Bipartisan Senators Accuse Apple of Avoiding Billions in U.S. Taxes

| Analysis

A Senate committee investigating U.S. corporate tax rates has accused Apple of using a global network of complex subsidiaries to avoid paying billions of dollars in U.S. taxes. The accusation represents a rare bipartisan front in the U.S. Senate, with both Democrat and Republican senators issuing statements in the accusation.

Examining Apple's Taxes

The timing of the accusation is interesting. It comes one day before Apple CEO Tim Cook and CFO Peter Oppenheimer are scheduled to testify in a hearing titled "Offshore Profit Shifting and the U.S. Tax Code." It also comes a few scant hours after Apple released the text of its planned testimony, in which the company claims precisely and specifically that it does not use tax gimmicks or other methods to avoid U.S. taxes.

The New York Times reported that the Senate committee believes otherwise, accusing Apple of shifting at least US$74 billion in profits outside the reach of the Internal Revenue Service (IRS). That's just between 2009 and 2012.

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” Senator Carl Levin (D-MI), said in a statement. “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.”

Ranking committee Republican John McCain of Arizona added, “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.”

Those are damning words, and a sure signal that Apple is likely to face hostile questions from both sides of the aisle when Messrs. Cook and Oppenheimer appear.

Tim Cook said last week that he wants to use the appearance to propose a major corporate tax overhaul, and in the testimony released on Monday, that plan was revealed to be an elimination of tax loopholes and a lowering of U.S. corporate tax rates and the imposition of "reasonable tax rates" for foreign profits.

It's important to note that behind the bipartisan bluster, the Senators are not accusing Apple of breaking the law.

They did, however, describe some brazen techniques used by Apple to avoid paying taxed on some profits. Specifically, Apple has a subsidiary named Apple Operations International (AOI). It's incorporated in Ireland, but holds its board meetings in California and keeps its money and records in the U.S.

Here's where it gets sneaky: U.S. law bases a company's residency status on where it's incorporated—Ireland in this case. Irish law looks at where a company is managed and controlled—the U.S. in this case.

Apple then used this loophole to say it fell outside the jurisdiction of either country, and didn't file tax returns for $30 billion in revenue for AOI from 2009 and 2012. It's completely legal, but obviously sneaky as all get out, and it's an example of how Apple has been called a pioneer in these international subsidiary shell games.

Apple acknowledged the existence of Apple Operations International in the 16-page PDF it released on Monday. In that document, the company argued that AOI is a holding company that is serving the role for which such companies were originally intended under U.S. law.

"AOI allows Apple to efficiently redeploy funds to meet the needs of Apple’s international operations," Apple wrote in its PDF. "Using this structure, Apple’s Irish subsidiaries have invested billions of dollars to fund customized tooling equipment used to manufacture Apple products. The Irish subsidiary structure has also allowed the Company to transfer funds efficiently to construct retail stores in Europe and elsewhere."

We can expect lots of tit-for-tat arguments along these lines in Apple's testimony on Tuesday. It's not even clear at this point if the Senators are saying anything different than Apple. In Apple's PDF, the company argues that it's using legal means to manage risk, while the Senators aren't accusing Apple of breaking the law.

If this is two sides of the same coin, it remains to be seen what will come out of the hearing. Whether or not Apple is being shifty, the company is far from alone, and the fact is that the U.S. corporate tax system is broken.

The proof of this lies in the reality that it's cheaper for Apple to borrow money to pay out to shareholders than it is to bring profits back to the U.S. There's at least another $1.6 trillion in such money besides Apple's $100 billion being held offshore by other companies, too.

Image made with help from Shutterstock.

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Comments

Tiger

Given the state of Washington DC and the IRS, it comes as no big surprise that people and companies want to avoid sending any more money than absolutely required by the letter of the law.

As Homer Simpson says…DOH!

Bosco (Brad Hutchings)

Of course the Senators aren’t accusing Apple of breaking the law. Even if Apple were, it wouldn’t be Apple’s worst offense here. They’re accusing Apple of being un-American. Part of me wishes that the math would add up so that it would make sense for Apple to bid itself out to whatever country gives it the best long term deal. Then just pack up and move. F the tools in Washington who just money to waste on boondoggle health care debacles and bombing third world countries.

