Tax
Apple executives face Senate grilling
Tim Cook, Apple’s chief executive, faces a grilling by a US Senate committee on Tuesday over claims that the company exploited loopholes to avoid paying billions of dollars in tax.
Mr Cook and two other executives – including Peter Oppenheimer, Apple’s chief financial officer – will appear at 9.30 Washington time at a hearing set to shine a harsh political spotlight on the US technology group.
On Monday the Senate permanent subcommittee on investigations released a 40-page report on Apple’s international tax structure which accused the company of using Irish subsidiaries that are not tax residents of any country.
“Apple sought the Holy Grail of tax avoidance,” said Carl Levin, the Democrat who chairs the panel and will lead the hearing. “It has created offshore entities holding tens of billions of dollars, while claiming to be tax-resident nowhere.”
Apple, in testimony prepared for Tuesday’s hearing, denied it used “tax gimmicks” to lower its payments and claimed to be the largest payer of corporation tax in the US, accounting for $1 in every $40 paid last year.
The company also denied that Apple Operations International (AOI) was a “shell company”, arguing that the entity had been set up to manage its “global flow of funds” and that its activities did not reduce Apple’s US taxes.
Apple also defended its practice of shifting part of the costs of its research and development to Ireland, even though it conducts “virtually all” of the work in the US – a technique that was attacked as a tax-avoidance scheme by the committee. The arrangement was “authorised by US law and complies with all US regulations”, Apple said.
Monday’s Senate report said Apple’s elaborate use of loopholes for international profits allowed it to save US tax on $44bn in “otherwise taxable offshore income” in the past four years. But the committee said there was no indication Apple had done anything illegal in attempting to minimise its tax bill.
“This is the definition of a tax loophole, technically something which may be in compliance with the law but violates the spirit of the law,” Mr Levin said.
Staff for the committee said the most surprising findings included the use of the non-tax resident subsidiaries in Ireland, through which the bulk of Apple’s international profits are funnelled.
One of them, Apple Sales International, paid virtually no taxes on sales of $74bn between 2009 and 2012. In 2011, it paid $10m in taxes on $22bn in profits, or a rate of 0.05 per cent, according to the panel.
Another unit with no tax home, AOI, did not file an income tax return in any country over the past five years, despite income of $30bn between 2009 and 2012, the investigation found. Established in 1980, AOI holds board meetings in the US but has no physical presence or employees.
“I have never seen anything like this, we don’t know of anyone who has seen anything like this,” Mr Levin said.
In addition, the investigators found that Apple cut a special deal with Ireland to apply a tax rate of less than 2 per cent on any profits that are taxable in the country, well below the 12 per cent Irish corporate tax rate.
Apple is the third big US technology group to face scrutiny from the Senate investigations panel after Microsoft and Hewlett-Packard – and committee staff said Apple did co-operate with the probe.
The disapproval of Apple’s tax practices was bipartisan. John McCain, the subcommittee’s top Republican, told reporters Apple had orchestrated a tax scheme that was “egregious” and “outrageous”.
“A company that found remarkable success by harnessing American ingenuity and the opportunities afforded by the US economy should not be shifting its profits overseas to avoid the payment of US tax, purposefully depriving the American people of revenue,” Mr McCain said.
The scrutiny of Apple may spark further debate on the structure of the US’s tax code. Congress and the White House are debating whether to lower the 35 per cent corporate tax rate.
It could also stoke further discussion about international co-ordination to stem tax avoidance, which is expected to be a major theme at the upcoming G8 summit in Northern Ireland.
(Published by Financial Times – May 21, 2013)