Senate Subcommittee Accuses Apple of Tax Gimmicks

Apple avoids billions in U.S. taxes through creative, unique tax structures, and even negotiated a special corporate tax rate of less than 2% with the Irish government, according to a report released by the Senate Permanent Subcommittee on Investigations, ahead of its Tuesday hearing featuring CEO Tim Cook.

“Over a four-year period, from 2009 to 2012, this arrangement facilitated the shift of about $74 billion in worldwide profits away from the United States to an offshore entity with allegedly no tax residency and which may have paid little or no income taxes to any national government on the vast bulk of those funds,” said the committee report.

The report also accuses Apple of using “multiple U.S. tax loopholes” enabling the tech company to amass offshore $102 billion of its $145 billion in holdings. Federal tax law allows companies to defer paying federal taxes on offshore profits until companies return that money to the U.S.

Apple’s first-tier offshore affiliate, Apple Operations International, has a mailing address in Cork, Ireland and has never had employees in its 30-year history, according to subcommittee staff.  From 2009 to 2012, Apple Operations International received nearly $30 billion in dividends from other international affiliates, comprising 30% of Apple’s worldwide net profit, said the report. Over that period, Apple Operations International failed to pay any corporate income tax to any government, according to the subcommittee.

In prepared remarks released Monday by Apple, Cook defended Apple Operations International calling it “a holding company that performs centralized cash and investment management of Apple’s foreign, post-tax income The existence of AOI does not reduce Apple’s US tax liability.”  Cook also denied his company uses tax gimmicks and highlighted its nearly $6-billion 2012 federal tax bill.

“Apple complies fully with both the laws and spirit of the laws. And Apple pays all its required taxes, both in this country and abroad,” said Cook.

Subcommittee staff investigators acknowledge Apple’s tax structure may be unique, though it’s hardly out-of-bounds or even uncommon for international businesses.  This subcommittee said it has also examined Microsoft and Hewlett Packard’s international tax structures.  The reports are designed to highlight vulnerabilities of U.S. corporate tax law, said committee staff members.

Cook agreed, and called for a dramatic simplification of the corporate tax system that is revenue neutral, eliminates all tax expenditures, lowers tax rates and implements a reasonable tax on foreign earnings that allows free movement of capital back to the U.S.”

Democratic committee staff members argued corporate tax income has fallen as a share of federal revenues, making the case to revise the tax code to raise revenue.