Panel says Apple uses firms outside US to avoid taxes (Update)

May 20, 2013 by Associated Press
Apple avoided paying taxes on tens of billions of dollars in profits through a complex network of subsidiaries, many with "no declared tax jurisdiction," a US Senate panel has concluded.

The world's most valuable company, Apple Inc., employs a group of affiliate companies located in Ireland to avoid paying billions of dollars in U.S. income taxes, a Senate investigation has found—and its CEO will be questioned Tuesday.

Apple is holding overseas some $102 billion of its $145 billion in cash, and an Irish subsidiary that earned $22 billion in 2011 paid only $10 million in taxes, according to the report issued Monday by the Senate Permanent Subcommittee on Investigations.

The strategies Apple uses are legal, and many other multinational corporations use similar tax techniques to avoid paying U.S. income taxes on profits they reap overseas. But the report found that Apple uses a unique twist, and lawmakers are raising questions about loopholes in the U.S. tax code.

While Apple claims to be the biggest U.S. corporate taxpayer, it is also "among America's largest tax avoiders," said Sen. John McCain, the panel's senior Republican.

Apple CEO Tim Cook, the company's chief financial officer and its tax chief are scheduled to testify and explain the company's tax strategy Tuesday at a subcommittee hearing. Apple spokesmen didn't immediately respond to a request for comment Monday.

The spotlight on Apple's tax strategy comes at a time of fevered debate in Washington over whether and how to raise revenues to help reduce the federal deficit. Many Democrats say the government is missing out on collecting billions because companies are stashing profits abroad and avoiding taxes. Republicans want to cut the corporate tax rate of 35 percent and ease the tax burden on money that U.S. companies make abroad, saying the move would encourage companies to invest at home.

The subcommittee's members could hold up Apple as an example of a powerful company using its privileged position to avoid taxes while ordinary Americans must pay them. The subcommittee last year derided executives from other technology giants over similar allegations.

Apple refuted the subcommittee's assertions in testimony prepared for Tuesday's hearing and released to the public Monday evening. Apple said it pays "an extraordinary amount" in U.S. taxes, citing the roughly $6 billion it paid in fiscal 2012.

"Apple does not use tax gimmicks," the statement says.

Apple has made clear that given current U.S. tax rates, it has no intention of repatriating its overseas profits to the U.S.

The report estimates that Apple avoided at least $3.5 billion in U.S. federal taxes in 2011 and $9 billion in 2012 by using the strategy. The company, based in California, paid $2.5 billion in federal taxes in 2011 and $6 billion in 2012.

The subcommittee also has examined the tax strategies of Microsoft Corp., Hewlett-Packard Co. and other multinational companies, finding that they too have avoided billions in U.S. taxes by shifting profits offshore and exploiting weak, ambiguous sections of the tax code. Microsoft has used "aggressive" transactions to shift assets to subsidiaries in Puerto Rico, Ireland and Singapore, in part to avoid taxes. HP has used complex offshore loan transactions worth billions while using the money to run its U.S. operations, according to the panel.

Apple uses five companies located in Ireland to carry out its tax strategy, according to the report. The companies are located at the same address in Cork, Ireland, and they share members of their boards of directors. While all five companies were incorporated in Ireland, only two also have tax residency in that country. That means the other three aren't legally required to pay taxes in Ireland because they aren't managed or controlled in that country, in Apple's view.

The report says Apple capitalizes on a difference between U.S. and Irish rules regarding tax residency. In Ireland, a company must be managed and controlled in the country to be a tax resident. Under U.S. law, a company is a tax resident of the country in which it was established. Therefore, the Apple companies aren't tax residents of Ireland nor of the U.S., since they weren't incorporated in the U.S., in Apple's view.

The subcommittee said Apple's strategy of not declaring tax residency in any country could be unique among corporations.

"Apple wasn't satisfied with shifting its profits to a low-tax offshore tax haven," Sen. Carl Levin, the subcommittee's chairman, said in a statement. "Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere."

