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Committee attacks Apple for tax loopholes, admits rate issue

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."




by MacNN Staff

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Comments

  1. ctt61

    Fresh-Faced Recruit

    Joined: 06-21-05

    It is incredible that Goverment did not create any jobs. only take away from hard working people. they always spend more than they have. I did not see any one take one dollar salary even the rich one. They have retirement and health care set for life. They should be the one in hot seat instead of Apple ..

  1. Flying Meat

    Dedicated MacNNer

    Joined: 01-25-07

    I agree. "It is incredible that Government did not create any jobs." I'm pretty sure they have.

    "Only take away from hard working people." is entirely incorrect.

    Spending more than you have is common. It's the American way. You have credit cards, probably. Big expenditures paid over time based on projected income, blah blah blah...

    I haven not got a clue what you're talking about in the next sentence about "taking one dollar salary..."

    Retirement and health care set for life? Sounds ideal. I want that! :)

    Levin may well find himself in the hot seat for spouting rhetoric about corporations taking advantage of tax code he himself voted for. It's up to the voters, ultimately, unless he actually breaks a law.

  1. Flying Meat

    Dedicated MacNNer

    Joined: 01-25-07

    "something in the mid-twenties". That my friends is a reasonable guy.

  1. Charles Martin

    MacNN Editor

    Joined: 08-04-01

    "It is incredible that Goverment did not create any jobs."

    It *would* be incredible if that were true. But of course, it isn't. The government is one of the largest employers in the United States, and that's not even counting the Post Office or the armed forces.

    "only take away from hard working people."

    Um, no. Who do you think built the internet you're writing this on, the roads you use, the hospitals and schools? We all agreed, a long time ago, to the tax system we have that takes money from everyone (yes, even the rich and even the very poor) and puts it together to create things we as a society need. We also agreed as a society that we would elect representatives to direct and manage this spending. Sometimes they don't do a great job, but an informed and educated public would vote out those elected officials who do a bad job. Or at least that's the way it used to be.

    "they always spend more than they have."

    I can totally appreciate how you might feel that way, but in fact that's not true. There have been both Republican (Nixon) and Democratic (Carter) presidents who submitted balanced budgets, and one in modern times (Clinton) who generated a huge surplus. Broadly speaking, Congress is the problem with budgetary matters (see paragraph above).

    "I did not see any one take one dollar salary even the rich one."

    I think you're trying to say that a lot of these politicians are very wealthy and could easily afford to take a "token" $1 salary instead of all the benefits they vote for themselves. If so, I agree.

    "They have retirement and health care set for life. They should be the one in hot seat instead of Apple .."

    Indeed. As the article points out, Congress created the system; why they're made at Apple for playing by Congress' rulebook I really don't know. It's as though they don't have any idea that if a loophole in the tax code (or just the entire tax code) is bothering them, well, they have the power to fix it.

  1. prl99

    Dedicated MacNNer

    Joined: 03-24-09

    Can you use a better photo of Mr. Cook. It's amazing how great our technology is yet we seem to end up with the most unflattering photos of people. Was this on purpose? I'm sure this is from a video feed so just take one a second or two before or after this one.

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