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Senators to query Apple on tax shelters

Apple loves Ireland: "One secret subsidiary was revealed only Sunday night."

May 20, 2013

Washington -- Apple CEO Tim Cook is scheduled to appear Tuesday before the Senate Permanent Subcommittee on Investigations to explain why the Cupertino computer giant is avoiding paying billions of dollars in taxes by diverting nearly two-thirds of its pretax revenue through Irish subsidiaries.

The novel tax avoidance scheme, according to a committee report, uses entities that do not exist in the eyes of the Internal Revenue Service, Ireland or any taxing authority anywhere.

Sens. Carl Levin, D-Mich., and John McCain, R-Ariz., said they hope to crack down on what they called abuses of overseas tax havens by U.S. multinationals. More than 1,000 U.S. companies are estimated by the research firm Audit Analytics to hold $1.9 trillion in earnings overseas.

Levin called Apple's scheme "the epitome of tax creativity" Monday by establishing entities that do not exist for the purposes of taxation anywhere in the world. He said Apple's argument that it does not shift profits overseas is "a distinction without a difference," because the company instead shifts rights to its valuable intellectual property.

"It's like saying you haven't shifted the golden eggs offshore after you've moved the golden goose offshore," Levin said.

U.S. Sen. Carl Levin (D-MI) (L), Chairman of the Senate Investigations Subcommittee, and U.S. Sen. John McCain (R-AZ) speak to reporters during a briefing on Capitol Hill, May 20, 2013 in Washington, DC. The briefing was held in advance of Tuesday's hearing on offshore profit shifting and the United States tax code. (Photo by Mark Wilson/Getty Images)

Apple released Cook's written testimony in which he argues for lower U.S. tax rates to allow "free movement" of revenue back to the United States, and said the company has a large amount of revenue overseas because that's where most of its sales are.

McCain called the argument by multinationals that closing the loopholes should wait for overall tax reform a "cop-out," saying "every lobbyist in their $1,000 suit" is trolling Congress urging to wait for a reform that may never come. "Why wait?" McCain said.

First appearance

Tuesday will be Cook's first appearance before Congress since taking over as Apple's chief executive in 2011. Unlike Google and Facebook, Apple does not have a big lobbying shop in Washington. Like other Silicon Valley companies, however, Apple wants Congress to lower the corporate tax rate,arguing that high taxes force U.S. companies to move overseas.

Committee staffers said they could not estimate Apple's total tax avoidance, but they hazarded that one loophole has let the company avoid $9 billion in U.S. taxes in 2012 alone, while bragging that it paid $6 billion in federal taxes.

Apple "likes to boast that they're the highest-paying taxpayer in the United States," McCain said. "What they often leave out is they are also one of the largest corporate tax avoiders."

A subsidiary called Apple Operations International reported a net income of $30 billion from 2009 to 2012, according to the report, but "has no declared tax residency anywhere in the world and, as a consequence, has not paid corporate income tax to any national government for the past five years."

Another subsidiary, Apple Sales International, also claims no tax residency anywhere, despite sales income of $74 billion from 2009 to 2012, the report said. The subsidiary has no employees and no physical presence.

Big pile of cash

Apple sits atop a cash pile of $145 billion, significantly larger than the U.S. Treasury's cash balance and larger than the national income of most small countries. More than $100 billion of that cash is in retained foreign earnings.

The committee report charged that the Irish subsidiaries exist solely to avoid taxes. Apple also has negotiated a sweetheart 2 percent tax rate in Ireland, in contrast to the 35 percent U.S. corporate tax rate, and Ireland's standard 12 percent corporate tax rate.

The offshore tax schemes originate from a provision of the U.S. tax code that allows corporations to "defer," or not pay, taxes on their overseas income until they bring it back to the United States. That creates an incentive to hold money offshore.

The loopholes seem tailor-made for Silicon Valley tech giants and other multinationals such as pharmaceutical companies whose business models rely on patents and other intellectual property. The economic use of these intangible properties, such as licensing rights, can be easily transferred anywhere around the globe to siphon profits to low-tax jurisdictions. Earlier committee reports uncovered similar offshore tax avoidance at Microsoft and Hewlett-Packard, employing strategies unique to each company.

The British Parliament is conducting a separate investigation of Google's use of offshore tax havens.

The senators did not accuse Apple of doing anything illegal. They instead called for eliminating the loopholes that have shrunk the corporate share of U.S. taxes to less than 9 percent from a high of more than 32 percent in 1952, shifting the tax burden onto domestic companies and individuals.

Silicon Valley tech companies continue to seek a tax holiday, similar to one they received in 2004, sponsored by Sen. Barbara Boxer, D-Calif., to "repatriate" their foreign earnings at a drastically reduced rate. Corporations generally are lobbying for a tax overhaul that uses revenue from closing loopholes to lower the corporate tax rate. Levin and other Democrats want to close the loopholes in the current code to raise revenue to fund the government.

Although Apple cooperated fully with the months-long committee investigation, the company did not volunteer information. Uncovering the tax scheme required artful phrasing of questions, which in turn required knowledge by committee staff of what exactly to ask for. One secret subsidiary was revealed only Sunday night.

'Political sideshow'

Dean Garfield, president of the Information Technology Industry Council, a trade group, said in a blog e-mailed to reporters that Levin is conducting a "political sideshow ... designed to embarrass Apple, a company that has a strong record of U.S. job creation and employs Americans and pays about $1 million an hour in state and federal income taxes."

Cook will be accompanied by Apple Chief Financial Officer Peter Oppenheimer and head of tax operations Phillip Bullock. The committee will also hear from two professors of tax law and officials from the Internal Revenue Service and the Treasury.

Carolyn Lochhead was the Washington correspondent for the San Francisco Chronicle, where she covered national politics and policy for 27 years. She grew up in Paso Robles (San Luis Obispo County) and graduated from UC Berkeley cum laude in rhetoric and economics. She has a masters of journalism degree from Columbia University. Twitter: @carolynlochhead


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