Apple, Congress spar over tax: Cook testifies, lawmakers unsatisfied

Apple, Congress spar over tax: Cook testifies, lawmakers unsatisfied

Summary: Apple says it has a "what you see is what you get" approach to its taxes, but Congress disagrees, believing it sought the "holy grail of tax avoidance." Apple's Tim Cook testified.

TOPICS: Apple, Government US
Tim Cook testifies to the U.S. Senate (Image: via live stream)

Apple chief executive Tim Cook will testify to the U.S. Senate Permanent Subcommittee on Investigations later on Tuesday, to explain how his company manages its tax arrangements.

While the iPhone and iPad maker claims it does not use "tax gimmicks" and pays roughly $6 billion into the U.S. kitty, Congress has accused the company of seeking out nefarious ways of avoiding paying the full amount of tax in the country its main headquarters are based.

The tech giant denies these claims, and actively welcomes tax reform in the United States.

Apple claimed it pays more taxes than any other company in the U.S., but investigators say Apple used shady methods to avoid paying taxes, such as creating a number of subsidiaries that contained no staff apart from top executives. Most companies that seek to avoid paying the full amount of tax open bank accounts in so-called tax "havens". 

Much of the testimony today will be reeled out from a pre-prepared statement, which was published on Monday by Apple on its website. However, this will be an opportunity for lawmakers on the Hill to grill the Apple boss on its tax affairs.

Highlights from the hearing:

  • Ireland's EU affairs minister Eamon Gilmore said that the Ireland was "not to blame" for Apple's low global tax payments.

  • Sen. Carl Levin (D-MI), the committee's chair, says that Apple is "exploiting" a tax loophole, but it is important to note that Apple is not breaking the law via tax evasion -- but rather is employing methods to avoid tax on international sales.

  • Apple is one of the biggest taxpayers in the United States, paying $6 billion in 2012 and expecting to pay $7 billion during this fiscal year. However, Levin believes that by shifting $36 billion away from American soil, the iPad and iPhone maker avoided an additional $9 billion -- making the firm one of the "biggest tax avoiders." Apple allegedly kept $44 billion in otherwise taxable offshore income away from the U.S. over the past four years.

  • Both Apple and Sen. John McCain (R-AZ) believe the situation has come about due to a flawed corporate tax system; the former due to loopholes waiting to be exploited, the latter due to the 35 percent tax imposed on transferring funds to the U.S. 

  • Sen. Rand Paul (R-KY) called Apple "one of America's biggest success stories," highlighting the fact nothing illegal has been committed. The Senator suggests that the current 35 percent tax markup be reduced to five percent. 

  • Expert witness J. Richard Harvey said he suspects what Apple has done is "within the bounds of the international tax law." Stephen E. Shay with the Harvard Law School, believes allowing such tax avoidance to continue undermines public confidence in the system. 

  • Apple CEO Tim Cook said that Apple is absolutely an American firm. "We pay all the tax we owe. Every single dollar." Cook does not believe the company's financial practices are unfair to smaller companies that cannot use the same loopholes. 

  • Cook said Apple could support a "reasonable tax rate" which would bring back capital to the U.S.

  • Sen. Rob Portman said Apple and Samsung pay "effectively the same tax rate" globally. Oppenheimer suggested that while Samsung is able to bring its funds back to South Korea, Apple "cannot" due to high taxation. 

  • Cook denies telling Levin's staff that Apple will refuse to bring funds home unless tax rates are changed. However, Cook "has no current plan" to do so.

  • Levin commended Cook on his company's success, but remained unsatisfied -- saying that "It's not right." 

Live blog of the hearing:

Editor's note at 1:32 p.m.: That's the end of Cook, Oppenheimer and Bullocks' testimony. Thanks for tuning in. 

1:31 p.m.: "Folks, it's not right. That's not right," Levin said talking about Apple's 2008-2009 decision. "I know it's your intention — I applaud your constructive view — but it's important for us to write the laws, and it's important for Cook et al for us to also fix those laws."

"I want to commend your company for all the work that it does," Levin added. Cook concluded: "Thank you, Mr. Chairman."

1:30 p.m.: "From the bottom of my heart, we cannot continue a system where a multinational company can make a decision sitting down in 2008-2009, as to where the profits are going to flow," Levin said. Citing the benefits of living in the U.S., research and development credits and patent protection, "the profits shifted away from the reach of the U.S. tax man," Levin reiterated.

1:26 p.m.: Levin holds up his iPhone. "95 percent intellectual property is in the U.S., but most of the company's profits are in Ireland." Cook said: "We're proud that our research and development is in California."

1:24 p.m.: "But you didn't have to continue that agreement. You were in control. Your company. It was your decision. But don't kid us over the implications over what this means to America's revenue," Levin went on. "You made that decision in 2008-2009 to continue that arrangement."

