Apple uses firms outside US to avoid taxes: panel

STRATEGY::The tax techniques Apple and many other multinational corporations use are legal and allow them to avoid paying US income taxes on profits they make overseas


Wed, May 22, 2013 - Page 15

The world’s most valuable company, Apple Inc, employs a group of affiliate companies located in Ireland to avoid paying billions of dollars in US income taxes, a US Senate investigation has found — and its chief executive officer was to be questioned yesterday.

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

The strategies Apple uses are legal, and many other multinational corporations use similar tax techniques to avoid paying US income taxes on profits they reap overseas.

However, the report found that Apple uses a unique twist, and lawmakers are raising questions about loopholes in the US tax code.

While Apple claims to be the biggest US corporate taxpayer, it is also “among America’s largest tax avoiders,” said US Senator John McCain, the panel’s senior Republican.

Apple CEO Tim Cook, the company’s chief financial officer and its tax chief were scheduled to testify and explain the company’s tax strategy yesterday at a subcommittee hearing.

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 US companies make abroad, saying the move would encourage companies to invest at home.

Apple refuted the subcommittee’s assertions in testimony prepared for yesterday’s hearing and released to the public on Monday evening.

Apple said it pays “an extraordinary amount” in US taxes, citing the roughly US$6 billion it paid in fiscal year last year.

“Apple does not use tax gimmicks,” the statement says.

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

The report estimates that Apple avoided at least US$3.5 billion in US federal taxes in 2011 and US$9 billion last year by using the strategy.

The company, based in California, paid US$2.5 billion in federal taxes in 2011 and US$6 billion last year.

The subcommittee also has examined the tax strategies of Microsoft Corp, Hewlett-Packard Co (HP) and other multinational companies, finding that they too have avoided billions in US 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 US 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 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 are not legally required to pay taxes in Ireland because they are not managed or controlled in that country, in Apple’s view.

The report says Apple capitalizes on a difference between US and Irish rules regarding tax residency.

In Ireland, a company must be managed and controlled in the country to be a tax resident.

Under US law, a company is a tax resident of the country in which it was established. Therefore, the Apple companies are not tax residents of Ireland nor of the US, since they were not incorporated in the US, in Apple’s view.

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