US government accuses Apple of dodging billions of dollars in taxes, CEO Tim Cook calls for tax reform

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Apple has almost $100 billion of cash offshore, and the company doesn’t pay US taxes for this large amount. They also recently took on billions in debt to buy back shares instead of bringing over money from their massive offshore cash reserve. On May 21st, Tim Cook testified on behalf of Apple at a Senate hearing regarding the company’s offshore tax practices.

Leading up to the hearing, Cook was interviewed by Politico, and defended Apple ahead of his testimony. “I can tell you unequivocally Apple does not funnel its domestic profits overseas,” he said. “We don’t do that. We pay taxes on all the products we sell in the US, and we pay every dollar that we owe. And so I’d like to be really clear on that.” In the same interview, he also reminded everyone that a new version of an existing Mac, along with many of its components, is going to be manufactured in the US.

A day before the scheduled hearing, Apple released the same statement that Tim Cook would be giving the Senate. In it, the company stated that it is “likely the largest corporate income tax payer in the US, having paid nearly $6 billion in taxes to the US Treasury in FY2012″ and that it “pays all its required taxes, both in this country and abroad.”

But a few hours after they released the statement, a senate probe concluded that Apple “employed elaborate and extensive measures to exploit loopholes in the tax code.” In reference to the company saying that it paid nearly $6 billion in taxes in 2012, Senator John McCain said that, “Apple claims to be the largest US corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.”

During the hearing, the leaders of a US Senate subcommittee criticized Apple for its strategy when it came to taxes. Senator John McCain’s prepared testimony even referenced Apple’s old ‘Think different’ ads:

“By engaging in these elusive corporate strategies aimed at deferring and reducing tax payments, Apple’s tax department has given new meaning to the company’s old slogan: ‘think different.’”

Senator Rand Paul on the other hand, defended Apple and instead pointed at the Congress and current tax code as the source of the problem:

“Tell me what Apple’s done that is illegal. “If anyone should be on trial here, it should be Congress…I say instead of Apple executives, we should have brought in here a giant mirror, so we can look at the reflection of Congress, because this problem is solely and completely created by the awful tax code.”

He was immediately countered by Senator Carl Levin, who said:

“No company should be able to determine how much it’s going to pay in taxes, how many profits they are going to keep offshore, how they are going to bring them back home, using all kinds of gimmicks to avoid paying the taxes that should be paid to this country. They make use of this country, they use our law system, they have a right to lobby here for whatever they want to do, and they do lobby here plenty…this subcommittee is not going to apologize to Apple.”

Tim Cook, in his testimony defended Apple and its overseas cash. “I’m not an unfair person, that’s not who we are as a company or who I am as an individual,” he said. “We pay all the taxes we owe, every single dollar.”

When questioned by the senators regarding the numerous overseas subsidiaries that paid no taxes, Cook and Phil Bullock, Apple’s head of tax operations, said that most of them were set up in the early 80s and were designed to comply with all international and US regulations. They also added that the Ireland-based Apple Operations International was set up to be “an efficient way to manage Apple’s cash.”

Cook and Bullock were also questioned whether these subsidiaries were “functionally managed and controlled in the US,” to which they agreed. But Cook did point out that one of them had 4,000 employees and made a “significant amount of decisions” for Apple’s European operations.

Cook then offered Apple’s help on reforming the US corporate tax code, in order to further provide incentive for more companies to bring money back to the US by lowering the tax rate. Senator Kelly Ayotte asked Cook what he would recommend in regards to changing the tax code, to which Cook responded that he thought the US corporate tax rate should be in the  “mid-20s” percent and the rate for bringing overseas earnings should be in the single-digits.

It remains to be seen whether we’ll see any action on reforming the current US tax code anytime soon, but it seems that Apple, along with its tax strategies are in the clear for now.

[via BloombergPoliticoThe Verge, image via Mike Deerkoski]

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14 comments

  1. Jagr2

    Rand Paul makes sense that a Government should apologize to a corporation for any reason?

    Only a deeply corrupt Government if that is what you are implying. If that is the case it opens up a completely different topic.

    I think this Government has done enough apologizing and extended too much leniency for corporations.

