WASHINGTON – Apple chief Tim Cook faced a grilling Tuesday by U.S. lawmakers on “sham” subsidiaries and “convoluted” strategies to shift profits offshore, but denied the company uses “gimmicks” to avoid paying taxes.
Cook told a Senate hearing Apple lives up to its tax obligations and more, but some lawmakers expressed outrage over findings of the panel’s probe that the firm avoided taxes by using a web of foreign subsidiaries, some without any tax jurisdiction.
Sen. Carl Levin, chairing the hearing, said the investigation found a disturbing pattern of shifting profits, despite denials by Cook and other Apple executives.
“Of course you shifted something, the most valuable thing you have, the intellectual rights of your company,” Levin told Cook and two other Apple executives called before the Senate Permanent Subcommittee on Investigations.
Levin said the report showed Apple shifted profits to offshore entities that were “a sham and a mere instrumentality of the parent.”
The Michigan Democrat said the report showed Apple assigned its “crown jewels,” or intellectual property rights, to three Irish subsidiaries controlled by Apple, which collected profits on much of Apple’s global profits.
“About 70 percent of the profits you own end up with those three Irish corporations,” he said.
Republican Sen. John McCain echoed those sentiments, saying, “It is completely outrageous that Apple has not only dodged full payment of U.S. taxes, but it has managed to evade paying taxes around the world through its convoluted and pernicious strategies.”
Cook said the issue was “complex” and often misunderstood.
“The way I look at it is that Apple pays 30.5 percent of its profits in taxes in the United States,” the chief executive said.
“We do have a low tax rate outside the United States but this tax rate is for products we sell outside the United States.”
Cook said he was “proud of our contributions to the American economy” and said Apple complied with laws and taxes wherever it operates, dismissing the talk of shell companies.
“Apple has real operations in real places with Apple employees selling real products to real customers,” he said. “We pay all the taxes we owe, every single dollar.
“We don’t depend on tax gimmicks. We don’t move intellectual property offshore and use it to sell our products back to the United States to avoid taxes. . . . We don’t stash money on some Caribbean island.”
Apple Chief Financial Officer Peter Oppenheimer, also appearing at the hearing, said that while its Ireland-based holding company pays little or no taxes, “the profits have already been taxed by foreign governments where the income is earned.”
Cook acknowledged that Apple keeps a large amount of cash offshore, and said that the top corporate tax rate of 35 percent discourages the company from repatriating the funds.
This situation, he said, highlights the need for a “dramatic simplification of the corporate tax code,” in which rates would be lowered and loopholes closed.
Cook said that even though this would mean Apple would pay more in taxes, he supported “a reasonable tax rate that allows the free flow of capital back to the United States.”
Richard Harvey, a Villanova University law professor, told the hearing that “I suspect what Apple has done is within the bounds of international law.”
But he said that when he heard Apple’s comment that it did not use “gimmicks” to reduce taxes, “I about fell off my chair.”
He said his analysis showed Apple shifted 64 percent of its 2011 income into Ireland into a “shell corporation” that had “no employees, no real activity, basically an entity on paper.”