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  (Source: Reuters)
Ireland also blasts U.S. criticism of "tax sheltering"

The Democratic-controlled U.S. Senate has turned its attention to Apple, Inc. (AAPL) by focusing on the low effective tax rates paid on the profits hauled in by the tech industry's most profitable firm.  Today as Apple's CEO Tim Cook -- who once suggested Apple has more money than it knows what to do with -- was grilled by Congress on his so-called "Double Irish With a Dutch Sandwich," which allows Apple to cut taxes by directing profits through low-cost Irish subsidiaries, the Netherlands and the Caribbean. However, Irish officials and some U.S. conservatives returned fire.

I. Irish Say Senate's Numbers Are Wrong

Apple's cash pile may grow to $170B USD by the year's end which is about 1 percent of the national debt of the U.S. Officially, U.S. tax rates on corporate profits hover around 18-20 percent after deductions, but Apple is accused of paying far less via using shell companies in low tax regions.

But in an interview with Irish news agency RTE Deputy prime minister Eamon Gilmore slammed accusations of wrongdoing, remarking, "They are issues that arise from the taxation systems in other jurisdictions, and that is an issue that has to be addressed first of all in those jurisdictions." 

A spokesman for Ireland's finance department said the nation's system was fully transparent and statute based.  He stated resolutely that there was "no possibility of individual special tax rate deals for companies."

A spokeswoman for Ireland's Office of the Revenue Commissioners adds, "All companies in Ireland pay the standard 12.5 percent rate on their trading profits arising in Ireland, and they pay a corporation tax rate of 25 percent on their Irish non-trading income."

Apple Operations
Apple Operations Inc. (A.O.I.) in Cork, Ireland reportedly received $29.9B USD in profits between 2009 and 2012, and paid less than 2 percent in taxes. [Image Source: Reuters]

Irish citizens are also defensive about the country's strategy of snagging multinational companies' outposts via low tax rates.  They say the nation's unemployment issues would be worse if it were not for companies like Apple.  Comments one worker to Reuters, "We're a small country and feel we can't say no. We know they'll just go off to one of these Asian countries ... They're a law unto themselves."

Apple maintains a three-story office building in Cork, which is currently receiving a shining new glass-and-steel expansion, funneling money to local builders and contractors.  Apple also directly employs 2,800 in Cork, and has promised to add another 500 employees shortly.

But according to the 40-page Senate memo released before the hearing, Apple hides much of its income in a trio of Irish subsidiaries that have no official tax residency in Ireland.  The Senate memo claims Apple has paid an effective rate of around 2 percent for the last ten years, versus the aforementioned "official" rate of 12.5 percent.  The report claims that between 2009 and 2012 Apple affiliates funneled $29.9B USD in profits -- or roughly 30 percent of profits -- into the Cork subsidiaries.

The average tax rates of the Organisation for Economic Co-operation and Development (OECD) -- whose member states include most of the nations Apple operates in -- had an average tax rate of 24 percent in 2012, yet Apple only paid 1.9 percent that year on its $37B USD in overseas profit that year, thanks to its clever positioning.  The memo comments, "Ireland has essentially functioned as a tax haven for Apple."

Ireland's European Affairs minister Lucinda Creighton claimed the Senate's figure of a 2 percent rate in Ireland was flat-out wrong.  She comments, "There is no such deal. There is no deal for any company to pay 2 percent corporate tax in Ireland - that is erroneous."

But Apple's accounting firm Ernst & Young LLP refused to confirm or deny the number, saying it was confidential information.

II. Conservatives in the Senate Blast Hearings

Scrutiny picked up steam in April 2012, following a report in The New York Times accusing Apple of dodging millions of dollars in taxes in California and 20 other U.S. states (and dodging billions of dollars in taxes worldwide).  Over the past year, British Parliamentarians have held hearings regarding Apple's behavior.

According to their figures Apple pocketed £6B ($9.50B USD) in profit from the British market last year, but paid only £10M ($15.8M USD) in taxes.  Apple in a statement denied it engaged in "tax gimmicks" and said it would pay $7B USD in the U.S. in taxes in fiscal 2013.

