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.

<--  Later remarks from the second panel

11:56 a.m.: Phillip A. Bullock, Apple's head of tax operations, answers questions to chairman Levin. Both Cook and Bullock agree that "most" decisions are managed by its Apple U.S. headquarters.

11:55 a.m.: Cook: "I don't consider deferral to be a sham." 

11:53 a.m.: Oppenheimer also notes that it acts in the "best interests of its shareholders."

11:50 a.m.: He also notes that "half of Apple [research and development] is funded through its Ireland operations." He confirms that Irish law dictates that its Irish operations can be incorporated without being a tax resident. "The reason [that its European subsidiaries are not tax residents] does not reduce U.S. taxes at all."

11:47 a.m.: Oppenheimer dips into more details regarding the subsidiaries it has in Europe, Ireland in particular: "Our U.S. tax structure is quite simple [...] Outside the U.S., we try to provide the same industry-leading support that our U.S. customers expect. Apple must follow the laws and the regulations of where we are located."

11:44 a.m.: Cook says: "We pay all the tax we owe. Every single dollar. The U.S. tax code has not kept up to date." But he notes that with an additional but "reasonable" tax on bringing foreign earnings back to the U.S. could result in Apple paying more than it does at present.

11:38 a.m.: Cook deviates from his pre-prepared statement from yesterday and says if Apple considers itself an American company. In a stern voice: "An emphatic yes." 

11:37 a.m.: Cook and Oppenheimer take the oath and are sworn in to the hearing.

Previous remarks follow from the first round of hearings:

10:57 a.m.: Harvey asked simply: "How should technology developed in the U.S. be taxed?" 

10:53 a.m.: "Apple points out in its testimony that it only does this for its international sales," Shay says. "There's nothing preventing this from being done. Microsoft did this with its domestic sales. This is not an Apple bashing exercise."

10:33 a.m.: Stephen E. Shay, an expert from Harvard Law School, said: "The revenue lost to tax base erosion and profit shifting is hard to estimate, but there is compelling evidence the amount lost is substantial," he said. "This revenue loss exacerbates the deficit and undermines public confidence in the tax system. Restoring revenue lost to base erosion and profit shifting would support investing in job-creating growth in the short term and reducing the deficit over the long term."

10:26 a.m.: Harvey said: "Apple recorded approximately $22 billion of its 2011 pre-tax income in Ireland. As a result, 64 percent of Apple's global pre-tax income is recorded in Ireland where only 4 percent of its employees and 1 percent of its customers are located."

10:22 a.m.: J. Richard Harvey, an expert from Villanova University School of Law, giving expert opinion said: "I suspect what Apple has done is within the bounds of the international tax law." He said he almost fell off his chair when he read that Apple does not use tax "gimmicks."

10:16 a.m.: "You can apologize if you wish, but that's not what this committee is about," Levin said, and then proceeded into a raised voice string of abuses that Apple allegedly has committed. "They use our law system, they lobby here, but they don't have the right to avoid paying taxes. Avoiding paying taxes here: it's not right. This subcommittee will not apologize." Politician war of words on deck.

10:13. a.m.: Sen. Rand Paul (R-KY) steps in to defend Apple. "Tell me what Apple's done illegal. I'm offended by this hearing, and that this hearing is bullying one of America's success stories. Congress should be on trial, and the committee should apologize to Apple."

Paul suggested that in helping companies repatriate their cash from offshore units, Congress should change the rate to 5 percent, rather than the 35 percent that Apple claims it would pay.

10:11 a.m.: Apple has utilized U.S. tax loopholes to avoid taxes in the United States on $44 billion in otherwise taxable offshore income over the past four years," he highlighted.

10:10 a.m.: McCain (whose full statement can be found here) continues: "I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America." 

10:08 a.m.: McCain noted that smaller companies are taking the brunt for Apple's tax strategies, by pay a higher tax rate because they can't siphon their funds or profits offshore, McCain added.

10:03 a.m.: Sen. John McCain (R-AZ) said the situation "reflects a flawed corporate tax system," after applauding Tim Cook, the late Steve Jobs, and Apple's products and services. He also said Apple was the country's biggest tax payers in the U.S.

"Apple is one of the biggest tax avoiders in the U.S.," he added. 

10:01 a.m.: Citing President Ronald Reagan: "Individuals and corporations who are not paying their fair share or, for that matter, any share," adding: "These abuses cannot be tolerated."

9:58 a.m.: Apple shifted $36 billion in worldwide sales away from the U.S., Levin said, and paid "no U.S. tax on any of it," avoiding $9 billion in U.S. taxes.

9:53 a.m.: $AAPL is down 1.5 percent just after the Senate hearing began.

9:52 a.m.: Apple uses a "cost-sharing agreement in which Apple's U.S. headquarters develops the technologies and products, and its offshore units get the marketing rights and the profits for international sales. Apple's profits are shifted offshore, leading Apple to pay "almost no income tax." Apple on Monday said it paid $6 billion last year, and will pay more than $7 billion this year.

9:51 a.m.: "Most of the profits are assigned to [Apple's subsidiaries in] Ireland," Levin said, before pointing the finger at the Irish government for "negotiating" terms in which Apple pays less than 2 percent tax in the country. 

9:46 a.m.: "Our legal system has a preference to respect the corporate form." He said that it was a "sham" that AOI and ASI [Apple Sales International] don not owe any U.S. taxes.

9:38 a.m.: Sen. Carl Levin (D-MI), the committee's chair, says he carries an iPhone in his pocket. But he reiterates his comments from yesterday that Apple sought the "holy grail" of tax avoidance by setting up companies in various locations without employees. (His full statement can be found here. Some key parts are below.)

Displaying a chart of Apple's offshore corporate structure, Levin explains that their "activities are entirely controlled by Apple in the United States," but did not appear to have any tax residency in any particular country.

Levin noted that its operations unit, Apple Operations International (AOI), is neither an Irish tax resident, nor is it technically based in the U.S. "It's neither here nor there," he says. Apple Operations International (AOE), "also has no tax home," he says, regarding tax residency. Apple is "exploiting" a tax absurdity, he says. 

9:29 a.m.: Reuters is reporting that Ireland's EU affairs minister Eamon Gilmore said that the Ireland was "not to blame" for Apple's low global tax payments, following claims by the U.S. Senate investigators that the company created subsidiaries in the country.

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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