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.

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


Charlie Osborne, a medical anthropologist who studied at the University of Kent, UK, is a journalist, freelance photographer and former teacher. She has spent years travelling and working across Europe and the Middle East as a teacher, and has been involved in the running of businesses ranging from media and events to B2B sales. Charli... Full Bio

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Zack Whittaker is a writer-editor for ZDNet, and sister sites CNET and CBS News. He is based in the New York newsroom. His PGP key is: EB6CEEA5.

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