Apple CEO Tim Cook strongly defends tax policy at Senate hearing

By Jim Puzzanghera

May 21, 2013 9:22 AM PT

WASHINGTON — Apple Inc. Chief Executive Tim Cook strongly defended the company’s tax practices Tuesday at a Senate hearing highlighting the technology giant’s use of Irish subsidiaries to shelter billions of dollars in income from U.S. taxes.

“We pay all the taxes we owe — every single dollar,” Cook told the Senate’s Permanent Subcommittee on Investigations.

“We not only comply with the laws but we comply with the spirit of the laws,” he said. “We don’t depend on tax gimmicks.”

Cook said the tax code “has not kept up with the digital age” and restricts the free movement of capital in comparison to the codes of other countries. He called for a “dramatic simplification of the corporate tax code,” including lower tax rates and a “reasonable tax on foreign earnings.”

He said Apple was “deeply committed to our country’s welfare.”

“We are proud to be an American company, and we are equally proud of our contributions to the U.S. economy,” Cook said.

The panel’s chairman, Sen. Carl Levin (D-Mich.) called Apple “an American success story” with a “well-earned reputation for creativity.”

He admitted that he carries an iPhone. But he said that doesn’t excuse the company’s tactics, which the subcommittee’s investigation found helped Apple avoid paying at least $9 billion in U.S. taxes in 2012.

“Apple executives want the public to focus on the U.S. taxes the company has paid, but the real issue is the billions in taxes it has not paid, thanks to offshore tax strategies whose purpose is tax avoidance, pure and simple,” Levin said.

Such tax avoidance by U.S. multinational companies hurts because it increases the federal budget deficit, forcing average Americans to make up the difference with a higher tax burden, he said.

Levin said Apple “is exploiting an absurdity” that allows three of its subsidiaries in Ireland to claim they have no responsibility to pay taxes to any country.

One of the companies, Apple Operations International, which has no employees but reported $30 billion in income over the four years, has not filed an income tax return in any country for the last five years, the subcommittee investigation found.

A second company, Apple Sales International, holds the economic rights to Apple’s intellectual property in Europe, Asia and Africa. The subsidiary had $74 billion in sales income from 2009-2012 but paid less than 1% in taxes to Ireland.

The tactic, which is legal, is possible through complex cost-sharing agreements that transfer the economic rights to the valuable intellectual property behind the iPhone, iPad and other products to subsidiaries outside the U.S., Levin said.

“Many U.S. companies, including Apple, use transfer pricing to shift intellectual property rights to offshore affiliates and then direct income associated with that intellectual property – taxable income that would otherwise flow to the United States where the intellectual property was developed – to the affiliates’ home jurisdiction, which is typically a tax haven,” Levin said.

Sen. John McCain (R-Ariz.) said he and his colleagues should make it clear they admire Apple’s achievements in creating some of the world’s most popular electronics products.

But he said its tax strategies are “unacceptable” and hurt smaller U.S. companies that don’t have the ability to shift profits to foreign subsidiaries.

McCain said Apple “has violated the spirit of the law, if not the letter of the law.”

Sen. Rand Paul (R-Ky.) came to Apple’s defense.

“Frankly, I’m offended by the tone and tenor of this hearing,” Paul said, calling the session a “show trial.” He noted that Corning makes the Gorilla Glass for Apple products in Kentucky.

“I’m offended by a $4-trillion government bullying, berating and badgering one of America’s greatest success stories,” he said. “Tell me what Apple’s done that is illegal.”

Congress should apologize for creating a “bizarre and byzantine tax code” and should compliment Apple for its job creation, he said.

“They’re doing what their shareholders ask, which is to maximize profit,” Paul said.

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