Now that the panel with Apple executives is over, we’re going to wrap up after a long morning dissecting corporate tax minimization maneuvers.
There was some controversy heading into this, as voiced by Rand Paul in the first part of today’s hearings: why “drag” a company so successful as Apple before the investigations subcommittee to question its tax strategies, which all accept as legal? Hasn’t Apple done enough?
Senator Carl Levin, chair of the subcommittee, is retiring at the end of his term. That may explain why he was willing to tread a fair line, but one which nevertheless might invite some backlash. His goal was to use Apple – a company so prominent that it compels livebloggers to watch hours of early subcommittee hearings about it – to show the strategies that the largest U.S.-headquartered multinational corporations can use to exploit a loophole-ridden corporate tax code to the point where somehow, they’re barely paying any taxes.
All of the senators agreed that the corporate tax code is in desperate need of fixing.
But some of the senators, notably Paul and Ron Johnson, noticed few to no problems here: fewer taxes on corporations if beneficial to economic growth, “everyone” has an ownership stake in Apple one way or another. Apple deserves an apology.
By the end of the second panel with Apple executives, it looked as though the committee had lost its focus and just wanted to bounce some ideas off of Cook: what would be a good corporate tax rate? What do you think about Simpson-Bowles? What can we do to help protect our intellectual property owners in foreign markets?
Control worked back to Levin by the end, who closed things with a charge. Basically, he just wanted Apple to admit that it, like other MNCs, set up subsidiaries overseas and transferred assets there there to avoid paying taxes in the United States. That’s all. And what he got in return was legalese.
Thank you for joining us.
The second panel is over.
As the “bullying” hearing shifts pretty quickly into rich folks on both sides on the questioning complaining about how long it takes to do their taxes, Senator Levin tries refocus things. If Apple says it can’t bring its profits home from the Irish subsidiaries, why can it bring them back from South America? Bullock, the tax chief, says it’s because of the different cost-sharing agreements.
The question is whether transfer of intellectual property (the “crown jewels”) is really an “arms-length agreement” between two separate parties. Are the parties really “separate,” if Apple owns and controls the foreign parties?
Levin is asking Cook why he says he “can’t” bring those $100 billion properties home? Apple can, but of course it would require more tax payments, which is the whole point of these things.
Cook seems to like it better when Republican senators are complimenting him on dodging taxes.
The Apple suits keep trying to move everything back to the original agreement made in Ireland in 1980, calling everything since then a natural continuation of it. Levin wants to ask about the specific agreement, made between Apple employees in 2008, that “shifted” the “crown jewels” overseas.
“Don’t kid us” about the implications this makes on U.S. revenues, Levin says.
This is a great line of questioning from Levin, and the first time all day that Cook and co. look uncomfortable.
While Senator Rob Portman asks Apple’s tax chief how much tax compliance costs the company in administrative costs (“A lot”), let’s watch McCain ask about why he has to update his apps all the time.
Senator Kelly Ayotte asks Cook what a good corporate tax rate would be. (Remember when people thought this hearing would be a crucifixion of Apple, instead of asking them for advice?) Cook suggests mid-20s, according to studies he’s seen.
Senator Ron Johnson again is asking about who owns Apple – it’s largely mutual funds, pension funds, etc. He’s getting around to the same point he made earlier, that “everyone” benefits from Apple not paying taxes. This does assume that “everyone” has a sizable investment portfolio, or at least one that’s more beneficial than expanded public services would be.
The second panel is restarting after a break. Senator McCaskill is up. She asks about the relationship with the Irish government.
Cook explains, again, that this arrangement was set up in 1980, and since then the company has built up a valuable operation there. McCaskill, like Levin earlier, wants to talk about now. How does the U.S. keep other countries from ”undercutting us” like Ireland did in the 80s? Cook offers the usual corporate tax code simplification/base-broadening talk.
McCaskill asks about how Apple applies a cost-benefit analysis in deciding if it should relocate to another country. Cook goes on an adorable patriotic tangent about how much he loves America. “We are an American company!” Hmm.
The second panel ends (for now) with McCain asking “why the hell” he keeps having to update all his apps.
Cook: “I don’t see it as unfair. I’m not an unfair person.”