The subcommittee report also noted that Apple has been setting aside billions for tax bills it may never pay. As previously reported by The Associated Press, the overlooked asset that Apple has been building up could boost its profits by as much as $10.5 billion. However, Apple has been lobbying to change U.S. law so it can erase its tax liabilities in a less conspicuous fashion.

In its second quarter ended March 31, Apple posted its first profit decline in 10 years. Net income was $9.5 billion, or $10.09 a share, down 18 percent from $11.6 billion, or $12.30 a share, in the same period a year ago. Revenue increased 11 percent, to $43.6 billion.

Apple said in April that it will distribute $100 billion in cash to its shareholders by the end of 2015. The company is expanding its share buyback program to $60 billion, the largest buyback authorization in history, and is raising its quarterly dividend by 15 percent, to $3.05 a share.

In Monday's regular trading session, Apple's stock rose $9.67, or 2.23 percent, to close at $442.93.

President Barack Obama has proposed using the tax code to encourage companies to move jobs back to the U.S. and discourage them from shifting jobs abroad. Many in both top political parties say they want to overhaul the entire tax code, but there are vast differences in how they would do so.

Explore further: Android grabs 85% of smartphone market: survey

5 /5 (3 votes)
add to favorites email to friend print save as pdf

Related Stories

Apple, US lawmakers in offshore tax showdown

May 17, 2013

Apple and US lawmakers are gearing up for a showdown over taxes—specifically how to deal with the huge stockpile of cash held by Apple and other multinational firms offshore.

Senate probe: Microsoft, HP avoid offshore taxes (Update)

Sep 20, 2012

(AP)—Microsoft Corp., the Hewlett-Packard Co. and other multinational corporations have avoided billions in U.S. taxes by shifting profits offshore and taking advantage of weak, ambiguous sections of the tax code, Senate ...

How Apple's phantom taxes hide billions in profit

Jul 23, 2012

On Tuesday, Apple is set to report financial results for the second quarter. Analysts are expecting net income of $9.8 billion. But whatever figure Apple reports won't reflect its true profit, because the ...

Recommended for you

Android grabs 85% of smartphone market: survey

8 hours ago

Smartphones powered by the Android operating system captured 85 percent of the worldwide market in the second quarter, threatening to marginalize rival platforms, a new survey shows.

Chinese man brings gay conversion therapy lawsuit

13 hours ago

(AP)—A gay Chinese man said Thursday he was suing a psychological clinic for carrying out electric shocks intended to turn him straight, as well as the search engine giant Baidu for advertising the center.

Alcatel loss narrows in 2Q but revenue stagnates

14 hours ago

(AP)—Telecommunications equipment company Alcatel-Lucent SA says its net loss narrowed in the second quarter thanks to lower accounting charges, while revenue stagnated and restructuring charges mounted.

User comments : 4

Adjust slider to filter visible comments by rank

Display comments: newest first

Neinsense99
1 / 5 (4) May 20, 2013
I guess the 'Think Different' is the thinking that they want you to do, while they play the same old game.
Get Mikey
3 / 5 (2) May 20, 2013
I find it amusing that a group of senators responsible for passing tax laws is now surprised that somebody actually sat down and studied the tax laws and figured out how to beat them at their own game. Don't you?

They put the loopholes into the law when they wrote it, and now they are shocked, just SHOCKED I tell you, that anybody has the audacity to actually use them!

I guess the words "Audacity of Hope" mean something different to the CEO of Apple than they do to the President of the United States.
kochevnik
1 / 5 (3) May 20, 2013
Apple simply realized the debt-ridden USA has no future, and decided to make that future a reality. USA has no culture it is simply a junkpile of assets for sale to the highest bidder, and a playground for rich foreigners
alfie_null
1 / 5 (1) May 21, 2013
I guess it bugs me a bit that this [tax avoidance technique] is yet another way that really large companies have an unfair advantage over smaller companies.