  2. Jagr2

    Let’s stop beating around this enormous bush. The majority of us are paying the tax bill and it is not those chosen few who each year are grabbing a larger portion of the pie and leaving us with diminishing power and assets. I’m sure the majority of us are not in that chosen few group.

    Whether it be taxes , income, or whatever we know which way the balance currently shifts to protecting those who need it least. Is anyone here afraid of a sea of change where the elite few stop getting everything they wish?

    Taxes is a tip of the iceberg. Whose wages are self designated and whose are delegated by someone else? I hardly think Apple or any other entity or wealthy individual needs our protecting. It’s time you worry about your own well being and protection.

  3. Mike

    If any company could save more in taxes than it has to pay lawyers to structure its business to pay those lower taxes, why wouldn’t it do so?

    Silly me, but: simply close the loopholes. Congress. And, simplify the tax code . . . .

  4. Louis

    [@Machar] Careful when using tax terminology — Tax Evasion is an outright crime, referring to tax fraud, such as not declaring income earned (anywhere), or claiming false or non-existent expenses as having been incurred. This will end up with a person being charged with a crime, and probably sent to jail, in other words, it’s not so much about tax, than about the criminology.

    In none of the cases you mentioned, are there any charges of tax evasion against any of these companies.

    Rather, it is of tax avoidance in terms of international vs local tax laws, and will likely come down to interpreting the Double Taxation Agreements between the relevant countries, e.g. between the UK and Ireland, in the Google Europe case currently going on, etc.

    There is no crime involved, it’s about politicians being indignant about losing tax revenue as a direct result of drafting their own tax laws in such a way as to force companies to legitimately move their operations elsewhere.

    As you make your bed, so you must lie in it.

  5. Machar

    Interesting that no mention has been made about the investigations made against Apple, Google, Amazon and others (notably Starbucks) in the UK recently about tax evasion. Personally I tend to agree with the argument that says tighten up tax laws to eradicate these instances.

    However, there’s also the massively hypocritical US stance where on the one hand Barack Obama launches tirades against other countries that are ‘tax havens’ whilst completely ignoring those states in the USA which are exploiting tax laws to the umpteenth degree. Take a look at this article from the New York Times about the four states in the USA that enables the USA to retain its status as one of the top 5 tax havens in the world. http://www.nytimes.com/2012/07/01/business/how-delaware-thrives-as-a-corporate-tax-haven.html?pagewanted=all&_r=0

    When I achieve multimillionaire status I’ll certainly consider setting up a company in Delaware so that I can save those taxes being spent on ridiculous areas and donate them instead to the people and institutions that deserve them. Yay – USA – the safest (and most hypocritical) tax haven of all!

  6. JonE

    I am not an Apple fan by any means, but in this case it’s like the Kettle (the U.S. Legislature) calling the (Apple) Pot Black. And not just because of the tax code.

    So, who benefits most from the current tax codes? That’s right? The body that created the code in the first place. So Ashraf I do understand the fuss. I was always taught that actions speak louder than words, and action is what get recognized, but these days, it seems, that those that talk the loudest and longest are the ones who get recognized. Lots of reasons for that I suppose, but it is true. So all those pointing fingers at Romney, during the election, were just as guilty of what they accused him of. Did Romney do anything illegal? No! And the rest of them probably didn’t either, but we didn’t get to see their returns now did we? The fuss is that these legislators are on a national stage and doing and saying what they think the public wants to hear; villanizing big business. In other words garnering votes. They aren’t necessarily doing what’s right and true, but he or she that speaks the loudest and the longest does get the votes. That’s not to say that we don’t have good legislators that work for the good of the people who elected them, but I think, I could be wrong, but I doubt it, I think they are outnumbered by those legislators that are willing to compromise their principles.

    Anyone who has been paying taxes for any number of years knows that there is a need to overhaul the tax code, but with that said it isn’t all that simple either. How do you overhaul the tax code without over burdening those that employ people while at the same time not overburdening those that are employed? But, if this were only an issue of tax code it may, I say may, be a bit simpler issue.

