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:
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.