Apple's Unpaid Billions Put Corporate Tax Policy in the Spotlight

Apple, which uses legal means to avoid paying billions in U.S. taxes, offered itself as an example of why corporate tax policy should be changed.

Apple, like Hewlett-Packard, Microsoft and other multinational organizations, uses a complicated fiscal system to help it avoid the 35 percent tax rate that the U.S. government charges on money earned abroad and brought home. Apple's system helped it to avoid paying at least an additional $9 billion in federal taxes last year, the Senate Permanent Subcommittee on Investigations said in a report May 20.

The following day, Apple CEO Tim Cook voluntarily testified before the subcommittee and called for a more simplified tax system.

"We pay all the taxes we owe. Every single dollar," said Cook. "We don't depend on tax gimmicks."

In his written testimony, Cook expanded on the gimmicks idea, adding that Apple doesn't have off-shore accounts or keep its money on a Caribbean island or in an account in the Cayman Islands.

The subcommittee, however, was focused on another island—Ireland—where Apple has created five subsidiaries, including Apple Operations International (AOI). Cook said in his submitted written testimony that Apple pays taxes in the jurisdictions where its money is earned—61 percent of Apple revenue came from international operations last year—and that AOI "does not reduce Apple's U.S. tax liability."

AOI, which is incorporated in Ireland, keeps its bank accounts in the United States and holds its board meetings in California, The New York Times reported May 20.

"It would be very expensive to bring that cash back to the United States," Cook said during the hearing, according to a partial transcript published by MacRumors. "Unfortunately, the tax code has not kept up with the digital age. We are handicapped in relation to our foreign competitors who do not have such constraints on the free movement of capital."

Sen. John McCain (R-Ariz.), asked Cook whether he didn't think it was unfair to smaller companies in the United States that Apple doesn't bear the same tax burden it would if its money were all at home.

"Apple is earning these profits outside the U.S. By law and regulation, these are not taxable in the U.S. AOI invests that money overseas and then the interest from those investments is taxed in the U.S.," Cook said. "I see this as a very complex topic and I'm glad we're having the discussion. Honestly, I don't see it as being unfair. I am not an unfair person. That's not who we are as a company or who I am as an individual."

Apple has asked for changes to the tax laws.

"We recommend a dramatic simplification of the corporate tax code," Cook said. "We made this recommendation with our eyes wide open, fully recognizing that this would likely result in an increase in Apple's U.S. taxes. We strongly believe that such reform would be fair to all taxpayers and would keep the U.S. competitive."

Sen. Carl Levin, (D-Mich.), who in a statement ahead of Cook's testimony had said that Apple "sought the Holy Grail of tax avoidance," suggested to Cook that while Apple's practices may be legal, they're not right.

"You made a decision to shift economic value overseas and the result is that most of your profits are not taxed," Levin said. "You're an American company. You're proud of it. We're proud of it. The result of these arrangements is that most of your profit is now in Ireland in these companies that don't exist. Of course we have to change this system. But to change it, we have to understand what is going on, and what it going on is a huge loss of revenue to the United States. ... We cannot continue a system where a company ... as phenomenally successful as yours can make a decision ... as to where the profits will flow."