Apple CEO Tim Cook has doubled down on his earlier defense of Cupertino's accounting practices in testimony before a US Senate subcommittee on Tuesday, describing the company as "America's largest corporate income taxpayer."
"Apple complies fully with both the laws and spirit of the laws," Cook said in his prepared remarks, which he released on Monday ahead of the hearing. "And Apple pays all its required taxes, both in this country and abroad."
Not all of the assembled Senators agreed with these sentiments, however. In his opening remarks, Senator Carl Levin (D-MI), who chaired the subcommittee, said, "Apple is exploiting an absurdity, one that we have not seen other companies use."
Levin warned that the US government is empowered to collect unpaid taxes on corporate income abroad in some cases, such as when a company's overseas subsidiary has been created solely for tax avoidance and is "nothing more than an instrumentality of its parent company, a sham."
Three of Apple's subsidiaries, he added, "sure seem to fit that description."
Levin described how, during the years from 2009 to 2012, Apple in the United States declared profits of $38bn, while its Irish subsidiaries took in $74bn. In 2011 alone, he said, 64 per cent of Apple's global pretax income was recorded in Ireland, despite just 4 per cent of Apple employees and 1 per cent of Apple customers being located there.
"My proposal is that we eliminate all corporate tax expenditures and get to a very simple system and have a reasonable tax on bringing money back from overseas." – Apple CEO Tim Cook
And although Apple says it paid $6bn in US taxes in 2012, Levin said it also avoided paying another $9bn – equivalent to $25m a day, he said, or more than $1m per hour.
Here at Vulture Annex in San Francisco, we hasten to add that $9bn is also nearly enough to build Apple's planned "spaceship" headquarters ... twice.
Senator John McCain (R-AZ) noted that 95 per cent of Apple's research and development takes place in the United States, while less than 1 per cent of it happens in Ireland. Meanwhile, he said, Apple's Irish subsidiaries are classified as a "tax resident nowhere in the world," a status that allows Cupertino to avoid taxes in multiple jurisdictions.
"Apple has violated the spirit of the law if not the letter of the law," McCain said.
Cook disagreed with the Senators' comments, arguing that the current tax law is inadequate when it comes to modern global business. "Unfortunately the tax code has not kept up with the digital age," he said.
Apple and Ireland: Great together
Cook and Apple CFO Peter Oppenheimer both denied the Senators' assertion that Apple's Irish sales subsidiary was a nonentity. On the contrary, they said, the Irish branch employs nearly 4,000 people and has done so for many years – this, mind you, given a global workforce of 72,800 full-time employees, as reported on Apple's most recent annual statement.
Oppenheimer said that Apple originally set up its subsidiaries in Ireland 30 years ago to sell computers overseas, and that business continues. If two-thirds of Apple's profits are in Irish companies, he said, "That's because of the way we set ourselves up 30 years ago."
Cook said Apple's Irish subsidiary "is nothing more than a company that has been set up to provide an efficient way to manage Apple's cash from income that's already been taxed" in other jurisdictions, and that in his view it "does not reduce US taxes at all."
That's not to say Cook wouldn't like to reduce Apple's US taxes, mind you. The Apple CEO said he has "no current plan" to bring the $100bn in profit that Apple is currently holding in Ireland back to the US. A tax rate low enough to encourage companies like Apple to do so, he said, would likely need to be "a single digit number."
The current US tax rate of 35 per cent is the main reason Apple borrowed money to help fund its shareholder divided plan, rather than bringing its own profits back from overseas, Cook said. Under current market conditions, he added, Apple was able to borrow at around 2 per cent interest.
The Senators seemed mostly skeptical of the Apple team's remarks – but not all of them. Senator Rand Paul (R-KY) repeatedly took the floor during the proceedings to describe Apple as a great company that had done no wrong. Paul said he was "offended" by the Senate's questioning of Cook – the same way, he said, that he is offended by the Internal Revenue Service "bullying" the Tea Party. The proceedings were "a show trial," he said, and he continued his remarks on Twitter.
I am offended by a $4 trillion government bullying, berating and badgering one of America's greatest success stories.— Senator Rand Paul (@SenRandPaul) May 21, 2013
To the Apple executives here, I apologize for this theater of the absurd.— Senator Rand Paul (@SenRandPaul) May 21, 2013
Meanwhile, Cook took the opportunity of the hearings to voice his desire for a radical revamp of the US corporate tax system.
"My proposal is that we eliminate all corporate tax expenditures and get to a very simple system and have a reasonable tax on bringing money back from overseas," Cook said. "A permanent change, to me, is materially better than a tax holiday."
Levin countered that the committee was certainly interested in change, but that Apple had made its accounting so complicated that it was difficult to see what changes would be most beneficial.
"Of course we've got to change it. Of course we've got to change the system," Levin said. "But first we have to understand it."
Following Cook's remarks, the Senate subcommittee went on to hear testimony from officials from the Internal Revenue Service and the US Treasury. ®