Apple CEO Tim Cook Pressed By Senators On Offshore Tax Policies

Apple Pressed By Senators On Offshore Tax Practices

on May 21 2013 9:36 AM

Apple Inc. (Nasdaq:AAPL) CEO Tim Cook testified at a Senate hearing Tuesday morning to address a congressional report that found the tech giant has kept billions of dollars in profits in Irish subsidiaries to pay little or no taxes to the U.S. government.

A 40-page memorandum released on Monday, drafted by the Senate's Permanent Subcommittee on Investigations, identified three subsidiaries -- including Apple Sales International, or ASI, and Apple Operations International, or AOI -- that have no "tax residency" in Ireland, where they are registered, or in the United States.

The bipartisan committee is now grilling Apple and tax experts about the legality of keeping money offshore in subsidiaries. Before Cook even took the microphone, the political clashes began between Kentucky Sen. Rand Paul and Sen. Carl Levin, who is leading the hearing.

Three separate panels are speaking on Tuesday morning. First, came the experts: J. Richard Harvey of Villanova University School of Law and Stephen E. Shay of Harvard Law School. Second,Apple CEO Tim Cook, Chief Financial Officer Peter Oppenheimer and Phillip A. Bullock, the head of tax operations. Third was Mark J. Mazur, the assistant secretary for tax policy and Samuel M. Maruca, the Internal Revenue Service's director of transfer pricing operations, large business and international division.

Refresh this page for live updates from the hearing, which starts at 9:30 a.m. EST.

Update 2:25 p.m.: That concludes the International Business Times' live-blog, thanks for following.

Update 2:24 p.m.: Levin adjourns the meeting, saying "these tax-shifting capabilities that these major corporations have cannot continue."

Update 2:23 p.m.: "Three employees of Apple, a tremendously creative company, sat around a table and decided what share of profits would come back to the U.S.," Levin says. "Something that has a huge effect on the revenues of our country is intolerable, unfair ... it needs to change. We should close these unacceptable, unfair, corporate offshore loopholes."

Update 2:22 p.m.: Levin closes the hearing by saying Apple does abuse tax gimmicks, though he'll leave it to someone else to determine if that is legal.

Update 2:10 p.m.: Maruca says the IRS can disregard the tax-status of a company that has no employees and is wholly controlled by the company if the shell entity is solely for the instrumentality of the parent. But the grounds to tax that company are very narrow, he says.

Update 1:52 p.m.: "We are now training our agents ... to address compliance issues we've seen of income activities of U.S. and foreign-based multinationals," Maruca says

Update 1:47 p.m.: Now, Maruca is up. "The IRS takes very seriously ... multinationals' need to pay taxes," he says.

Update 1:46 p.m.: Mazur says the Treasury Department has a "multilateral set of steps" is necessary to address this "world-wide problem."

Update 1:38 p.m.: Mazur is just reading from his written testimony as he gesticulates with his left hand like an chef in a Disney movie.

Update 1:33 p.m.: After a vicious tirade, Levin concludes panel 2 and moves on to the third panel.

Update 1:30 p.m.: "We can't continue a system where a multinational company as phenomenally successful as yours can make a decision in 2008 and 2009 as to where the profits are going to flow," Levin says. With all the protection of patents and other amenities of being based in the U.S., Levin asks if Apple is going to continue to skirt the "American taxman."

Update 1:29 p.m.: Levin says that Apple signed agreements in 2008 and 2009 to continue to shift these so-called "crown jewels" in Ireland, in "these companies that don't exist anywhere except in the water."

Update 1:27 p.m.: Levin says people around the world loves iPhones and iPads. "My granddaughter knows how to use it," he says.

Update 1:26 p.m.: Oppenheimer says this is what Apple has been doing for the last 30 years.

Update 1:24 p.m.: Levin combatively suggests that the deals with the Irish subsidiaries moved the economic rights to Apple's intellectual property to those companies. "You made a decision to shift most of your crown jewels in terms of economic values and rights, which creates the profits that are so massive, you made the decision" to keep those in the hands of the Irish companies, Levin says.

Update 1:21 p.m.: "You brnig home the profits from Mexico, Canada and South America," Levin says. "It's your decision not to bring those profits [in Ireland] home. So now $100 billion is stashed away in these Irish companies. The question is, will you bring them home?" Levin is pushing Cook very hard. He is trying to corner him into saying that he won't bring home the money until the corporate tax rate is reduced. "I have no current plan to bring them back on the current tax rate," Cook says, uncomfortably.

