Apple CEO Tim Cook will meet before Senate leaders on Tuesday to explain how the tech giant has navigated through a series of complicated international subsidiaries over the past several years to avoid paying higher taxes during an era of record corporate profits and expanding international sales.
Tim Cook’s public appearance before the Senate Permanent Subcommittee on Investigations presents an inevitable clash of competing interests around the themes of capitalism, fiscal governance, and corporate taxation.
As Americans pay higher taxes in 2013 while U.S. corporations seek to lower the 35 percent U.S. corporate tax rate, there is growing debate today about whether Washington D.C. should continue to allow wealthy corporations to use tax loopholes to keep billions of their profits abroad rather than to face higher taxes in the U.S.
During the U.S. presidential election last November, President Obama and Republican candidate Mitt Romney both spoke about the need to lower the corporate tax rate and close tax loopholes that permit corporations and the wealthiest Americans to avoid paying U.S. taxes.
Obama proposed lowering the corporate tax rate to 28 percent from the current 35 percent top corporate rate while establishing a minimum tax on multinational corporations’ foreign earnings.
Mitt Romney proposed lowering the corporate tax rate to 25 percent and switching from taxing worldwide income to a territorial based tax system.
During Tuesday’s hearing before a Senate subcommittee Apple CEO Tim Cook will testify about Apple’s role in avoiding U.S. corporate taxes through a complicated Pandora’s box like system of international subsidiaries that is anything but transparent and easy to understand.
The Senate hearing is expected to raise some important questions about the role of capitalism in 21st century America operating in a polarized political system which maintains one of the highest corporate tax rates in the word and uses a complicated tax system that allows many corporations to take advantage of longstanding tax loopholes to pay lower levels in actual taxes.
Many of the questions from the Senate subcommittee on Tuesday will be directed at CEO Tim Cook to discover whether the Senate panel’s findings are correct that show Apple took full advantage of technicalities in Irish and American tax laws to pay hardly any taxes on corporate taxes of $74 billion over the past four years through a subsidiary called Apple Sales International.
Although the Senate panel concluded that Apple did nothing illegal, one loophole in particular has allowed the tech company to avoid $9 billion in U.S. taxes in 2012 alone.
“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” said Senator John McCain (R-Arizona), a ranking member of the committee.
The Senate committee’s report targets Apple’s international base in Cork, Ireland, where Apple has based its financial operations for the rest of the world which is beyond the reach of the IRS.
Apple has negotiated a 2 percent tax rate in Ireland which holds a 12 percent corporate tax rate.
While running another internal subsidiary from Cork, Ireland, known as Apple Operations International, Apple benefited from the 2 percent tax rate in Ireland and shrewdly avoided being audited by both American and Irish auditors, walking away with a significantly lower tax bill.
Apple has $145 billion in cash with $100 billion kept offshore, according to data released in these documents from Apple.
Like many other U.S. corporations, Apple seeks corporate tax reform in the U.S. that will create more of an incentive for the company to re-allocate their billions in corporate profits back to the U.S.
Apple wants Congress to eliminate all corporate tax loopholes, lower the corporate income tax rates, and implement a “reasonable tax” on foreign earnings.
Apple maintains that it pays billions in U.S. taxes while still supporting thousands of jobs across the U.S. as the company becomes less dependent on U.S. profits to generate revenue growth.
According to Apple’s testimony documents, “Apple estimates it has created or supported approximately 600,000 jobs in the U.S., including nearly 50,000 jobs for Apple employees and approximately 550,000 jobs at other companies in fields such as engineering, manufacturing, logistics and software development.”
“Apple is likely the largest corporate income tax payer in the U.S, having paid nearly $6 billion in taxes to the US Treasury in 2012. These payments account for $1 in every $40 in corporate income tax the U.S Treasury collected last year.”
Last year, approximately 61% of Apple’s revenue was gained from its international operations.
Apple reports that it “carefully manages this foreign, post-tax income to support its foreign operations through a corporate structure that protects and promotes the interests of its shareholders” while “current US corporate income tax law severely discourages the use of these funds in the US by imposing a 35% tax on repatriation.”
The Senate subcommittee hearing on Tuesday will highlight some of the tension that is building on Capitol Hill to hold giant corporations like Apple accountable for paying their fair share in corporate taxes as Apple maneuvers to preserve their large cash profits from the cash strapped U.S. government that is still undecided about how to embrace corporate tax reform and confront U.S. corporations that use deceptive tactics to avoid being taxed.