But the real danger to us of a high corporate tax in an competitive international economy? Look at the news of Google complying with a subpoena from DOJ in 2009 over a Fox News reporter who was looking into N. Korea policy. It’s leverage that the government should not have. It’s effectively fascism when companies can be ordered to comply with government whims. This is the crap you’re asking for when you insist on taxing companies rather than investors, and you hit them with punitive rates on top of that.

skipaq

These reports are close to what I expected this probe was all about. It would not be surprising to find this kind of practice being widespread. I also find myself agreeing with Brad on the waste of America’s wealth by the Feds. The insatiable federal beast needs to be starved to half it’s size. They could best begin by simplifying the tax code to the point of eliminating the IRS completely.

ibuck

Unfortunately, it’s probably nothing but Washington bluster that leads nowhere. If a bill were introduced to change the tax code as Apple suggests, there would be a filibuster to prevent any progress on it. We all know which group likes to filibuster.

But this is just a few elected officials, not universal condemnation, as that would send the wrong signal, namely that Congress wants US companies to do well domestically, but not in other countries.

Lee Dronick

This stuff has been going on for a long time. If Congress is looking for someone to blame then hand them a mirror, they write the laws, they take donations from corporations who as we all know are people.

archimedes

So the esteemed Senators are angry that Apple is not paying US tax on products it sells outside the US?

Fair enough - maybe they should consider changing the tax code.

Or are they outraged that Apple is not paying enough Irish tax in Ireland, or that Apple is using money it makes in Europe to pay for R&D expenses (and salaries) in Cupertino rather than Cork, Ireland? If so, I am sure that the Irish people are touched by the Senators’ magnanimity.

 

 

vpndev

It seems that the Senators are mostly steamed about the sweet deal in Ireland. If so, then they should move to Europe and run for European Parliament, or in Ireland. Irish tax is not a proper concern for the U.S. Senate. That said, it does seem that Apple has pushed the envelope by having a company in Ireland with *no* tax residency anywhere.

It is interesting to note their complaint about R&D expenditures and “Cost-Sharing”. In Section 3, Senators say that Apple’s IP is created in the U.S. and therefore revenue derived from it should be recognized there and not in Ireland. But Apple says that the cost and risk of development is shared between the U.S. and international divisions and therefore the reward should be also. In fact, international revenue is creating U.S. jobs - in Cupertino. The Senate’s complaint here is off-base.

ctopher

It is a side show for the American people who are asking themselves, why, if all these corporations are doing so well, am I not. Of course the answer is complicated so lets put on a show and trot out big numbers to get people indignant.

Last year they put Microsoft and H.P. through this, but it didn’t resonate, nor were any laws changed. I think Mr. Cook is doing a smart thing by trying to push for reform, but it’s a no-win situation. Blood will have blood.

barryotoole

We almost elected a man as President who was sneakier than Apple in putting his ‘hard-earned’ money - from the lower taxed dividends, offshore and paying approximately 14% of Federal Income Tax; all legal, of course.

Sy

Seems to me that the Senators are angry that Apple isn’t paying “their fair share”.  Even though I’m a Democrat, I side with Apple here.  If Apple isn’t breaking any laws, and only using the tax codes of various countries to their advantage, then change the tax code.

The Senators forget that this isn’t GM in the 60’s, where stuff “Made in America” was sold all over the world, and taxed here.  This is stuff designed in America, but manufactured in China, 61% of which is sold outside of the US.  THIS is what pisses off Congress. They want this “American” company to pay more taxes.  But it isn’t really an “American” company….it is a multi-national corporation.  So if Apple makes something in China, and sells it to an Italian through their Irish subsidiary, and keep the profits in a European bank, why should the US make them pay taxes on that profit?  If the Senators want Apple to bring that money back into the US, then lower the tax rate for those “foreign” profits.  It’s that simple.

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