The Congressional hearing took place this afternoon.

In the hearing Tim Cook -- accompanied by Apple's Head of Tax Operations Phillip A. Bullock -- admits, "I have no current plan to bring them back at the current tax rate."

On Apple Operation Int'l, Tim Cook said, "[A.O.I.] is nothing more than a holding company — it’s not an operating company.  [A.O.I.] is nothing more than a company that has been set up to provide an efficient way to manage Apple’s cash from income that’s already been taxed.  In my view A.O.I. does not reduce U.S. taxes at all."

Tim Cook
Apple CEO Tim Cook defended his company at the hearing. [Image Source: Reuters]

He says Apple pays tax on profit from every single product it sells in the U.S.

Senator Carl Levin (D-Mich.) remarked, "The only reason you’re not bringing them home is because they were transferred to these three Irish companies.  That’s the reason why they’re there. It’s your decision not to bring those profits home, so now $100 billion plus is stashed away in those three Irish companies that you control but is nonetheless in their legal name. The question is, will you bring them home?"

He points to an Apple subsidiary to paid only $5B USD back to Apple's U.S. operations, but received a reported $74B USD in profit -- a net tax loss of almost $70B USD in taxable income for the U.S.

Sen. Levin suggests Congress should play debt collector, trying to recoup the lost taxes from Apple's cash pile.  And he believes it is possible to do so under the current law.  He comments, "It is possible to penetrate an entity’s corporate structure for tax purposes and to collect U.S. taxes on its income, [if it is shown that a foreign subsidiary is] nothing more than instrumentality of its parent company, a sham."

Some conservatives joined in the fray.  Sen. John McCain (R-Ariz.), a former Republican presidential nominee, remarked that, "Apple has violated the spirit of the law if not the letter of the law."

John McCain
Sens. John McCain (R, right) and Levin (D, left) were not satisfied with Mr. Cook's answers.
[Image Source: AP]

He argued, though, that the onus was on Congress to perform "comprehensive reform" of the tax system.

III. Sen. Paul Wants Apology From Congress, Reform

But Senator Rob Portman (R-Ohio), countered that Apple's South Korean rival Samsung Electronics Comp., Ltd. (KSC:005930) pays the same effective rate as Apple globally -- 14 percent.  But he comments that the real problem is the high tax rate in the U.S. -- he points out that South Korea's lower tax rate allows it to return its profits home.

Villanova University Law School Professor J. Richard Harvey Jr. seemed to echo this perspective in testimony as an expert witness.  While he accused Apple of dodging $7.7B USD in U.S. taxes, he complained that the U.S. tax code makes returning money onerous.  He suggested a "long term solution" of lowering the tax rate on overseas profits returned to the U.S. to 15 percent.

Tim Cook agrees.  In his testimony, he comments, "Unfortunately the tax code has not kept up with the digital age."

One of Mr. Cook's biggest defenders was Sen. Rand Paul (R-Kent.).  He said Apple should be cheered for, not "vilified", remarking, "Money goes where it is welcome.  Everybody talks about tax reform. Just do it."

Sen. Rand Paul
Sen. Rand Paul defended Apple and said Senate Democrats -- as well as some Republicans like Sen. McCain should be ashamed and owe Apple a big apology. [Image Source: The NYT]

On Twitter he posted:

While the debate is unlikely to be laid to rest easily, it should be noted that many other companies like Microsoft Corp. (MSFT) and Google Inc. (GOOG) also shelter money in Ireland.  Google recently came under fire for dodging about $1.6B USD USD (£1B) in taxes by way of the island Bermuda. Google sent £6B ($9.6B USD) through Bermuda over the course of last year, which halved its 2011 tax bill.

Other top companies like Starbucks Corp. (SBUX) and, Inc. (AMZN) also are accused of using Caribbean, European, or Asian tax havens.  Of course, such tactics could be argued to actually be performing a key duty to shareholders -- minimized taxes under the law and maximizing profits.

Sources: The New York Times, Reuters

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RE: The World's Tax Collector
By MozeeToby on 5/21/2013 5:47:21 PM , Rating: 5
This isn't precisely how it works, but gives a good idea of how the basic system functions.

