A U.S. congressional investigation into the accounting practices of major technology firms such as Apple, Google, HP, and Microsoft is nearing its end, with the Senate Permanent Subcommittee on Investigations expected to release its findings soon. While the subcommittee’s findings will not directly impact any of the involved companies, they are likely to play a large role in future changes to tax and accounting rules in the United States.
As reported by The New York Times Thursday, the investigations began over a year ago and are focused on at least a half dozen technology and biotechnology companies. During the course of the inquiry, representatives from Apple, Google, Microsoft, and others testified on their tax avoidance methods, which are largely legal but seen by many to be a significant factor in the increasingly complicated U.S. tax system and economic woes of the nation.
Apple was a primary focus of the inquiry due to its novel accounting principles. Even though the company does a majority of its business within the United States, Apple’s accountants have used various methods to shelter about 70 percent of the company’s profits in overseas jurisdictions, where taxes are often lower. This has resulted in a domestic tax bill that has not increased proportionally with the company’s incredible revenue over the past several years.
Apple also pioneered what is now one of the most popular tax avoidance schemes, the “Double Irish With a Dutch Sandwich.” Perfected by Cupertino’s accountants in the 1980s, the delicious-sounding tactic reduces taxes by routing profits through subsidiaries in Ireland, the Netherlands, and the Caribbean.
Apple has cooperated with the investigation thus far, and strongly denies any wrongdoing. According to a statement by Apple Thursday, the company was “one of the top corporate income taxpayers in the country, if not the largest,” and it “conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules.”
Technology firms are the focus of the investigation due to the relative ease with which they can shift profits overseas. Because much of their revenue is derived from intellectual property and digital transactions, transferring those properties and transactions to legal entities in low-tax jurisdictions allows tech firms to legally record some revenue and profit there, rather than in the jurisdiction where the company primarily operates.
Senator Carl Levin (D-MI), the subcommittee’s chair, has been particularly critical of the companies under investigation:
This subcommittee has demonstrated in hearings and comprehensive reports how various schemes have helped shift income to offshore tax havens and avoid U.S. taxes. The resulting loss of revenue is one significant cause of the budget deficit, and adds to the tax burden that ordinary Americans bear.
Subcommittee Chairman Sen. Carl Levin (D-MI)
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Apple alone is estimated to have deferred payment of taxes on over $35 billion in offshore income between 2009 and 2011, although much of this was kept from the public’s eye until 2012, when The New York Times published an exposé on the issue.
“Apple went out of its way to try and ensure that its tax savings didn’t attract too much public attention, because tax avoidance of that magnitude — even though it’s legal and permissible — isn’t in keeping with the image of a socially progressive company," Martin A. Sullivan, a former economist for the Treasury Department, told The Times.
Beyond Apple, tech companies are also among the least taxed in American business, despite their record profits and growth. A New York Times analysis shows that over the last two years, the 71 tech companies in the S&P’s 500-stock index reported paying worldwide cash tax rates that averaged about 33% less than those of other S&P companies.
In the wake of the U.S. “fiscal cliff” deal and with several important economic decisions to come in the first half of the year, the subcommittee’s findings may have significant impact on the way companies like Apple record business, and may prevent them from repatriating profits that have been long kept overseas.
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