Apple Inc. has created a web of offshore entities to avoid paying billions of dollars in U.S. taxes, including three foreign subsidiaries the company says have no home country for tax purposes, congressional investigators say.
The world's most valuable technology company has $102 billion in offshore accounts and shifted billions in profits out of the U.S. into affiliates, based in Ireland where it negotiated a tax rate of less than 2 percent, according to a report by the Senate Permanent Subcommittee on Investigations. The offshore entities of the Cupertino, Calif.-based company have paid little or no tax in recent years, the probe found.
One Apple affiliate – Apple Operations International – generated net income of $30 billion between 2009 and 2012, and declined to declare a tax residence, filed no corporate tax return and payed no income taxes to any nation, the report said. AOI is Apple's principal offshore holding company.
"Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven," Democratic Senator Carl Levin of Michigan, the chairman of the panel, said in a prepared statement. "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."
Release of the report comes in advance of a subcommittee hearing Tuesday, where Apple executives including Chief Executive Officer Tim Cook and Chief Financial Office Peter Oppenheimer are scheduled to testify. Cook's appearance is unprecedented for Apple, whose co-founder and former CEO Steve Jobs never testified before Congress.
In prepared testimony to Congress posted on its website Monday, Apple defended its practices, saying it paid $6 billion in U.S. taxes last year and is one of the largest taxpayers in the country.
Apple's cash is largely held in U.S. banks in U.S. dollar-denominated assets, segregated into a portion that can be used for domestic operations and a portion that can be used only for international investments, the company said. The company doesn't use foreign subsidiaries or gimmicks to avoid U.S. taxes, said the testimony.
The company also said the Irish subsidiaries, which are cost-sharing arrangements, have helped to fund Apple's research and development activities and taken on risks, leading to bigger profits and higher-paying jobs in the U.S.
"This balance of risk and reward is precisely what was contemplated by the U.S. Treasury regulations governing cost sharing agreements," Apple said. The company also said it supports a broader overhaul of the U.S. tax system.
The committee has been examining companies that use various maneuvers to reduce their tax bills, including Microsoft Corp. and Hewlett-Packard Co.
Apple, based in Cupertino, California, has said in filings with the Securities and Exchange Commission that it has $40.4 billion in earnings outside the U.S. on which it hasn’t paid U.S. taxes. If Apple brought that money back to the U.S., the company would owe $13.8 billion, according to the filings
The panel's report is designed to be a “case study” of how a company is able to pay an effective tax rate much lower than the 35 percent U.S. corporate rate, according to staffers on the subcommittee.
The bipartisan probe found that Apple through cost-sharing arrangements has transferred offshore the profits powered by economic rights to its patents and other intellectual property – aspects like licensing and sales. At the same time, the legal rights to its patents remain in the U.S., the panel found.
Apple's relationship with the offshore affiliates is hardly an arms-length one, the probe found.
One of the Irish entities, Apple Sales International, before 2012 had no employees, and two of its three directors are Apple Inc. employees located at California headquarters. All 33 ASI board meetings between May 2006 and March 2012 took place in Cupertino, the report found.
ASI buys Apple's finished products from a Chinese manufacturer, resells them at a higher price to Apple affiliates, and retains the profits, the report said.
From 2009 to 2012, the ASI arrangement facilitated a shift of about $74 billion in global profits away from the U.S., the report said, and the entity paid little in taxes worldwide. In 2011, ASI’s pretax earnings were $22 billion, and it paid just $10 million in taxes – a tax rate of 0.05 percent.
'Check the Box'
The report said Apple benefits from part of the so-called "check the box" tax regulations. Those rules allow dividends, royalties and other fees of lower-tiered subsidiaries to avoid IRS scrutiny because they can be marked as "disregarded" and no longer considered as separate entities. The "passive income" paid by the subsidiaries to a higher-tiered parent company effectively disappears, the report said.
Using this method, Apple avoided paying $9 billion in U.S. taxes in 2012, the report found.
Lawmakers in both parties are seeking a bipartisan agreement on how to tax income that U.S.-based corporations earn outside the country. Democrats and Republicans on the panel say Apple's tax maneuverings, while not illegal, will help frame the debate about how to make the corporate tax system more fair.
"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," Senator John McCain of Arizona, the panel's top Republican, said in a statement. "A company that has found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue."
In the report, the committee also disputed Apple's claim in public filings to investors that it pays an effective tax rate of between 24 percent and 32 percent. It's actually billions less than that, the committee said, because the company includes what it pays the U.S. government in income taxes, and also what it pays to foreign governments and to states.
In 2011, for example, Apple said in its annual report that its net income before taxes was $34.2 billion and that the company’s tax provision for payment of corporate income taxes was $8.2 billion – an effective tax rate of 24.2 percent. Taking out other forms of taxes, the rate paid for U.S. income taxes was 20.1 percent, the Senate committee said.
After years of avoiding the attention of lawmakers and regulators, Tuesday’s hearing reflects a heightened scrutiny of Apple in Washington. Apple's rapid growth since its founding in 1976 means that its operations now touch on a variety of policy issues in entertainment and media such as privacy and international working conditions.
Apple next month will face allegations by the Department of Justice that the company conspired to raise prices of electronic books. Lawmakers also have raised questions about Apple's privacy policies.
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