Apple avoided billions in taxes

18-month Congressional probe still finding offshore subsidiaries

New York TimesMay 20, 2013 

— Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and surprised experts, a congressional investigation has found.

Some of these subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif., according to congressional investigators. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless – exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.

In 2011, for example, one subsidiary paid Ireland just one-20th of 1 percent in taxes on $22 billion on pretax earnings from various operations; another did not file a corporate tax return anywhere and has paid almost nothing on $30 billion in profits since 2009.

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” said Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations. “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.”

Sen. John McCain, R-Ariz., the ranking member on the committee, added: “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.”

Overall, Apple’s tax avoidance efforts shifted at least $74 billion from the reach of the Internal Revenue Service between 2009 and 2012, the investigators said. That cash remains offshore, but Apple could still have to pay taxes on it to American authorities if the company were to return the money to its coffers in the United States.

Scale, audacity huge

Still, the findings about Apple were remarkable both for the enormous amount of money involved – tens of billions of dollars – and the audaciousness of the company’s assertion that its subsidiaries are beyond the reach of any taxing authority because they are “stateless.”

“There is a technical term economists like to use for behavior like this,” said Edward Kleinbard, a law professor at the University of Southern California in Los Angeles and a former staff director at the Congressional Joint Committee on Taxation.

“Unbelievable chutzpah.”

And while Apple’s strategy was unusual in its scope and effectiveness, it underscores how riddled with loopholes the American corporate tax code has become, critics say.

At the same time, it shows how difficult it will be for Washington to overhaul the tax system and shut these loopholes down.

“It’s like playing Whac-A-Mole,” said one congressional staff member. “We’re still puzzling our way through this.”

Subsidiary found Sunday

Although the Senate examination of Apple was started by a Senate subcommittee more than 18 months ago, investigators discovered one major subsidiary in Ireland only Sunday night.

A Senate hearing on the issue is scheduled for Tuesday, and will include testimony by Apple’s chief executive, Timothy D. Cook.

Apple declined to comment, except to make available a text of the testimony Cook is expected to provide at the hearing.

Cook is expected to emphasize that Apple is most likely “the largest corporate income tax payer in the U.S., having paid nearly $6 billion in taxes to the U.S. Treasury” in the last fiscal year.

“Apple does not use tax gimmicks,” Cook is expected to testify.

Cook to push for overhaul

He is expected to seek to rebut the congressional findings by arguing that some of Apple’s largest subsidiaries do not reduce Apple’s tax liability, and to argue in support of a sweeping overhaul of the U.S. corporate tax code – in particular, lowering rates on companies moving foreign overseas earnings back to the United States.

Apple currently assigns more than $100 billion to offshore subsidiaries.

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