Senate Slices into Apple’s Core on Offshore Tax Shelters
Policy + Politics

Senate Slices into Apple’s Core on Offshore Tax Shelters

iStockphoto/The Fiscal Times

Apple’s designers and engineers clearly aren’t the only creative whizzes at the company. The accountants and money managers have also gotten inventive in trying to help the company avoid paying taxes on billions in income, based on the findings of a Senate investigation released this week.

The cleverness of those designers, coders and marketers have helped Apple become the most profitable tech company in the country – and the most valuable brand in the world, according to a BrandZ ranking released Tuesday. The accountants' handiwork helped, too, but it also landed CEO Tim Cook and other executives in the congressional hot seat Tuesday and made Apple “Exhibit A” in an ongoing debate over corporate tax reform.

“It is important to understand Apple’s byzantine tax structure so that we can effectively close the loopholes utilized by many U.S. multinational companies, particularly in this era of sequestration,” Sen. John McCain, R-Ariz., said in a statement Monday. “The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.”

The senator also quipped Tuesday during a hearing of the Senate's Permanent Subcommittee on Investigations that “Apple’s tax department has given new meaning to the company’s old slogan, ‘Think Different.’”

Apple isn't unusual among global corporations in concocting strategies and seeking to take advantage of offshore havens to minimize, defer or avoid taxes. Companies ranging from General Electric to Google to Facebook have all come under scrutiny for their tax strategies, and previous Senate investigations have focused on Hewlett-Packard and Microsoft – but investigators said Apple devised some unusual schemes that enabled the company to avoid paying taxes in the U.S., or anywhere else, on billions and billions in income. 

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” Sen. Carl Levin, D-Mich., said Monday. “Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere.”

RELATED: Why Apple, with $145 Billion in Cash, Wants to Borrow More

In recent annual reports, Apple has claimed effective tax rates between 24 percent and 32 percent. The Senate investigators said those figures included states and foreign taxes, and that Apple’s effective U.S. corporate tax rate was 20.1 percent, far below the statutory rate of 35 percent. In 2012 alone, Levin said, Apple avoided paying $9 billion in U.S. taxes. Critics of the current system say that such corporate tax avoidance forces Washington to depend more on personal income tax receipts and payroll taxes.

Source: Tax Policy Center
Note: "Federal Other" includes federal estate taxes, gift taxes, and custom duties. Excludes Federal nontaxes. "Social Insurance" includes Employer, Employee and Self-Employed Contributions at the Federal, State and Local levels. Source: Bureau of Economic Analysis, National Income and Product Accounts, Annual Tables 1.1.5, 3.2, 3.3, 3.6. BEA

The Senate panel’s report said Apple’s distinctive approach to the global tax game hinged on three key subsidiaries based in Ireland, where the company had also negotiated a tax rate of less than 2 percent, far lower than the country’s statutory 12 percent rate. Investigators described how one subsidiary called Apple Operations International took advantage of differences in U.S. and Irish tax laws to avoid paying any taxes in either country, or anywhere else, on at least $30 billion in income since 2009.

The subsidiary was incorporated in Ireland but managed and controlled from the U.S. Because Ireland asserts tax jurisdiction over companies managed and controlled there and the U.S.  determines tax residency based on where a company is incorporated, the structure of the subsidiary allowed it to avoid taxes altogether. And you thought Jony Ive was imaginative.

On Tuesday, Cook and Apple defended the company’s practices and said the company pays “every single dollar” it owes in taxes. The CEO also said that the company was likely the largest corporate tax payer in the country and sent $6 billion to the U.S. Treasury in its fiscal 2012. “Apple complies fully with both the laws and spirit of the laws,” the company said in testimony (PDF) prepared for the Senate’s Permanent Subcommittee on Investigations. “And Apple pays all its required taxes, both in this country and abroad.” The company, in its prepared testimony, also said it “does not use tax gimmicks”:

“Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands. Apple has substantial foreign cash because it sells the majority of its products outside the US. International operations accounted for 61% of Apple’s revenue last year and two-thirds of its revenue last quarter.”

Those specifics aside, Apple’s broader claim was met with disbelief. “I about fell off my chair” when seeing Apple’s claim that it doesn’t use gimmicks, said tax policy expert J. Richard Harvey, a professor at Villanova’s School of Law and former IRS and Treasury Department official.
Even so, the hearing made clear that the issue was less with Apple’s specific strategies than with a nominally high corporate tax rate and a code that is laden with loopholes. “The tax code,” Cook said, “has not kept up with the digital age.”

Apple’s executives also emphatically lobbied for a “dramatic simplification” of the tax law, noting that the company’s annual tax return filing papers stack up at two feet tall or higher. Cook advocated for a revenue neutral overhaul of the tax code that would eliminate all corporate tax expenditures and offer a lower tax rate on cash repatriated from overseas – reforms that the company said would likely raise its tax bill.  “I’d really like for comprehensive tax reform to be passed this year,” Cook said, “and any way that Apple can help to do that, we’d like to.”