    The United States used to be the largest industrialized nation in the world; no more. Hundreds of thousands of jobs have moved overseas. The exodus of manufacturing jobs to overseas happened so fast that it created a vacuum that created a sucking sound. And we now wonder why we are in the economic mess we are in today. All thanks to Free Trade legislation by our very own beloved United States legislature; GAP, NAFTA, the whole ball of wax. And so, if the legislature is so determined to villanize companies like Apple all they need to do is repeal all Free Trade legislation. And revise the tax code to give huge tax breaks to anyone willing to create manufacturing jobs, in the U.S. or move their jobs back to the U.S.

    Oh sure, the inexpensive toys we are able to buy now won’t be so inexpensive any more, but the economy would grow and become strong again. And through that strength there will be competition that will drive prices down.

    I’m not an Apple fan, but Apple isn’t doing anything wrong, or illegal; it is doing what hundreds of other companies are doing. Apple and a few hundred other companies are only doing what the U.S. legislature made possible with Free Trade and Tax Code legislation.

    And so, I’m thinking, that we need to be pointing the bony finger at the U.S. Legislature (Congress and Senate) and do a better job ourselves of electing people of integrity to represent us.

    And Ashraf isn’t it a shame that large corporations are more beholding to their shareholders that they are to the people that spend dollars on their products and services? Yes, I know it’s a reality, but it didn’t used to be that way.

  7. jayesstee

    [@Louis] You are 100% correct.

    Here in the UK the tax authorities have things sewn up so that the normal (Joe Bloggs) wage earner cannot avoid paying due tax.  It is deducted at source.
    Even worse, and I assure you this is correct, if the taxman makes a mistake and over-charges you, he(/she) doesn’t have to tell you!  It is the tax payer’s responsibility to find out and challenge the tax man.

    Meanwhile, these big companies pay experts to minimize their tax liability, whilst staying within the law.  The newspapers ‘big’ the story up and our inept Government jumps on the bandwagon to get cheap , popular headlines.

    If they spent as much time sensibly redrafting the tax laws, they might collect more taxes, but thy wouldn’t get the popularist headlines.

    Then they wonder why only a third of the population bother to vote.

  8. Louis

    Well, I’m a tax consultant, and teach tax law, so yeah, Ashraf, you’ve summed it up nicely. There’s even case law from the highest court stating categorically that any taxpayer has the right to legally arrange (structure) it’s affairs as to pay the least tax.

    So right now, the UK Gov is having a similar big scrap with Google basing a large part of its operations in Ireland (yep, apparently same as MS). Reason being simple : Low corporate tax rate and simplified tax code.This is a global issue.

    So no matter how indignant politicians can mouth off — they create the complex tax law, and high tax rate, and entities will move to a more tax friendly town.

    That, dear politicians, is not a crime, it’s a duty to shareholders to ensure the largest after tax profit available for dividends to be declared (shareholders here meaning voters, who voted you in, in the first place).

    Emotional tirades about tax dodging (there’s no such thing !) is empty words. It’s properly called tax avoidance, which is legal, and only exist where tax are perceived to be too complex/too high.

    So instead of crying in your soup, Mr Senator and Mr Congressman, do the right thing and make your tax jurisdiction attractive for taxpayers.

  9. Seamus McSeamus

    Not saying that Apple is right in their actions, but the US government all but invites this sort of thing with all the loopholes in the tax code. Simplify the tax code, strictly define what is and isn’t legal (no gray area), and this sort of thing doesn’t happen.

  10. Ashraf
    Mr. Boss

    I don’t understand all the fuss. How many people willingly pay more taxes than they are legally owed? Please name one person, aside from Mitt Romney who didn’t take some deductions during election year so that his effective tax rate would remain about the 13% he claimed. I understand the emotional reaction to this; after all, who wouldn’t get upset at multi-billion dollar corporations not paying billions of dollars in taxes. However, you must remember: these corporations have shareholders, and they will do whateverthey think is best for their shareholders. Just like a normal person, corporations will always pay less taxes when legally possible because paying taxes = less money for shareholders. It is as simple as that.

    If you want corporations to pay more tax, then change the laws. Stop being greedy bastards using the world-wide tax system and go to a territorial system. Sure that won’t solve all problems, but much of this funneling of profits overseas and companies purposefully keeping money overseas will be mitigated.