Update 1:17 p.m.: Bullock says that the shell companies in Ireland have "arms-length" deals with Apple, but Levin is getting annoyed. "I think we ought to be able to get a straight answer on this," he says.

Update 1 p.m.: Asked about China's Apple knockoff stores, Cook says "that's been an issue." He raises his eyebrows. "That's clearly been an issue."

Update 12:59 p.m.: Cook says the tax rate for U.S. corporations should be around 20 percent, and money coming in from overseas should be a "single digit number."

Update 12:56 p.m.: Cook says Apple can't use any of its overseas cash to invest in the U.S.

Update 12:49 p.m.: Oppenheimer said the top 50 shareholders own about 80 percent of Apple. He says that those shareholders, which are largely pension funds and other groups, benefit from Apple paying less in taxes to foreign governments.

Update 12:42 p.m.: "That's unimaginable," Cook says of moving Apple out of California. "And I have a pretty wild imagination."

Update 12:41 p.m.: McCaskill asks how much it would cost to move Apple's headquarters out of Cupertino, Calif. and to another country. China, perhaps, when the company closes a deal with China Mobile Ltd.?

Update 12:40 p.m.: Cook says it would be nice to bring back money to the U.S., but the high corporate tax rate makes it not worth it.

Update 12:39 p.m.: McCaskill wonders, if the U.S. simplified its tax code, would an emerging market undercut the U.S. anyway, as Irish did in the 1980s?

Update 12:35 p.m.: And, we're back. Sen. Claire McCaskill is up.

Update 12:15 p.m.: The committee is in a short, 10 minute recess.

Update 12:07 p.m.: McCain, after paying a gentlemanly compliment to Cook, asks if the Apple CEO feels "bullied." "No," Cook says. "You were not dragged before this committee?" "I was not dragged here, sir." McCain goes in for a joke: "I imagine you don't drag easily?" Cook laughs.

Update 12:03 p.m.: Bullock says that about $30 billion of the $70 billion earned abroad goes to AOI.

Update 12 p.m.: Lots of "functionally managed and controlled" being thrown around by Levin, Bullock and Cook. Apparently that is language in the Irish tax code.

Update 11:55 a.m.: Oppenheimer says that the U.S. corporate tax rate, at 35 percent, is so egregious that it is was cheaper to issue debt to shell out to shareholders. Debt was at 2 percent.

Update 11:53 a.m.: Oppenheimer says the profits held by AOI and ASI are taxed.

Update 11:48 a.m.: Oppenheimer, Apple's CFO, is up.

Updated 11:48 a.m.: Here is Cook's full testimony: STMT - Apple Inc

Update 11:47 a.m.: "We are deeply committed to our country's welfare," Cook says. "Apple has always believed int he simple, not the complex. You can see this in our products and the way we conduct ourselves. It is in the spirit that we recommend the dramatic simplification of the tax code." He adds: "We make this recommendation with eyes wide open." He says he knows it would increase Apple's taxes in the U.S.

Update 11:45 a.m.: Here's how Cook sees things: "Apple has real operations in real places with Apple employees selling to real customers." "We not only comply with the laws, but we comply with the spirit of the law. We don't use intellectual property offshore to skirt" taxes. "The tax system handicaps" the U.S. compared to foreign competitors, and he says 70 percent of Apple's cash is abroad because that's where its fastest growing businesses lie.

Update 11:43 a.m.: "We've used our earnings growth to invest billions of dollars in the U.S.," Cook says. He also said that iPhone parts are made, in part, in Kentucky. Now, don't you wish Paul didn't storm out before Cook came in?

Update 11:40 a.m.: Cook is basically laying out Apple's awesomeness: App Store, devoted employees, creation of new markets with the iPhone and iPad. "None of that economic activity was there before," Cook says, but Apple took a risk and invented the App Store.

Update 11:39 a.m.: "Our international revenues are now twice as large as our domestic revenues," Cook says. "As a result, I'm often asked, does Apple still consider itself an American company? My response is always an emphatic: Yes! We are proud to be an American company."

Update 11:38 a.m.: Apple's trio of executives, fronted by Cook, has taken the stand.

Update 11:33 a.m.: McCain steps in to say Levin has never bullied anyone in the thousands of committees they have sat on together. Classic McCain -- chastising a rowdy younger congressman from his own party to defend a fellow veteran, despite the fact that Levin is a Michigan Democrat. "Frankly, it's offensive to hear you characterized like that," the Arizona Republican said.

