updated 03:29 pm EDT, Tue May 21, 2013
Chairman believes Apple 'exploiting absurdity' of tax laws
During Tim Cook's appearance on Tuesday before the US Senate Permanent Subcommittee on Investigations (which is presently looking into the tax code), Chairman Carl Levin (D-Michigan) accused Apple of "exploiting an absurdity [in US tax laws] that we have not seen other corporations use," referring to a loophole he believes should be closed. Cook maintained that Apple pays US taxes on its US profits as it should.
It is tempting to point out that the "absurdity" in US tax code -- which taxes companies based only on where they are physically located rather than where they are actually controlled or managed -- was enshrined into law by members of the US Congress such as Senator Levin, and that that body is the only one that can change the law to close the loophole. Apple, however, used the opportunity to push its own proposals for corporate tax reform and defend its current practices as being entirely legal. Cook also mentioned, and committee members agree, that the corporate tax rate in the US -- at 35 percent before deductions and credits -- was among the highest in the world.
At the conclusion of the interrogation of Cook, CFO Peter Oppenheimer and Head of Tax Operations Phillip Bullock, it became obvious that Levin and other questioners were criticizing their own previous actions as much as Apple's taking advantage of those actions. While angry that Apple had engaged in a "strategy of tax avoidance," Levin seemed unaware both that all other corporations actively engage in trying to pay as little tax as possible, and that the problem was not Apple's talent at doing so but that Congress itself had created the foundation of such strategies.
For its part, Apple -- Cook in particular -- vigorously denied charges that Apple had set up "ghost" corporations for the sole purpose of hiding profits. Cook specifically pointed out to the senators that Apple did not send any US profits overseas, paid all taxes on sales throughout the Americas at the US tax rate, and repeatedly reminded them that Apple set up the Irish corporation that handles its European sales in 1980 -- long before bad economies or the current corporate tax situation -- and that it operates essentially unchanged from then.
Apple's perspective is that the Ireland-based European corporation is an "arm's length" entity that exists to centralize sales, operations and manage profits (and pay taxes) on Apple sales in Europe, and that the Irish corporation just happens to enjoy a lower corporate tax rate. Because of a deal signed with Ireland in 1980 when it was recruiting tech companies, Apple's effective tax rate there is around two percent.
Levin was quick to praise Apple, admit he used their products ("my granddaughter even knows how to work it!") and repeatedly pointed out that Apple had done nothing illegal, but frequently inferred that Apple had some sort of moral duty not to be so good at working the US tax system to their advantage. Bullock, Oppenheimer and Cook all repeatedly objected that Levin was ignoring important context that would have made it clear that Apple's maneuvers were not solely to avoid taxes.
The questioning was not entirely adversarial. Senators Claire McCaskill (D-Alaska) and Kelly Ayotte (R-New Hampshire) probed Cook for suggestions on improvements to the tax code, including what repatriation rate would be appropriate and how the intellectual property protections of the US could be enhanced. Cook surprised Ayotte by saying that "we require much more work on IP in this country" after she and other senators had spent much time praising the US protection of IP as one of its competitive advantages over other countries.
"The U.S. court system is currently structured in such a way," Cook said, "that it's currently difficult to get the protections a technology company needs, because the cycle is very long." He added that the US should look for a way to settle IP disputes far faster, as technology companies can go through "several cycles" before a dispute even comes to trial.
On the issue of corporate tax rate, Cook restated his long-held position (which has been echoed by the Obama administration) that Apple is against "tax holidays" of the sort that have periodically happened since the 1980s and more in favor of a permanently-lowered US corporate tax rate of "something in the mid-twenties" in terms of percentage, along with the removal of some current corporate deductions -- which Cook said would be enough to convince other companies to bring in some of their foreign capital to the United States.
Senator Rand Paul (R-Kentucky) said the entire hearing was a sham and a waste of time, since the problems originated and could be fixed by Congress, reflecting his view that corporations are entitled to take advantage of every opening to reduce their tax burden. In addition to calling for a near-elimination of corporate taxes, Rand also said the committee should apologize to Apple for hauling it before Congress, and praised the company for creating American jobs.
Finally, in response to a question asking hypothetically if Apple would ever consider leaving California (or the US generally) if the tax rate didn't become more favorable. "I have a pretty wild imagination," Cook replied in a firm dismissal of the notion, "and that [idea] is beyond it."