Apple Says It Follows Tax Codes to the Letter

The Seattle Times, May 22, 2013

Apple CEO Tim Cook strongly defended the company’s tax practices in a Senate hearing highlighting their use of Irish subsidiaries to shelter billions of dollars of income from U.S. taxes. “We pay all the taxes we owe-every single dollar,” Cook told the Senate’s Permanent Subcommittee on Investigations. “We not only comply with the laws but we comply with the spirit of the laws,” he said. “We don’t depend on tax gimmicks.”

Cook said the tax code “has not kept up with the digital age.” He said it restricts the free movement of capital in comparison to the codes in other countries. He called for a “dramatic simplification of the corporate tax code,” including lower tax rates and a “reasonable tax on foreign earnings.”

The panel’s chairman, Sen. Carl Levin, called Apple “an American success story with a well-earned reputation for creativity.” But he said that doesn’t excuse the company’s tactics which the subcommittee’s investigation found helped Apple avoid paying at least $9 billion in U.S. taxes in 2012. He said the real issue is not on the U.S. taxes paid but is the billions in taxes it has not paid, thanks to offshore tax strategies whose purpose is tax avoidance, pure and simple,” Levin said. He went on to say that Apple “is exploring an absurdity” that allows three of its subsidiaries in Ireland to claim they have no responsibility to pay taxes to any country.

One of the companies, Apple Operations International, which has no employees but reported $30 billion in income over four years, has not filed an income tax return in any country for the past five years, the subcommittee investigation found. A second company, Apple Sales International, holds the economic rights to Apple’s intellectual property in Europe, Asia and Africa. This tactic, which is legal, is possible through complex cost sharing agreements that transfer the economic rights to valuable intellectual property.

Levin said, “Many U.S. companies, including Apple, use transfer pricing to shift intellectual property rights to offshore affiliates and then direct income associated with that intellectual property-taxable income that would otherwise flow to the United States where the intellectual property was developed-to the affiliate’s home jurisdiction, which is typically a tax haven.”

Comment: This is a complex situation, but it appears that Apple is following the letter of the law. Most companies and individuals want to legally minimize their tax. Many U.S.-based global companies are transferring intellectual property transfer outside the U.S. The IRS is knowledgeable, or certainly should be, of this strategy. You might consider it a moral issue but the IRS has made it legally possible in the tax code. The tax code should be changed or we should accept that companies are limiting income taxes legally as the present code is written.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics