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updated: 5/21/2013 11:43 AM

Apple's Cook to face Senate questions on taxes

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  • Tim Cook, chief executive officer of Apple Inc., will face off against U.S. senators leveling accusations the iPhone maker has created a web of offshore entities to avoid paying billions of dollars in U.S. taxes.

      Tim Cook, chief executive officer of Apple Inc., will face off against U.S. senators leveling accusations the iPhone maker has created a web of offshore entities to avoid paying billions of dollars in U.S. taxes.
    Bloomberg News

  • An exhibits booklet for the Senate Permanent Subcommittee on Investigations hearing titled Offshore Profit Sharing and the U.S. Tax Code Part 2 (Apple Inc.) sits in the hearing room in Washington, D.C., U.S., on Tuesday, May 21, 2013.

      An exhibits booklet for the Senate Permanent Subcommittee on Investigations hearing titled Offshore Profit Sharing and the U.S. Tax Code Part 2 (Apple Inc.) sits in the hearing room in Washington, D.C., U.S., on Tuesday, May 21, 2013.
    Bloomberg News

 
Associated Press

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 damning report Monday on Apple's tax practices.

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"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 and noting that Apple is the nation's largest corporate taxpayer. Cook said he advocates an overhaul of the U.S. tax code.

The Senate investigation, results of which were disclosed Monday, found Apple employs a group of affiliate companies outside the United States to avoid paying taxes.

Apple is holding overseas some $102 billion of its $145 billion in cash, and an Irish subsidiary that earned $22 billion in 2011 paid only $10 million in taxes, according to the report issued Monday by the Senate Permanent Subcommittee on Investigations.

The strategies Apple uses are legal, and many other multinational corporations use similar tax techniques to avoid paying U.S. income taxes on profits they reap overseas. But Apple uses a unique twist, the report found. The company's tactics raise questions about loopholes in the U.S. tax code, lawmakers say.

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 collecting billions because companies are stashing profits abroad and avoiding taxes. Republicans want to cut the corporate tax rate of 35 percent and ease the tax burden on money that U.S. companies make abroad. They say the move would encourage companies to invest at home.

Apple's chief financial officer and its tax chief are also scheduled to testify and explain the company's tax strategy.

They are expected to face tough questions. The subcommittee's chairman, Sen. Carl Levin, D-Mich., and other panel members could hold up Apple as an example of a powerful company using its privileged position to avoid taxes while ordinary Americans must pay them. The subcommittee last fall derided executives from other technology giants over similar allegations.

Apple refuted the subcommittee's assertions in testimony prepared for the hearing and released to the public Monday evening. Apple said it employs tens of thousands of Americans and pays "an extraordinary amount" in U.S. taxes, citing the roughly $6 billion it paid in fiscal 2012.

Apple "complies fully with both the laws and the spirit of the laws," the testimony says. "And Apple pays all its required taxes, both in this country and abroad."

"Apple does not use tax gimmicks," the statement says.

The company has made clear that given current U.S. tax rates, it has no intention of repatriating its overseas profits to the U.S. Apple reiterated in its testimony its support for comprehensive tax reform as a way to support economic growth and boost U.S. companies' competitiveness.

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.

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 the strategy. The company, based in Cupertino, Calif., paid $2.5 billion in federal taxes in 2011 and $6 billion in 2012.

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.

The subcommittee said Apple's strategy of not declaring tax residency in any country could be unique among corporations.

"Apple wasn't satisfied with shifting its profits to a low-tax offshore tax haven," said Levin. "Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere."

The subcommittee's inquiry and hearing are intended to shine a light on "offshore tax-avoidance tactics" by Apple, Levin said at a news conference Monday with Sen. John McCain of Arizona, the panel's senior Republican. Companies' use of such loopholes has the effect of raising the taxes of ordinary Americans and increasing the federal deficit, he said.

McCain said that while Apple claims to be the biggest U.S. corporate taxpayer, it is also "among America's largest tax avoiders."

He called Apple's strategy "an egregious and really outrageous scheme that Apple has been able to orchestrate to avoid paying taxes."

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

The subcommittee report also noted that Apple has been setting aside billions for tax bills it may never pay. As previously reported by The Associated Press, the overlooked asset that Apple has been building up could boost Apple's profits by as much as $10.5 billion. However, Apple has been lobbying to change U.S. law so it can erase its tax liabilities in a less conspicuous fashion.

In its second quarter ended March 31, Apple posted its first profit decline in ten years. Net income was $9.5 billion, or $10.09 a share, down 18 percent from $11.6 billion, or $12.30 a share, in the same period a year ago. Revenue increased 11 percent, to $43.6 billion.

Apple said in April that it will distribute $100 billion in cash to its shareholders by the end of 2015. The company is expanding its share buyback program to $60 billion, the largest buyback authorization in history, and is raising its quarterly dividend by 15 percent, to $3.05 a share.

In Monday's regular trading session, Apple's stock rose $9.67, or 2.23 percent, to close at $442.93.

President Barack Obama has proposed using the tax code to encourage companies to move jobs back to the U.S. and discourage them from shifting jobs abroad. Many in both parties say they want to overhaul the entire tax code, but there are vast differences in how they would do so.

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