Cook: “I personally don’t understand the difference between a tax presence and a tax residence.” (He probably does, is the thing.)
McCain: Why does AOI exist? 4,000 employees is impressive, but not compared to the size of Apple’s workforce.
Cook: Well, in the 1980s, Apple was looking for a place to distribute its products abroad…
McCain: But what about today?
Cook says that the company’s long relationship with the Irish government has allowed it to develop employees overseas with great experience and knowledge of what they do there. (Perhaps realizing that this sounds laughably silly, he reiterates that AOI is just a holding company, doesn’t matter.)
Senator McCain asks Tim Cook if he feel he has been bullied. Cook is delighted to be here.
You don’t feel you had to be “dragged here?”
“I didn’t get dragged here, sir,” Cook responds, giggling.
Levin asks about if the subsidiaries own Apple’s intellectual property. “They do in part,” Bullock answers.
But do AOI and AOE file tax returns?
In the United States, they do not. But Apple Inc. does!
“We’ve already been through that,” Levin says.
And Levin’s time is up.
Watching Bullock is tense. Regarding the subsidiary AOI, he says: “It… does… not… have a… tax residence… which doesn’t mean it doesn’t pay taxes!” He could use a drink of water.
Senator Levin is ready for questions. He asks Apple tax chief Phillip Bullock where the Irish subsidiaries are “functionally” controlled. After a long pause and some strange faces, Bullock believes that the central management control is in the United States.
Cook doesn’t know the “legal definition” of where companies are centrally managed and controlled but “practically” agrees that the subsidiaries are.
Bullock doesn’t believe that “centrally managed and controlled” is an actual term in U.S. tax law.
What a chest-thumpingly patriotic speech from all-smiles Tim Cook. Now it’s time for the CFO, Peter Oppenheimer, to get into the weeds of the subsidiaries.
Oppenheimer talks of a time not long ago, when it was possible there would be a “world without Apple.” He talks about the streamlining of international operations that helped turn the company around. (There were some inventions along the way, if we recall.)
Cook: “We estimate that the App Store has developed over 300,000 jobs in the U.S … None of that activity was there five years ago.”
We keep the “design and development” of Apple products in the United States.
Perhaps coincidentally, perhaps not, he responds to McCain, noting that Apple does comply with “the spirit of the law.”
He adds that U.S. tax law has not kept up with “the digital age.” Good for him, no?
Tim Cook’s panel begins
The first panel of tax experts is dismissed, the second is brought in. Apple CEO Tim Cook is delivering his statement.
Apple is proud to be an American company he says, exuberantly. He is now delivering corporate pablum about the excitement of innovation and so on.
The grinning man second from the right. Check out that grin.
Our Dan Roberts, in the room, adds: “Apple team (lots of pinstripes and ties for the Valley) nodding along and smiling as Rand Paul says they would be neglecting their duty to shareholders if they didn’t seek ways to minimise their tax exposure.”
Senator Claire McCaskill has no questions, but just wants to say that she loves Apple. “I love Apple. I love Apple!”
McCain, who does *not* get along with Rand Paul, expresses that he finds it “offensive” for Levin to be accused of trying to “bully” a company. Cue the gossip press.
Poor old Mr. Apple, just trying to mind his own business.
Rand Paul is up again. This should be fun. (Fun?)
He asks Professor Harvey if he makes use of any tax deductions.
“Obviously I do,” Harvey says, grinning.
Paul asks if he thinks he’s a bad person for doing that. Harvey does not. Well, there’s that.
Paul On tax reform: “Just do it.” Stop talking about “evil Apple.” Stop vilifying them – they should be getting an “award” today.
“I’m very frustrated by these proceedings… They’re just doing what every company does.” Bring me a company that tries to maximize their tax burden, he says.
This does simplify the issues under discussion a bit.
Responding to McCain, Shay strongly reiterates that the real problem is on the “imbalance” between the level of Apple R&D done in the United States and the tax revenue the government collects from it.
McCain says Apple has violated “the spirit of the law” if not the “letter of the law.” He agrees that much of the problem lies with Congress, however, and calls for comprehensive corporate tax reform.
