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.
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.
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