Oppenheimer defended the move, saying that this was how Apple was created. Levin said as a result of continuing that led to most of the company's profits are now in three Irish companies.

1:22 p.m.: Levin isn't letting the 2008-2009 agreement go. "Three Apple employees signed that agreement. It shifted the economic rights to three Irish companies, under Apple Inc.'s control, that don't pay taxes in the U.S."

"I respectfully disagree with that," Oppenheimer said. Levin is not letting this go. "It was the same rights that continued an earlier arrangement over the past 30 years."

1:19 p.m.: The chairman said Cook told Levin's staff that Apple will not bring the cash home unless the tax rates are changed. "I don't remember saying that," Cook said. Levin elaborated, and Cook further explained: "I have no current plan to bring [that cash] back under the current tax rates."

1:17 p.m.: Levin says 75 percent of sales earned by these three Irish subsidiaries. "Bring it home," he said. "You do this with Mexico and Canada. It's your decision, your judgment, not to bring those profits home. $100 billion dollars plus stashed in those three Irish companies."

"Will you bring [the profits home]?" Levin asked.

1:11 p.m.: Levin denies Cook's bid to add some "comments" on the shifting of economic rights — the intellectual property rights — signed by subsidiaries that are owned by Apple. Bullock "disagrees with the categorization."

Facts first, context later, said Levin. Cook signed the agreement that signed over its intellectual property overseas to three Irish companies.  

1:11 p.m.: Levin starts talking. Starts immediately with a sense of being less optimistic about the company's tax system, unlike others, it seems. "You've shifted that golden goose [intellectual property] in Ireland," he asked.

1:09 p.m.: "It would not be helpful," said Oppenheimer. "Not good," said Cook, regarding changing the tax system without changing the corporate tax rate.

1:03 p.m.: Sen. Rob Portman (R-OH), describing himself as a "recovering lawyer," is speaking about tax reform. Cook confirmed that Samsung was a "major competitor." Apple and Samsung pay "effectively the same tax rate" globally, Portman said. 

"Samsung is able to freely move its capital back to Korea," Oppenheimer said. He agreed that it was "worse for Apple" because the company can't bring it back to the U.S. 

12:58 p.m.: Talking about intellectual property protection, particularly in China, Cook said: "We've faced significant issues in countries other than China." He paused then added: "The U.S. courts system is currently structured in such a way that it's very difficult to give the protection a technology company needs. The cycles are very fast. Foreign competitors or even those in the U.S. can quickly take intellectual property, and they move on before the court rules."

"We require more work on intellectual property in the U.S.," he added, noting that countries should speak to each other to work on a global solution. 

12:57 p.m.: "We believe the tax code should be reformed for over a long period of time," Cook said. "A permanent change to me is materially better than a tax holiday."

12:54 p.m.: Sen. Kelly Ayyotte (R-NH) asked Cook about the rate of tax that should be imposed on cash being brought back to the U.S. from overseas. Cook said: "U.S. sales should be in the mid-20s, as all the expenditures are dropped down. Bringing back foreign earnings, to incentivize this, this should be in the single figures."

Cook added: "Many would be in a revenue neutral situation. It would be great for growth in this country." He also confirmed that overseas cash cannot be used to invest anything in the U.S.

"I put my whole weight of force behind it," talking about reforming the U.S. tax code. "All ships rise with the tide."

12:53 p.m.: Johnson asked Bullock about tax paid in foreign countries. "Apple paid over $900 million in income tax in fiscal 2012. It's significantly larger based on previous years," but said he didn't have those figures readily available. He said 50,000 out of Apple's 70,000 employees are in the U.S. "This is influenced by our retail stores. 260 retail stores are here [in the U.S.]"

12:51 p.m.: $AAPL stock has broken into the positive. It's now trading above its Tuesday opening price. Shareholders appear pleased.

12:48 p.m.: Cook passes the "who are its shareholders" question to Oppenheimer. "Our top 50 shareholders own about half the company, including public retirement systems, pension systems, and we also have individual retail shareholders," he says.

12:47 p.m.: Sen. Ron Johnson (R-WI) asked Bullock, noting that Apple "probably" has an IRS auditor "at all times." Bullock confirmed this is the case in the U.S., and that transfer prices and corporate structure for compliance. "They look at it in detail."

12:46 p.m.: Cook on its margins and international sales: "Apple's Mac business has larger sales in the U.S. than internationally. The iPhone became a larger international business than the U.S. The iPhone has higher gross margins. It's logical that the international margins are greater than the U.S. margins."

12:43 p.m.: McCaskill said there is a decision being made based on where the sale is versus where the intellectual property is. Cook said: "Today, everything that we sell in the U.S. is taxed in the U.S. In a foreign country, it's taxed in the local market, and then if it's one of the countries that is being sold by Ireland, it's served by an Irish subsidiary."