McCain asks about how successfully a repatriation deal, for companies to bring home earnings under a lower rate, could be done. Harvey sees such a tax holiday as a bad idea, as the last time it was done in 2004, companies used it to distribute dividends and pay down debt – not expand domestically. Shay concurs, calling such holidays a temporary “windfall” for companies that does little long-term help.
Senator Tom Carper is asking questions. Carper hails from Delaware, America’s own tiny tax haven on-the-shore.
Carper is using this as an occasion to ask about the tax recommendations in the Simpson-Bowles deficit reduction plan. Shay says the plan’s broad recommendation to eliminate all tax expenditures as part of tax reform is a pretty, well… undeveloped suggestion?
This is “difficult stuff,” and doing tax reform in “broad brush strokes” is not a good idea. In the meantime, there are smaller steps against income-shifting that the government can take to reclaim tax revenue.
Harvey says it would be a good question for Congress to ask, “how should technology income be allocated?” as a means of focusing the issue.
Senator Ron Johnson is asking who benefits from Apple’s arrangement. Who are the shareholders? Harvey, trying to say this without being a jerk: “The people who own shares of the company.”
What Johnson’s trying to get around to is that many of Apple’s shareholders are American so everything is fine.
Johnson suggests only taxing income on a pass-through basis, eliminating the corporate tax.
Levin is asking about ASI (one of the subsidiaries) being located in a foreign jurisdiction but effectively being controlled by Cupertino’s headquarters. Does that make sense? (He is trying to get the bow-tied professor all outraged, which doesn’t appear likely.)
Shay says we need to rethink our rules on the “cross-border context” to get in the minds of MNCs.
It gets even more elegantly vague:
Shay says he doesn’t see this as an “Apple-bashing day,” more just an opportunity to “see where we are.” How the development of the corporate tax code got to the point where we are today, where Apple can legally set up such a structure.
It’s time for a few questions.
Harvard Law tax professor Stephen Shay is now speaking. He says Apple subsidiaries’ lack of tax residence produces what tax planners call “ocean income.”
Here are some recommendations from his submitted testimony:
In the context of current law, changes may be made that would limit the scope for profit shifting. Most promising is a “minimum tax” imposed on the U.S. shareholder of a controlled foreign corporation in respect of low-tax foreign income earned by the controlled foreign corporation. In design, it actually would be a deemed distribution, as under current Subpart F, but the remaining U.S. tax would be collected when the earnings are distributed or the stock is sold. This approach would effectively take away the advantage of tax havens.
This should be accompanied by taking away the advantage of tax havens for foreign companies that invest in the United States. The United States should protect its source tax base by measures that may include imposing withholding tax on and/or restricting deductions for deductible payments of income paid to or treated as beneficially owned by related persons not “effectively taxed” on the income. In doing this, the United States would take away a substantial advantage that foreign-owned companies have in structuring investments in the United States.
Adopting a balanced approach is necessary to assure a level playing field. I have described elsewhere an approach that if taken by the United States would provide an incentive for other countries to adopt complementary rules. Moreover, the United States should strongly support and lead efforts at the OECD to combat base erosion and profit shifting. I acknowledge that the ideas described above need development into specific proposals, but this may be done in a reasonable time frame and will have value in relation to the principal international tax reform proposals.
Tax professor Richard Harvey is now giving his statement.
“This is going to be a little bit of an Apple-bashing day,” he suspects, but he notes that what Apple has done is within the bounds of international tax law – which “raises its own issues.”
He says he nearly “fell off my chair” when he heard Apple say it doesn’t use tax gimmicks. Although it should be up to the committee, not him, to decide whether they should be labeled gimmicks. What he’s most interested is in why Apple does this and how the system can be changed.
He relates “check-the-box” regulations to his children’s interest in magic, where companies can max taxable earnings go “poof.” From his submitted testimony:
Although shifting income out of the US and locating it in a tax haven like Ireland are key steps in Apple’s international tax planning, Apple must also avoid the so-called “Subpart F” rules. These rules were originally designed to tax passive income earned by foreign subsidiaries of US MNCs and therefore discourage the shifting of income out of the US. However, the rules have been substantially “gutted” through adoption of (i) the check-the-box regulations, (ii) the CFC look-through rule, (iii) the contract manufacturing exemption, and to a lesser extent (iv) the same-country exception.
