. As a result Google is not motivated by self interest to pay more tax to maintain gross revenues. Where Apple considers itself (closer to a standard replaceable commodity or a unique product) will determine where they will respond and volunteer to pay more tax anywhere than they are legally obligated.

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