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Apple uses subsidiaries to avoid billions in U.S. taxes, panel says

By Marcy Gordon

AP Business Writer

POSTED:
LAST UPDATED: 12:48 p.m. HST, May 20, 2013


WASHINGTON » Apple Inc. employs a group of affiliate companies located outside the United States to avoid paying billions of dollars in U.S. income taxes, a Senate investigation has found.

The world's most valuable company 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 today 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 Apple uses a unique twist, the report found. The company's tactics raise questions about loopholes in the U.S. tax code, lawmakers say.

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 complain that 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. They say the move would encourage companies to invest at home.

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 at a hearing by the subcommittee Tuesday.

The company refuted the subcommittee's assertions in testimony prepared for the hearing and released to the public today. Apple said it employs tens of thousands of Americans and pays "an extraordinary amount" in U.S. taxes, citing the roughly $6 billion it paid in fiscal 2012.

Apple "complies fully with both the laws and the spirit of the laws," the testimony says. "And Apple pays all its required taxes, both in this country and abroad."

"Apple does not use tax gimmicks," the statement says. The company insisted that it does not, as the subcommittee asserts, move its intellectual property rights into offshore tax havens and use it to sell products back into the U.S. to avoid taxes.

The company has made clear that given current U.S. tax rates, it has no intention of repatriating its overseas profits to the U.S. Apple reiterated in its testimony its support for comprehensive tax reform as a way to support economic growth and boost U.S. companies' competitiveness.

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.

The subcommittee's 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 Cupertino, Calif., paid $2.5 billion in federal taxes in 2011 and $6 billion in 2012.

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 of them 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," said Sen. Carl Levin, D-Mich., the subcommittee's chairman. "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's inquiry and hearing are intended to shine a light on "offshore tax-avoidance tactics" by Apple, Levin said at a news conference today with Sen. John McCain of Arizona, the panel's senior Republican. Companies' use of such loopholes has the effect of raising the taxes of ordinary Americans and increasing the federal deficit, he said.

McCain said that while Apple claims to be the biggest U.S. corporate taxpayer, it is also "among America's largest tax avoiders."

He called Apple's strategy "an egregious and really outrageous scheme that Apple has been able to orchestrate to avoid paying taxes."

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 Applehas been building up could boost Apple's 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 ten 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 today'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 parties say they want to overhaul the entire tax code, but there are vast differences in how they would do so.







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loquaciousone wrote:
The rich get richer and the poor get shafted.
on May 20,2013 | 12:50PM
oxtail01 wrote:
Not totally true as the "poor" class don't pay any taxes and a huge percentage live off government subsidies. I'm not disagreeing that the rich is getting richer at the expense of everyone else but I think it's also true that the other end of the economic spectrum games the system at the expense of everyone else. So, the injustice is at both ends and the losers are the majority in the middle.
on May 20,2013 | 05:30PM
inlanikai wrote:
Did they break the law? No. Don't like what they did? Fine, then change the law. And oh by the way, just remember you're going after a company that employees 10s of thousands of people in the US, pays billions of US taxes, creates untold thousands of jobs for people who work for companies that make Apple peripherals and apps inside the US and makes businesses and people more productive in their everyday lives and directly competes with foreign companies that would love to see them take a financial hit. Yeah, *they're* the bad guys.
on May 20,2013 | 12:55PM
Aquarius1 wrote:
Probably spoken by one with a tax avoidance strategy, InLanikai.
on May 20,2013 | 01:41PM
inlanikai wrote:
If you don't like tax avoidance strategies than I suggest you don't deduct the interest you pay on your mortgage or deduct on your Federal return your Hawaii state income taxes or any charitable contributions .... Shall I go on? The tax code is riddled with ways to avoid paying taxes on income for individuals and businesses. Like I said, don't like it, then change the law. Until then, don't disparage businesses and individuals for playing by the rules of the game the politicians establish.
on May 20,2013 | 01:56PM
inlanikai wrote:
New tax form: Line 1: How much did you make? Line 2: Send it in. How's that? Any better?
on May 20,2013 | 01:59PM
oxtail01 wrote:
Anyone who thinks that's better without knowing how much to send in got hole in their head - that explains the light you see going thru?
on May 20,2013 | 05:34PM
oxtail01 wrote:
You forgot to mention all the people the company made richer through their stock price appreciation.
on May 20,2013 | 05:32PM
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