Apple denies tax ‘gimmicks’ as criticism mounts

Apple CEO Tim Cook arrives on Capitol Hill, in Washington, Tuesday, May 21, 2013, to testify before the Senate Homeland Security and Governmental Affairs Permanent subcommittee on Investigations hearing to examine the methods employed by multinational corporations to shift profits offshore and how such activities are affected by the Internal Revenue Code. Cook is expected to defend how the world's most valuable company, based in Cupertino, Calif., holds a billion dollars in an Irish subsidiary as a tax strategy, according to a report issued this week by the subcommittee. (AP Photo/J. Scott Applewhite)

WASHINGTON, May 21, 2013 (AFP) – Apple denied Tuesday using “gimmicks” to dodge taxes as the tech giant came under attack from US lawmakers for using “sham” subsidiaries and “convoluted” strategies to shift profits offshore.

In a statement issued ahead of a Senate hearing on corporate strategies to minimize taxes, Apple said it “carefully manages its foreign cash holdings to support its overseas operations in the best interests of its shareholders.”

“Apple does not use tax gimmicks,” the company testimony said ahead of the hearing where chief executive Tim Cook and other Apple executives were set to testify.

“Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands.”

Senator Carl Levin, chairing the hearing of the Permanent Subcommittee on Investigations, said however the report by the panel found a disturbing pattern of shifting profits through a complex network of subsidiaries, many with no declared tax jurisdiction.

Levin said the investigation showed Apple shifted profits to offshore entities which were “a sham and a mere instrumentality of the parent.”

“Apple is a great company but no company should be able to determine how much they should pay in taxes,” Levin told the hearing.

Republican Senator John McCain echoed those sentiments, saying, “It is completely outrageous that Apple has not only dodged full payment of US taxes, but it has managed to evade paying taxes around the world through its convoluted and pernicious strategies.”

Senator Rand Paul meanwhile denounced the hearing, saying he was “offended by a $4 trillion government bullying and badgering one of America’s greatest success stories.”

“I think the Congress should be on trial for creating a bizarre and byzantine tax code… what we need to do is apologize to Apple, compliment them for the job they have done and get on with our business.”

Richard Harvey, a Villanova University law professor, told the hearing that “I suspect what Apple has done is within the bounds of international law.”

But he said that when he heard Apple’s comment that it did not use “gimmicks” to reduce taxes, “I about fell off my chair.”

He said his analysis showed Apple shifted 64 percent of its 2011 income into Ireland into a “shell corporation” which had “no employees, no real activity, basically an entity on paper.”

Apple said in its statement it “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.”

The California maker of iPhones and iPads said it “pays an extraordinary amount in US taxes” and is “likely the largest corporate income tax payer in the US, having paid nearly $6 billion in taxes to the US Treasury” in the past fiscal year.

Apple said it “has substantial foreign cash because it sells the majority of its products outside the US,” with 61 percent of Apple revenue coming from overseas last year.

The statement added that Apple supports “comprehensive reform of the US corporate tax system” even though “it would likely result in Apple paying more US corporate tax.”

The Senate report said Apple used a “cost sharing agreement” to transfer intellectual property assets offshore and shift the resulting profits to a tax haven jurisdiction.

One subsidiary “reported net income of $30 billion, but declined to declare any tax residence, filed no corporate income tax return, and paid no corporate income taxes to any national government for five years,” the report said.

The panel said Apple also negotiated a tax rate of less than two percent with the government of Ireland, lower than that the 12 percent statutory rate, to use Ireland as the base for its network of offshore subsidiaries.

An analysis by the activist group Citizens for Tax Justice produced similar conclusions to the Senate panel.

It said it found “Apple has paid almost no income taxes to any country on its $102 billion in offshore cash holdings,” and that “this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens.”