Bullock answered on Cook's behalf: "100 percent of the profits on any sale to a customer in the U.S. [...] is fully taxed in the U.S. There are no outbound payments going offshore."

12:40 p.m.: "The problem with repatriating cash is that it's at the 35 percent tax rate." Cook didn't say "zero tax," but said Apple could support a "reasonable tax rate" which would bring back capital to the U.S. and would be great for the economy.

McCaskill said, "what if Apple left California [and the U.S.]?" Cook said: "We're proud to be an American company. Most of our research and development in California." But, above all, he said, "it's who we are." He said it has "never entered our minds" to move out of the U.S.

12:37 p.m.: Sen. Claire McCaskill (D-MO) said Ireland gave Apple a 2 percent tax rate. Cook said in 1980, when Apple first went there, it was a fraction of the size. As a part of "recruiting" Apple, Ireland gave them a reduced tax rate. Since then, Apple has grown. "The skills of our people there is fundamental in understanding the European market," Cook added.

12:35 p.m.: Senate panel has reconvened. The lawmakers have taken their seats and Cook, Oppenheimer and Bullock have taken theirs.

12:14 p.m.: Cook on McCain's question: "This is a very complex topic. I'm glad we're having this discussion. But we don't see this as unfair. We're not unfair as a company. I don't see in that way." Jokingly, just before his time runs out, McCain said: "Why the hell do my apps on my iPhone keep updating all the time?"

12:11 p.m.: Cook also confirmed that its European/Irish subsidiaries "do not" have tax residency in any country, but isn't sure on the difference between "tax presence" and "tax residency."

12:10 p.m.: AOI is a "holding company," Cook confirmed. "It's nothing more than a company set up as a subsidiary set up to manage cash that has already been taxed." He stated: "AOI does not reduce our U.S. taxes at all."

12:07 p.m.: Cook: "Our tax rate is low outside the United States. But this is for products outside the United States, not within. There's no shifting going on."

12:06 p.m.: Cook confirms to McCain that he was not "dragged" to Congress. McCain asked if Apple has "legally taken advantage, internationally and domestic, of the tax code." But, could the conclusion be drawn that Apple has the advantage over smaller companies? Cook said: "No, that's not how I see it."

12:03 p.m.: Levin asked if its Irish subsidiaries, despite earning tens of billions, have not filed an income tax return. "That is correct. That is not subject to U.S. tax, under statute and regulation. Apple Inc. has paid on interest paid by AOE."

12:01 p.m.: Bullock on its European/Irish subsidiaries: "It does not have tax residency. U.S. taxes are paid in full on its interest in full." He's talking about the interest on the cash generated by its subsidiaries in Ireland. "ASI and AOE was subject to U.S. tax," said Bullock. He stumbled, but said "approximately yes" to 2 percent tax rate.

12 p.m. midday: $AAPL stock has bounced back to close to its market opening price. It now currently stands at about 0.7 percent down.

$AAPL trading at 12 p.m. midday on Tuesday. (Image: Google Finance)

Additional remarks from the first panel -->

Topics: Apple, Government US

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  • Face off - I've seen that film

    Isn't that the one where the good guy wins?

    My guess is that the US Government has neither the intellect; integrity nor determination to succeed. (The UK Government doesn't either, in case you were thinking this was a nationalistic comment.)

    Unfortunately this is not Hollywood - it's real life :-(

    "Fix the system." Oh boy how I'd like to.
    Has the US Government ever levied 'windfall taxes'.
    How about, instead of taking money from individual Cyprus account holders, we just plunder the coffers of global corporates?
    • Interesting you use the word "plunder"

      You seem to imply that the government is the good guy here. And then you use the word "plunder" (i.e. "The violent and dishonest acquisition of property"). So you either acknowledge that arbitrarily taking money from corporations (or anyone) is dishonest - or you have no problem with violently taking money from those who rightfully earned it.

      Taxation is legalized plunder, make no mistake about it. While "greedy" corporations must convince customers to spend their money on their products, the "good guy" government uses tax agents with guns to forcibly separate you from your money.

      Tax "avoidance" is not immoral. It's not even illegal as long as the law is followed. The government sets up the rules and then has the audacity to chastise those that follow it?

      Given the recent events showing how corrupt our government is, keeping more of your own money and out of the hands of the government may be one of the most patriotic things we can do right now.
      • Absolutely!

        I agree with you Marcel, 100%!
      • So is devaluing labor and using predatory means to destroy comptition

        Like price wars, which also drive down wages... or using illegals, or engaging in H1B fraud.