US Company A spends $100,000,000 developing cool new software. Company A sells or transfers the rights to the resulting software to company B for $110,000,000. Company B sells 100,000,000 individual copies of the software to distributors C, D, and E (again owned and operated by company A) for $100 a pop. Distributors C, D, and E sell the copies to consumers or retailers for $110 a pop.

Company A reports $10,000,000 in profits. Companies C, D, and E collectively report $1,000,000,000 in profits. Company B reports $9,890,000,000 in profits. Companies A, C, D, and E are based in the US, company B is in Ireland.

Company B is in a tax friendly jurisdiction, often employing just a few dozen people and with zero autonomy to make decisions without the OK from the home office. Despite the fact that the software was manufactured and sold in the US, less than 10% of the profits are taxed.

But, you say, you can't bring the profits back without being taxed, the money is useless to Company A! Well no, what company A can do is report that money as cash on hand, and then borrow against it at ridiculously low interest rates (because your collateral is perfectly liquid). Loans aren't income, so that isn't taxed. You can then use that money to do whatever you want, including paying your CEO millions of dollars or paying a dividend to the stockholders.

RE: The World's Tax Collector
By ptmmac on 5/21/2013 6:17:04 PM , Rating: 2
Tim Cook explicitly said that Apple does not do what you are describing. What they are doing is spreading the costs of the research and development across the whole world so that money from outside of the United States can be brought back to fund the development. What Apple can't do is use the money from over seas to buy assets such as Cap Expenses. Apple has one of the most conservative bookkeeping systems on this planet. Do you really believe if Apple was doing anything remotely shady that the CEO would agree to testify before Congress? Lying to Congress can get you sent to the poky. Tim Cook may not be prefect, but he is a straight arrow if ever there was one.

RE: The World's Tax Collector
By Mint on 5/22/2013 1:38:20 PM , Rating: 2
What Apple can't do is use the money from over seas to buy assets such as Cap Expenses.
Of course they can. All they have to do is shift profits back to the US, and then use them to cover the financing of the cap expense (which is tax deductible).

That's not an issue, though. The gov't wants companies to use profits to buy new equipment/buildings/etc, and it lets them deduct those expenses even when they keep all profits in the US.

What they don't want is for the company to put earning into a pile of cash without paying taxes.

RE: The World's Tax Collector
By Skywalker123 on 5/23/2013 4:20:31 PM , Rating: 2
Companies don't pay taxes, people do

RE: The World's Tax Collector
By Mint on 5/24/2013 7:41:56 AM , Rating: 2
That's like saying sales tax doesn't exist, only income tax does.

Would you like to make corporate tax zero and increase income tax to compensate? Let's assume companies give raises to their employees so that their net income is the same. Overall, the total tax burden is the same.

Individually, however, companies will feel different effects. Companies with a high payroll-to-profit ratio get punished, and companies with a low payroll-to-profit get rewarded. Great plan.

How you tax affects behavior.

RE: The World's Tax Collector
By StanO360 on 5/21/2013 6:32:12 PM , Rating: 1
Even if they did do what you're saying, Cook would and should be fired if he did not do it.

The problem is not Apple's, it's the government. Corporations are not the Devil incarnate as Obama would have us believe. A 35% tax (plus state, property, sales, and NOW hordes of onerous regulations) is crippling to many companies.

RE: The World's Tax Collector
By Fleeb on 5/21/2013 7:51:23 PM , Rating: 2
Only if we could bring those Foxconn jobs back to the USA. That is one indication companies like Apple invest back and bring jobs.

RE: The World's Tax Collector
By superflex on 5/22/2013 8:13:43 AM , Rating: 1
The EU has an effective flat corporate tax rate of 14% while the average American company pays 18% and up to 35%.
Senator Paul is 100% right. Goons like Charlie Wrangell and the other tax cheats on the Ways and Means Committee are to blame.

RE: The World's Tax Collector
By lewisc on 5/22/2013 3:53:12 PM , Rating: 2
Not quite sure what you mean with reference to the EU flat rate - within the EU, corporation tax rates are set at a national rather than supranational level.

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