Apple has submitted written testimony, in advance of CEO Tim Cook's May 21 appointment to speak before a U.S. Senate Subcommittee on Apple's tax-payment policies—and how U.S. regulators might update tax policy to make it more business-friendly.
The New York Times reported May 20 that Apple has avoided paying billions in taxes and, according congressional investigators, set up a "web of subsidiaries so complex it spanned continents and went beyond anything experts had ever seen."
According to the Times, Apple's efforts between 2009 and 2012 kept at least $74 billion out of reach of the Internal Revenue Service.
Apple maintains that it has done nothing wrong and in fact favors tax reforms that could result it paying even more in taxes. The Times says it is expecting a "potentially explosive confrontation" between Cook and a group of bipartisan lawmakers.
Below are 10 key takeaways from the 17 pages of testimony Apple submitted, on which Cook will base his remarks.
1. Apple says bring it on. "Apple welcomes an objective examination of the US corporate tax system, which has not kept pace with the advent of the digital age and the rapidly changing global economy. The Company supports comprehensive tax reform as a necessary step to promote growth and enable American multinational companies to remain competitive with their foreign counterparts in both domestic and international markets."
2. Apple says it makes great contributions to the U.S. economy. Apple says it employs 50,000 Americans and another 550,000 less directly, in fields including software development, engineering, manufacturing and logistics. In income and payroll taxes, it pays "billions of dollars annually to the US Treasury."
3. Apple believes it likely pays more in taxes than anyone in the U.S. Apple says it pays an "extraordinary" amount in taxes. In 2012, it paid nearly $6 billion in taxes, which it says is basically $1 in every $40 the Treasury collected last year. This year, Apple expects to pay $7 billion in taxes.
4. Apple says it doesn't use "tax gimmicks." "Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; it does not have a bank account in the Cayman Islands."
5. Apple has lots of cash outside of the United States because that's where it earns the majority of its money. "International operations accounted for 61 percent of Apple's revenue last year and two-thirds of its revenue last quarter." If it brought this money into the U.S., the money would be subjected to a 35 percent U.S. corporate tax rate, which isn't "in the best interests of its shareholders." For this reason, Apple preferred to borrow money, at a rate of 2 percent, to fund the $100 billion it plans to return to its shareholders over next two-plus years, rather than use the cash it has overseas.
6. Apple says its Ireland-based subsidiary Apple Operations International (AOI) is not a shell company. "Apple's base of operations in Ireland now employs nearly 4,000 people engaged in manufacturing, customer service, sales support, supply chain and risk management operations, and finance support services."
7. Apple says its foreign earnings are "taxed in the jurisdiction where they are earned." The Times has reported that the United States bases residency on where companies are incorporated, while Ireland looks at where they're managed, enabling Apple to "fall neatly between the cracks" of the two jurisdictions. According to the Times, AOI has not filed tax returns in Ireland, the United States or elsewhere over the last five years, though it saw income of $30 billion between 2009 and 2012.
8. Apple has sharing agreements with two of its Irish subsidiaries. Apple says it conducts nearly all of its research and development in the United States, and has agreements with two of its subsidiaries, AOI being one, which "share the costs and risks of this R&D." The subsidiaries have the right to distribute Apple products in areas outside of the U.S., in exchange for contributing to Apple's R&D. "Under US tax law," says Apple, "these foreign intercompany payments are not taxable."
9. Apple has been moving jobs to the United States. Since 2002, Apple says it has increased its U.S. workforce "five-fold." It has built and opened 250 retail stores, is building a new Cupertino, Calif., campus; is building a second campus in Austin, Texas; has built data centers in North Carolina, Oregon and Nevada; and this year is moving manufacturing of its Mac lines to the United States.
10. Apple has made tax reform recommendations to President Obama and several members of Congress. Apple says that the current tax system, "which applies industrial-era concepts to a digital economy, actually undermines US competitiveness." As ever, Apple says that it favors "the simple, not the complex." Apple believes comprehensive reform should accomplish four things: "Be revenue neutral; eliminate all corporate tax expenditures; lower corporate income tax rates; and implement a reasonable tax on foreign earnings that allows free movement of capital back to the US."
While the Times is anticipating considerable friction, Apple said it appreciates the opportunity "to contribute constructively to this important debate."