        You too make assumptions - that no corporation can ever do wrong.
        • Umm

          Who did this? I see no assumptions made. I see general statements about taxation. Besides, it's not the job of government to use taxation to punish anyone, although the current (and yes, past) administrations like to do so. It's in the regulation and penalty areas that you punish wrong-doing after due process. Using the government to somehow "right great wrongs" is part and parcel for the Left. It also betrays their loathing for freedom. Freedom cannot be accomplished through government. Freedom is the absence of tyranny via government.
          • well

            "via" should be "from."
          • How about discourage?

            Or maybe setting tax rates to whatever the market will bear (maximizing revenue)?
            John L. Ries
        • A=A

          Price wars are good business competition. Using illegal alien invaders for labor is, by definition, against the law. Would that the federal government enforce our border laws as well as hiring laws. Fraud is, again, fraud and therefore illegal.

          A corporation cannot do wrong, in doing *business*. But, illegal practices in business are no different than illegal practices by private citizens. But, illegal practices are not business.
          The problem comes in where government oversteps the authority ceded it by the people. If, say, the gov't demands that companies provide health care for employees, or that companies sell the same amount of a product to any customer, or create regulations which favor one specific business or general industry over another, such as the war on oil vs the "green energy" aspect of the environmental religion being foisted upon us in violation of the 1st Amendment, then companies are right and justified in doing everything in their power to evade the arrogant overstepping of the authority ceded to government.

          Sir Thomas More: "Listen, Meg, God made the angels to show Him splendor, as He made animals for innocence and plants for their simplicity. But Man He made to serve Him wittily, in the tangle of his mind. If He suffers us to come to such a case that there is no escaping, then we may stand to our tackle as best we can, and, yes, Meg, then we can clamor like champions, if we have the spittle for it. But it's God's part, not our own, to bring ourselves to such a pass. Our natural business lies in escaping." - A Man for all Seasons

          The government has no "right" to tax dollars (in fact, it has no "rights" whatsoever). The natural order for Americans is for citizens and their businesses to keep the benefits of their talent, skill and industry. Only the barest minimal amount necessary for the government to perform its Constitutionally allotted tasks should ever be granted to government.

          Government's don't exist for their own sake; they exist for the benefit of the citizenry. For the common defense, there is the war department. To settle disputes, there is the judicial system. To maintain cultural cohesion, there is the state department. That's it.
          The government doesn't exist to provide for my needs, or to protect me from my own foolishness, or above all, to counterbalance another's prosperity with my own.
          Apple's prosperity did not come from the coffers of government but from the creativity and industry of its employees, and in particular the genius of its founder. In avoiding paying more than the $6 billion in taxes they already pay, all Apple is doing is keeping the fruits of their talent, industry, skill and creativity from a parasite that did nothing that Apple could not do for itself, and could not possibly spend as responsibly or productively as Apple.

          Francisco D'Anconia: "Blood, whips, chains... or dollars.Take your choice; there is no other. And your time is running out" - Atlas Shrugged pt 2
          • Well said!

            Your comment is right on the mark! These hearings show that the real unscrupulous greed is on the part of the US tax and spend (Democrat) Senators and Congressional representatives. They concentrate on taking more and more, when they should be working to get spending under control. They fail or refuse to understand the proven fact, that lower tax rates result in a stronger and more active economy that generates higher profits and mare dollars in taxes even at lower tax rates!
        • ???

          Does the union actually sign your paycheck or something ??? WHACKO
      • Theres always the old way steel blood buring villiges etc.

        Tax is the government it must exist for government to exist or else pound steel and build longboats.
      • Are you suggesting?

        That government be funded solely from voluntary contributions? I think even the Libertarian Party dropped that plank from their platform some years ago.
        John L. Ries
        • Ridiculous

          Taxpayers have an obligation to pay the tax they're legally required to, nothing more.

          Govt creates the tax legislation, full of loopholes to appease favoured interest groups, then complains when these are used; feigning moral outrage. Their hypocrisy is sickening.
          Richard Flude
          • I'll accept that

            But his claim was that taxation was legalized plunder, which is an entirely different argument.
            John L. Ries
      • Agree!

        Well said!
  • USA is close to be flat broken

    So the government has two option:
    a) to force taxes over big business.
    b) to force taxes over small business and citizen.

    Since b) is in progress then a) its a matter of time.
    • Option three

      stop the out of control spending.
      • Agreed !!!

        Funny, how many bullets and drones a bankrupt government can buy, isn't it?
        • The FED

          Got all the money then now and forever. Bankrupt government is silly thing to say after all it still has citizens. The Fed cant go bankrupt it is not possible with fractional reserve banking.
          • The money it prints can become worthless.

            It has happened many times throughout history. If confidence in the value of the money drops to near nothing then yes, the government in essence becomes bankrupt.