Created on Tuesday, 21 May 2013 Written by MARCY GORDON,AP Business Writers PETER SVENSSON,AP Business Writers
WASHINGTON (AP) — Apple's CEO is disputing assertions by a Senate panel that the company avoids billions of dollars in U.S. taxes by shifting profits to foreign affiliates.
Apple CEO Tim Cook testifies on Capitol Hill in Washington, Tuesday, May 21, 2013, before the Senate Homeland Security and Governmental Affairs Permanent on Investigations as the panel examine the methods employed by multinational corporations to shift profits offshore and how such activities are affected by the Internal Revenue Code. Lawmakers want to know the tax strategy of how Apple, the world's most valuable company, based in Cupertino, Calif., holds a billion dollars in an Irish subsidiary as a tax strategy, according to a report issued this week by the subcommittee. (AP Photo/J. Scott Applewhite)
Tim Cook testified at a hearing Tuesday by the Senate Permanent Subcommittee on Investigations, which released a report Monday attacking Apple's tax practices.
"We pay all the taxes we owe — every single dollar," Cook said. "We don't depend on tax gimmicks."
Cook, who is more accustomed to commanding a stage in front of investors and techies than facing a congressional committee, took a defensive tone with his opening statement. He punched out words when stressing the 600,000 jobs that the company supports while adding that Apple is the nation's largest corporate taxpayer. Cook advocated an overhaul of the U.S. tax code.
At the same time, Cook said he was happy to appear in the spotlight of a congressional hearing to be able to give Apple's side of the story.
"I'm saying it's who we are as people. ... Wherever we are, we're an American company," Cook insisted when asked about Apple's use of affiliate companies in Ireland.
The $6 billion in taxes that Apple says it paid in fiscal 2012 works out to $16 million a day.
The subcommittee's report estimates that Apple avoided at least $3.5 billion in U.S. federal taxes in 2011 and $9 billion in 2012 by using its tax strategy, and described a complex setup involving Irish subsidiaries as being a key element of this strategy.
But Cook said the Irish subsidiaries don't reduce the company's U.S. taxes at all. Rather, they manage cash earned overseas. If that cash were to be repatriated to the U.S., it would be subject to U.S. taxes.
Like other multinationals, Apple choses to keep cash overseas so as not to pay the 35 percent U.S. corporate tax rate. Apple is holding overseas $102 billion of its total $145 billion in cash.
Cook reaffirmed Apple's position that given current U.S. tax rates, it has no intention of repatriating its overseas profits to the U.S.
He appeared with Apple CFO Peter Oppenheimer and Head of Tax Operations Phillip Bullock.
Sen. Carl Levin, D-Mich., the panel's chairman, said Apple's use of loopholes in the U.S. tax code is unique among multinational corporations.
Apple uses five companies located in Ireland to carry out its tax strategy, according to the report. The companies are located at the same address in Cork, Ireland, and they share members of their boards of directors. While all five companies were incorporated in Ireland, only two of them also have tax residency in that country. That means the other three aren't legally required to pay taxes in Ireland because they aren't managed or controlled in that country, in Apple's view.
The report says Apple capitalizes on a difference between U.S. and Irish rules regarding tax residency. In Ireland, a company must be managed and controlled in the country to be a tax resident. Under U.S. law, a company is a tax resident of the country in which it was established. Therefore, the Apple companies aren't tax residents of Ireland nor of the U.S., since they weren't incorporated in the U.S., in Apple's view.
"Apple is exploiting an absurdity," Levin said at the start of the hearing.
The spotlight on Apple's tax strategy comes at a time of fevered debate in Washington over whether and how to raise revenues to help reduce the federal deficit. Many Democrats complain that the government is missing out on billions of dollars because companies are stashing profits abroad and avoiding taxes. Republicans want to cut the corporate tax rate of 35 percent and ease the tax burden on money that U.S. companies make abroad. They say the move would encourage companies to invest at home.
The subcommittee also has examined the tax strategies of Microsoft Corp., Hewlett-Packard Co. and other multinational companies, finding that they too have avoided billions in U.S. taxes by shifting profits offshore and exploiting weak, ambiguous sections of the tax code. Microsoft has used "aggressive" transactions to shift assets to subsidiaries in Puerto Rico, Ireland and Singapore, in part to avoid taxes. HP has used complex offshore loan transactions worth billions while using the money to run its U.S. operations, according to the panel.
Levin and McCain are proposing legislation to close loopholes in the tax code.
Thanks largely to the iPhone, Apple is one of the world's most profitable companies. It earned $41.7 billion in calendar year 2012. It's neck and neck with Exxon Mobil Corp. as the world's most valuable company.
However, Apple's Irish subsidiaries date back thirty years, to the time when the Macintosh computer was Apple's banner product, and its profits were a fraction of 1 percent of today's figure.
The tone of the hearing turned tense before the Apple executives appeared, as Sen. Rand Paul, R-Ky., an anti-tax hawk who reflects tea party sentiment, insisted that the subcommittee apologize to Apple for unfair scapegoating.
"If anyone should be on trial here it should be Congress ... for creating a bizarre and byzantine tax code," said Paul. "If you want to assign blame, this committee needs to look in the mirror and see who created that mess."
Levin countered angrily that no such apology would be forthcoming. "Apple's a great company, but no company should be able to determine how much it's going to pay in taxes ..... by using gimmicks," he said.
And Sen. John McCain of Arizona, the subcommittee's senior Republican, condemned Paul's remarks as "offensive" for accusing Levin of bullying Apple executives.
Irish Prime Minister Enda Kenny on Tuesday denied the assertion in the subcommittee's report that Apple had negotiated an Irish corporate tax rate of less than 2 percent. All companies pay the standard rate of 12.5 percent on profits from Irish operations, the prime minister said.
"Reports of lower effective tax rates appear to arrive at their figures by running together the profits earned by group companies in Ireland and in other jurisdictions," Kenny said.
Associated Press writer Shawn Pogatchnik in Dublin contributed to this report.