Apple Accused of “Highly Questionable” Tax Avoidance

Cupertino-based technology giant Apple has been accused by a U.S. Senate committee of trying to find the “Holy Grail of tax avoidance” by using a “complex web of offshore entities” to avoid paying billions of dollars in U.S. income taxes.

Between 2009 and 2012, Apple shielded at least $74 billion in profits from U.S. tax authorities by setting up subsidiaries based ostensibly in Ireland, which had no employees or physical offices, that were run by top officials from the company’s headquarters in Cupertino, a Senate investigation unveiled on Monday.

Cupertino-based technology giant Apple has been accused by a U.S. Senate committee of trying to find the “Holy Grail of tax avoidance” by using a “complex web of offshore entities” to avoid paying billions of dollars in U.S. income taxes.

Between 2009 and 2012, Apple shielded at least $74 billion in profits from U.S. tax authorities by setting up subsidiaries based ostensibly in Ireland, which had no employees or physical offices, that were run by top officials from the company’s headquarters in Cupertino, a Senate investigation unveiled on Monday.

According to the report, one of the Irish affiliates, Apple Sales International, reported pre-tax profits of $22 billion in 2011 but paid just $10 million in tax, a rate of 0.05 percent.

While the practice of using foreign operations to avoid U.S. taxes is legal and common among multinationals reluctant to repatriate their foreign earnings, which could be taxed at a top rate of 35 percent, Apple’s scheme was unprecedented and fuels the debate over whether the U.S. tax code needs an overhaul.

Related: U.S. Firms Earned Record $1.9 Trillion Overseas in 2012

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” said Senator Carl Levin, head of the Senate Permanent Subcommittee on Investigations, in a statement Monday. Apple has a cash stockpile of $145 billion, but the committee said $102 billion of this was held offshore.

Levin added:

[quote] 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. We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed. [/quote]

Tim Cook, CEO of Apple, will answer the accusations at a hearing on Tuesday. In a prepared testimony, Apple said it did not use tax gimmicks and instead called for legislation that “dramatically simplifies the U.S. corporate tax system”.

“Apple complies fully with both the laws and spirit of the laws. And Apple pays all its required taxes, both in this country and abroad,” the statement read.

“Apple welcomes an objective examination of the U.S. corporate tax system, which has not kept pace with the advent of the digital age and the rapidly changing global economy. The company supports comprehensive tax reform as a necessary step to promote growth and enable American multinational companies to remain competitive with their foreign counterparts in both domestic and international markets,” it added.

Cook pointed out that Apple is one of the largest taxpayers in the United States, having paid $6 billion in federal income tax in 2012 and created more than 600,000 jobs in the American economy. Cook also defended the company’s Irish subsidiaries, which he says now employ more than 4,000 people.

He characterised Apple’s relationship with the Irish subsidiaries as “cost-sharing agreements” and said the subsidiaries shared risks as well as rewards, adding that the arrangement was regularly audited by the U.S. Internal Revenue Service.

U.S. Senators however dismissed his argument, calling the loophole on international profits to be closed. “This is not an agreement between independent parties. These tax agreements they talk about are people all working for Apple sitting down and signing a piece of paper which shifts profits to a tax haven, that’s what it is all about,” said Levin.

Related Infographic: Bailed Out and Bailing Ship – Tax Havens around the World

Senator John McCain attacked Apple’s “highly questionable tax strategies” and said its  “creation of companies that don’t exist anywhere for tax purposes” was “the epitome of tax creativity”.

McCain added that his constituents were “mad as hell” to learn that Apple was paying tax rates that were sometimes lower than 1 percent. “I’ve never seen anything like this,” said the Republican.