Update 11:31 a.m.: Again, Levin is refuting Paul's claims. He says this isn't vilification -- rather, a hearing like this looks at how the current practices of the government work.

Update 11:30 a.m.: Paul says that the majority of Apple shareholders are Americans, and therefore scrutinizing Apple is scrutinizing average Americans' stocks.

Update 11:28 a.m.: Paul says he's frustrated. "I want to see one company come here before us and tell us that they're different from Apple and want to maximize their tax burden," he said.

Update 11:26 a.m.: Paul's up again. He grills Harvey, asking him if he takes tax breaks or, if he were advising a company, would he try to minimize its tax burden? "Yes," he said. Paul replied: "They're doing what their shareholders asked and maximizing profits."

Update 11:17 a.m.: Harvey said that a minute amount of sales tax goes to the country in which the sale takes place.

Update 11:07 a.m.: Shay said the lengthier tax process -- which could take up to three years -- worked better. "This is difficult, complicated stuff," he said.

Update 10:55 a.m.: "How about creating corporations that don't exist anywhere -- have you ever heard of that?" Levin asked Harvey. "Have you heard of that being done in other cases?" Harvey says yes.

Update 10:43 a.m.: Shay says U.S. international tax rules are out of balance, and points to Apple, which has been able to skirt taxes through deferrals. Deferrals, he said, are granted under the auspice that the some country, somewhere, is taxing the income.

Update 10:38 a.m.: "The 2011 U.S. tax that was deferred is likely about $10 billion," Shay said.

Update 10:35 a.m.: Stephen E. Shay, a professor at Harvard Law School, is sporting a dapper red bow-tie. He says Apple's Irish companies earned about $22 billion before taxes, making up more than 60 percent of EBT -- earnings before tax.

Update 10:30 a.m.: "Except for executives at multinational companies, everyone I talk to" agrees we need to do something to close these loopholes, Harvey said.

Update 10:27 a.m.: Harvey said Apple entered into a cost-sharing agreement with its Irish subsidiary. He asks now whether it makes sense for an American corporation to be able to legally pass off some of its costs to tiny offshore companies.

Update 10:25 a.m.: J. Richard Harvey, a corporate tax policy expert at Villanova University School of Law, is testifying now. He says Apple hasn't done anything illegal, and that there are problems in that in and of itself.

Update 10:17 a.m.: Levin is getting heated. He tells Paul he can apologize, if he'd like, but "this subcommittee is not going to apologize to Apple. We did not drag them in front of his subcommittee."

Update 10:16 a.m.: Sen. Rand Paul takes the microphone -- and it's great. "Frankly, I'm offended by the tone and tenor of this meeting," he said, accusing Congress of needing to look in the mirror to see who is to blame for lost tax revenue. "I would say what we really need to do is apologize to Apple, compliment them for the job creation ... Currently our tax code makes money not welcome in this country."

Update 10:10 a.m.: "Our military cannot afford it, our economy cannot afford it, and the American people will not tolerate it," McCain said of tax avoidance, adding that he has long sought to reform tax policy. "It's past time for American corporations like Apple to reorganize their tax strategies" to make sure they pay their taxes.

Update 10:09 a.m.: "Apple's tax department has given new meaning to the company's old slogan, 'think different,'" McCain said. Boom.

Update 10:07 a.m.: McCain said 60 percent of Apple's profits have gone to these stateless subsidiaries. ASI paid one-12th of 1 percent in Irish taxes, he said.

Update 9:58 a.m.: Apple says it paid $6 billion in taxes to the United States. But Levin said that in 2012 alone, it avoided paying an additional $9 billion in taxes. "The real issue is the billions in taxes it has not paid, thanks to offshore entities," Levin said.

Update 9:56 a.m.: Common sense says Apple would never have offered as lucrative a deal its Irish subsidiaries if it weren't abusing a loophole, Levin said.

Update 9:54 a.m.: When interviewed, Apple executives could not explain why ASI, one of the Irish subsidiaries, needed Apple intellectual property patents. "This is not in any sense an arms length transaction," Levin said.

Update 9:52 a.m.: Why Ireland? Levin says Apple has "quietly negotiated" and income tax rate of under 2 percent, well under the normal 12 percent rate. "In practice, Apple is able to pay a rate far below even that low figure," Levin said.

Update 9:44 a.m.: "Apple is exploiting an absurdity," Levin said, reading from his opening remarks at the hearing.

Update 9:40 a.m.: Here is some live video, courtesy of Bloomberg, of the hearing.

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