Apple avoids taxes with ‘complex web’ of offshore entities, Senate inquiry finds

Kevork Djansezian/Getty Images - Apple chief executive Tim Cook plans to vehemently defend the company’s record on taxes before a subcommittee Tuesday morning, arguing that the company does not break any tax laws, according to his prepared testimony.

Apple used a “complex web” of offshore entities — with no employees or physical offices — that allowed it to pay little or no taxes on tens of billions it earned overseas, according to a Senate investigation unveiled Monday.

Between 2009 and 2012, the company shielded at least $74 billion in profits from U.S. tax laws by setting up subsidiaries in Ireland under a special arrangement, the report said. While the practice of using foreign operations to avoid U.S. taxes is legal and common among multinationals, Apple’s scheme was unprecedented in its use of multiple affiliates that had no semblance of a physical presence, Senate staffers said.

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The electronics giant’s rootless subsidiaries had just one purpose: to funnel much of the company’s global profits and dodge billions of dollars in U.S. tax obligations, according to the report by the Permanent Subcommittee on Investigations.

One of Apple’s Irish affiliates reported profits of $30 billion between 2009 and 2012, but because it did not technically belong to any country, it paid no taxes to any government. Another paid a tax rate of 0.05 percent in 2011 on $22 billion in earnings, according to the report. The U.S. corporate tax rate is 35 percent.

“Apple sought the Holy Grail of tax avoidance,” said Sen. Carl Levin (D-Mich.), chairman of the committee. “It has created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.”

Apple is the latest high-tech giant to have its offshore accounting practices come under congressional scrutiny. And the company’s high profile — it was the most valuable company in the world as of Monday — highlights the debate over how companies use legal loopholes in the tax code to avoid paying into U.S. tax coffers.

Apple chief executive Tim Cook plans to vehemently defend the company’s record on taxes before the Senate subcommittee Tuesday morning, arguing that Apple does not break any tax laws, according to a copy of the firm’s prepared testimony.

Cook and other senior executives are set to argue that their Irish subsidiaries help the U.S. economy by funding research and development projects and assist the company’s expansion in Asia and Europe, according to the testimony.

“Apple does not use tax gimmicks,” the company wrote in the prepared testimony. The Irish subsidiaries contributed more than half of Apple’s R&D costs in 2012, the company said. Apple declined to comment and referred questions to its prepared testimony.

The Senate investigation provides a rare window into the operations of one of corporate America’s most secretive companies. The arrival of its top executives in a congressional hearing also marks a departure for a firm that has deliberately chosen to keep a minimal profile in Washington. Steve Jobs, the Apple chief executive who died in 2011, notoriously called Washington policy issues distractions from the creation of new technology. Even as its chief rivals — Google, Facebook and Amazon.com — have beefed up their lobbying operations, Apple has kept a remarkably small presence.

Cook is showing more interest in increasing Apple’s inside-the-Beltway profile and touting the company’s importance to the U.S. economy. His testimony highlights how much Apple contributes to the U.S. Treasury and includes specific recommendations for tax reforms, putting Apple in the middle of a major congressional debate.

Apple is sending Cook, rather than just having the company’s chief financial officer testify before the Senate subcommittee, demonstrating how important it is for the company to convince the public it is paying its fair share of taxes.

But the subcommittee’s ranking Republican, Sen. John McCain (Ariz.), voiced doubt Monday about whether Apple should be held up as a model, calling its tax structure “byzantine.” A subcommittee staffer compared the company’s Irish divisions to boats that sail along the equator with no home.

“Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale it is also among America’s largest tax avoiders,” McCain said.

Lawmakers said the discoveries about Apple reveal a troubling trend of offshore profit shifting among high-tech firms such as Google, Microsoft and Hewlett-Packard. Such corporations have exploited weaknesses in an outdated tax code that allows some of the country’s largest companies to fatten their cash holdings overseas while depriving the United States of tax dollars, the lawmakers said.

The practice is particularly common among technology firms, which have an easier time shifting their assets — largely comprising intellectual property — to low-taxing territories. Companies that manufacture goods in factories, such as General Motors, cannot move their foreign subsidiaries as easily.

Apple appeared to use a particularly creative scheme of offshore firms, based in tax-friendly Ireland, to shelter overseas profits from U.S. taxes, subcommittee staffers said.

“They’d be stupid not to do it,” said Martin Sullivan, chief economist at nonprofit Tax Analysts. “It’s the loopholes in the U.S. tax laws that makes this all possible. All their competitors are doing it.”

The subsidiaries — two of them were named Apple Operations International and Apple Sales International — had a unique agreement with the tax authorities of Ireland that allowed Apple to use those businesses to hold foreign earnings, even though the units had no employees in the country.

Cook and other Apple executives plan to argue that its Irish subsidiaries are “authorized by US law” and comply “with all US tax regulations.” The subsidiaries are regularly audited by the Internal Revenue Service, the company said in the testimony.

Cook also plans to argue for changes to the U.S. tax code and a reduction of the 35 percent tax rate that corporations pay. He and other executives of U.S. corporations with global operations have argued that the tax rate — among the highest of developed nations — discourages companies from bringing their foreign cash holdings back to the United States, where it could be used to create more jobs and fund research and development.

The hearing hosted by Levin’s committee will also include Apple’s chief financial officer, Peter Oppenheimer, and head of tax operations, Phillip Bullock. In September, the panel said Hewlett-Packard and Microsoft employed similar offshore schemes that enabled them to avoid paying billions of dollars in U.S. taxes.

Jia Lynn Yang contributed to this report

 
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