Apple and those pesky tax laws

Apple CEO Tim Cook was in the spotlight Tuesday while being grilled by a Senate committee on Apple’s payment (or lack thereof) of taxes. The company is accused of using overseas accounts to hold cash, making it exempt from U.S. taxes, something the executive strongly denied.

From the Wall Street Journal:

Mr. Cook’s appearance on Capitol Hill followed the disclosure his company has paid no corporate income taxes on tens of billions of dollars in overseas income during the past four years, according to a report from the U.S. Senate’s Permanent Subcommittee on Investigations released Monday.

Sen. Carl Levin (D., Mich.), chairman of the panel, accused Apple of employing “alchemy” and “ghost companies” to escape tax collectors in the U.S. and Ireland, the base of the firm’s international operations outside the Americas.

“Apple has sought the Holy Grail of tax avoidance,” said Mr. Levin said. “Apple is exploiting an absurdity, one that we have not seen other companies use.”

Countered Mr. Cook: “There’s no shifting going on…We pay all the taxes we owe, every single dollar.”

Apple used technicalities in Irish and American tax law to pay little or no corporate taxes on at least $74 billion over the past four years, according to the Senate panel’s findings. The investigation found no evidence that Apple did anything illegal. Aides to the subcommittee said they have never seen a company use a subsidiary that didn’t owe corporate income taxes to any country.

USA Today offered the most concise summary of the tax issues:

The testimony came in response to the Senate panel’s Monday report that said Apple avoided tens of billions of dollars in U.S. taxes on its income by shifting the funds through a global web of offshore entities — including three that had no tax residency in any nation.

The three entities were run by some of Apple’s top executives but were located, on paper, in Ireland, though they in some cases had no employees. One reported $30 billion in net income for 2009-2012, yet filed no corporate tax return and paid no income taxes to any government during those years, according to the report.

Another affiliate received $74 billion in sales income over four years, but paid taxes “on only a tiny fraction of that income,” the report said.

Apple also transferred economic rights for some of its intellectual property to its offshore affiliates in low-tax jurisdictions, saving tens of billions of dollars in levies, the Senate panel concluded in its latest look at corporate tax avoidance tactics.

The company then went a step further by using U.S. tax loopholes to avoid federal taxes on $44 billion in otherwise taxable offshore income from the intellectual property rights during the last four years, the report said.

And many people aren’t happy about their accounting or use of the current tax code, according to the New York Times:

J. Richard Harvey Jr., a professor at Villanova Law School, estimated that Apple’s legal maneuvering had saved the company $7.7 billion in potential American taxes in 2011.

“Apple is an iconic U.S. multinational corporation that has enjoyed extraordinary financial success,” he said. “In addition to demonstrating excellence in designing, building and selling consumer products, Apple has been very successful at minimizing its global income tax burden.”

For example, in 2011, 64 percent of Apple’s global pretax income was recorded in Ireland, where only 4 percent of its employees and 1 percent of its customers were located, Mr. Harvey said.

While Apple has repeatedly insisted it does not engage in “tax gimmicks,” Mr. Harvey was dubious. “Apple does not use tax gimmicks? I about fell off my chair when I read that,” he said.

While Mr. McCain, the panel’s top Republican, and Senator Carl Levin, a Democrat, were critical of Apple, the company was not without its defenders on the panel.

“I’m offended by the spectacle of dragging in Apple executives,” said Senator Rand Paul, a Kentucky Republican. “What we need to do is apologize to Apple and compliment them for the job creation they’re doing.”

USA Today points out that Cook wasn’t without his own agenda for the hearing. He used it to make recommendations about ways to overhaul the tax code:

Cook also sketched a proposal for a revenue-neutral simplification of federal tax laws that would lower corporate tax rates to roughly 25% and create a “single-digit” percentage tax on foreign earnings that multinational U.S. firms bring home to use for job creation and economic investment. On paper, U.S. corporations are taxed 35% on worldwide income. But levies on overseas income are deferred until the funds are brought back to the U.S.

Such a change “would likely result in an increase in Apple’s U.S. taxes,” said Cook, who noted that the company’s $6 billion federal tax payment last year likely made it America’s largest corporate tax payer.

No matter the outcome of the hearings, it does raise the interesting point that individuals continue to bear the burden of supporting the government while cash-flush corporations are able to defer some taxes.

This just looks like all the more reason that Congress should tackle that overhaul of the tax code, but given the current issues at the Internal Revenue Service, that may not be possible. At least Congress is hopefully hearing the case for changing the rules for everyone, especially those corporations with lots of overseas profits.