• Tightening “Subpart F” rules.
• Increase required transparency for MNCs to get a “true picture” of their tax-planning.
He has other ideas about either (a) drastically overhauling U.S. corporate tax low to lower the nominal rate or (b) achieving global “consensus” on handling MNCs. But he doesn’t see either of those as realistic anytime soon.
Levin is ticked at Paul’s statement, and getting rather angry.
Senator Rand Paul is up, and he is angry… at his fellow senators. He is “offended” by this hearing “to bully one of America’s greatest success stories. “If anyone should be on trial here, it is Congress.”
The committee “should apologize to Apple.”
He says it’s the government’s fault for creating such a “byzantine” corporate tax system.
You can read all of the witnesses’ prepared testimonies here.
Senator John McCain is up now.
McCain labels Apple the country’s biggest tax avoider. (It’s a very large company, so.) Most of Apple’s profits, he says, are held by the Irish subsidiaries.
McCain: Apple’s tax strategy has given “new meaning” to its old slogan, “Think Different.”
He notes that 95% of Apple’s R&D takes place in the United States.
The hearing is beginning. Chairman Carl Levin is giving his opening statement.
He’s discussing the decline of corporate tax revenue as a share of total revenue the government brings in each year due to the use of offshore tax havens.
“Despite the immense impact of these offshore tax havens” on the federal deficit, “few Americans” see their impact. The point of the hearings is to show “the damage it does to our fiscal and economic health.”
“Apple is a success story… I carry an iPhone in my pocket,” he says. “What may not be known” is its complex use of tax havens. “More and more intellectual property is the dominant source of value in the economy. It is also highly mobile.”
“Apple’s tax avoidance strategy comes in two parts.” First, offshoring intellectual property. Second, making sure that once this is offshore, it remains free from U.S. taxes.
He is now outlining the subsidiary arrangements described by investigators yesterday. Apple subsidiaries exploit the difference between U.S. and Irish law to designate itself a tax resident “nowhere.” Levin argues that since the Irish subsidiaries are “functionally” controlled by stateside headquarters, they should be subject to U.S. tax law.
Apple’s primary method of offshoring intellectual property is through cost-sharing agreements. “I use the term ‘cost-sharing’ with some skepticism,” he says. All of the money being shared belongs to apple, and all of the signatories were Apple employees. “The intellectual property… was generated in the United States,” but the profits go to Ireland.
He now mentions Apple’s “quiet” arrangement with Ireland to pay “almost no income tax.”
The difference between ASI’s costs and earnings, he explains, was close to $70 billion, money that U.S. taxpayers see no chunk of.
Looking ahead to Apple’s prepared testimony, Levin notes: “Apple executives want to focus on the taxes it has paid, but the real issue is the billions that Apple has not paid.”
It should be a lively subcommittee hearing room, from early indications.
Good morning, this is Jim Newell in Washington. We’re here for this morning’s exciting new Apple public unveiling! Except no iPhones or iPads or dingdongs or anything will be unveiled, sadly. It will be Apple CEO Tim Cook appearing at a hearing before the Senate permanent subcommittee on investigations, about the company’s very special tax practices.
Congressional investigators released findings on Monday showing that Apple uses a “highly questionable” tax minimization strategy of impressive complexity. Several subsidiaries set up by the company, according to investigators, have few or no employees. Located in Ireland, these subsidiaries allowed the company to exist effectively “nowhere” in certain cases.
As the Guardian’s Dominic Rushe wrote yesterday:
During its investigations, the subcommittee found that Apple considers three key subsidiaries, all based in Ireland, to have no tax jurisdiction at all. One of those Irish affiliates, Apple Sales International (ASI), reported sales income of $74bn over four years but paid hardly any tax. In 2011 ASI had pre-tax earnings of $22bn but paid just $10m in tax, a rate of 0.05%.
Apple denies many of the subcommittee’s sweeping allegations, and its strategy heading into this morning’s hearing appears to be one of an ally to those questioning the insanity of the corporate tax code. The company’s prepared testimony says that 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.”
One might expect, however, that senators will badger Cook and other Apple executives, for the cameras.
The hearing begins at 9.30am.
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