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Tim Cook’s defense of Apple’s tax strategy, annotated

CEO Tim Cook testified about Apple's tax practices before the Senate Permanent Subcommittee on Investigations in 2013. In an exclusive interview with The Washington Post, he fiercely defended them again. (Photo by Andrew Harrer/Bloomberg)

Apple CEO Tim Cook offered revealing insights into his company’s tax strategies in an interview with The Washington Post’s Jena McGregor — ones that both highlight the company’s approach to global investment and its assessment of the chances for comprehensive corporate tax reform to move through Congress in the near future.

At times, though, what Cook did not say was as interesting as what he did say.

The tax-related excerpts from the interview are below. Post economic policy correspondent Jim Tankersley has annotated them, to help decode the company’s strategy and how it fits in the tax reform debate and the economy at large.

We were talking about getting advice from people before your first testimony on Capitol Hill. That hearing focused on the corporate taxes Apple pays. Apple is now awaiting a European Union ruling on whether you owe billions in back taxes, and corporate tax reform is a big election-year issue. Does either a Trump or a Clinton campaign give you or the company any hope that there could be corporate tax reform anytime soon?

I think it’s in the best interest of the U.S. to have corporate tax reform, regardless of which political party is in charge of the White House. Because if you look at it, the U.S. rules today are that international companies like us and many others can keep their earnings that they earn overseas overseas and then when they bring them back it triggers the tax liability.

What I’ve always felt should happen is that every dollar should be taxed immediately with no deferral. But as a consequence of doing that, you should have free flow of capital. What would happen is if a system like that were put in place, it should have more investment going into the United States. We’re the only major country in the world that has a system like this. It’s not good for the U.S., it’s not good for the economy, it’s not good for jobs, it’s not good for investments.

I think there’s wide agreement to that in both parties, by the way. There’s a difference of view with different people about how to fix it, but I think everybody agrees the current system isn’t working.

So I’m optimistic that, in 2017, there will be some sort of corporate tax reform. The U.S. needs to invest more in infrastructure — so what would be great is, if they take the tax proceeds of a corporate tax reform and invest it in infrastructure and roads and bridges and airports.

What do you say in response to Nobel economist Joseph Stiglitz’s comments on Bloomberg [television], where he called Apple’s profit reporting in Ireland a “fraud”?

I didn’t hear it. But if anybody said that, they don’t know what they’re talking about. Let me explain what goes on with our international taxes. The money that’s in Ireland that he’s probably referring to is money that is subject to U.S. taxes. The tax law right now says we can keep that in Ireland or we can bring it back. And when we bring it back, we will pay 35 percent federal tax and then a weighted average across the states that we’re in, which is about 5 percent, so think of it as 40 percent.

We’ve said at 40 percent, we’re not going to bring it back until there’s a fair rate. There’s no debate about it. Is that legal to do or not legal to do? It is legal to do. It is the current tax law. It’s not a matter of being patriotic or not patriotic. It doesn’t go that the more you pay, the more patriotic you are.

And so what we’ve said — we think it’s fine for us to pay more, because right now we’re paying nothing on that and we leave it over there. But we — like many, many other companies do — wait for the money to come back. In the meantime, it’s important to look at what we do pay. Our marginal rate, our effective rate in the U.S. is over 30 percent. We are the largest taxpayer in the United States.

And so we’re not a tax dodger. We pay our share and then some. We don’t have these big loopholes that other people talk about. The only kind of major tax credit that we get is the R&D tax credit, which is available to all companies in the United States. That’s important to know. The second thing I would point out is we have money internationally because we have two-thirds of our business there. So we earn money internationally.

We didn’t look for a tax haven or something to put it somewhere. We sell a lot of product everywhere. And we want to bring it back, and we’ve been very honest and straightforward about that.

How long are you willing to keep unrepatriated income overseas?

Honestly I believe the legislature and the administration will agree that it’s in the best interest of the country and the economy to have tax reform. So I don’t think I have to make that decision. I’m optimistic that it will take place next year.

With the E.U. ruling, do you feel picked on by the E.U.?

You know, they haven’t ruled yet. I don’t know how they will rule. I hope that we get a fair hearing. If we don’t, then we would obviously appeal it.

It’s important for everyone to understand that the allegation made in the E.U. is that Ireland gave us a special deal. Ireland denies that. The structure we have was applicable to everybody, it wasn’t something that was done unique to Apple. It was their law.

And the basic controversy at the root of this is, people really aren’t arguing that Apple should pay more taxes. They’re arguing about who they should be paid to.

And so there’s a tug of war going on between the countries of how you allocate profits. Currently, the way that the tax law works is the place you create the value is the place where you’re taxed. And so because we develop our products largely in the United States, the tax accrues to the United States. The part that happens inside the United States is taxed immediately. That is what makes us the largest taxpayer in the United States. And that which we earn internationally is taxed on a deferred basis when we bring it back.