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Cook Defending Apple Puts Loophole-Closing Back on Agenda

May 21 (Bloomberg) -- Apple CEO Tim Cook defended his company’s use of offshore tax shelters before U.S. senators who castigated the most-valuable technology company for avoiding $9 billion and more in payments. Peter Cook reports on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

A congressional hearing into Apple Inc. (AAPL)’s use of offshore tax shelters called attention to how U.S. companies lower their taxes, and underscored the difficulty Congress confronts when trying to end the practice.

Companies with multinational operations have lobbied for years to lower corporate tax rates in exchange for bringing some of their offshore cash home. Their efforts have been given a fresh push with the formation of new coalitions, including one organized by the Business Roundtable, an association of chief executive officers of leading U.S. companies with more than $7.3 trillion in combined annual revenues.

The hearing by the Senate Permanent Subcommittee on Investigations yesterday focused on the $102 billion in assets that Apple, the most valuable U.S. technology company, has stored in offshore entities. Apple executives defended their practices, with Chief Executive Officer Tim Cook saying the company complies with all laws and has no plans to repatriate earnings kept abroad.

“We pay all the taxes we owe -- every single dollar,” Cook said.

Apple’s appearance before the panel was intended to draw maximum attention to the flawed U.S. tax system and jump-start discussions in Congress about rewriting the tax code, said Senator Carl Levin, a Michigan Democrat who heads the panel. “We’ve got to change this system,” Levin said. “In order to change it we’ve got to understand it, not deny it.”

Photographer: Pete Marovich/Bloomberg

Tim Cook, chief executive officer of Apple Inc., testifies at a Senate Permanent Subcommittee on Investigations hearing in Washington, D.C., on May 21, 2013. Cook defended his companyís use of offshore tax shelters before U.S. senators who castigated the most-valuable technology company for avoiding $9 billion and more in payments. Close

Tim Cook, chief executive officer of Apple Inc., testifies at a Senate Permanent... Read More

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Photographer: Pete Marovich/Bloomberg

Tim Cook, chief executive officer of Apple Inc., testifies at a Senate Permanent Subcommittee on Investigations hearing in Washington, D.C., on May 21, 2013. Cook defended his companyís use of offshore tax shelters before U.S. senators who castigated the most-valuable technology company for avoiding $9 billion and more in payments.

Tax Overhaul

Senator John McCain of Arizona, the panel’s top Republican, said he and Levin are seeking to craft a bipartisan proposal that would end some tax benefits for companies, although the timing of an agreement isn’t clear.

The push to rewrite tax laws has cooled as the pace of deficit growth has slowed and lawmakers have become preoccupied with advancing immigration law revisions and investigations of accusations that the Internal Revenue Service improperly gave more scrutiny to anti-tax groups seeking nonprofit status.

U.S. companies are shifting more of their revenues overseas. The nation’s 83 biggest companies increased their untaxed offshore holdings by 14.4 percent to $1.46 trillion in the past year, according to data compiled by Bloomberg. The U.S. captured just 9 percent in 2010 of its federal tax revenues from companies, down from 32 percent in 1952, according to a 2011 Congressional Research Service report.

The Senate hearing was called to air accusations the iPhone, iPad and iPod maker has created a web of offshore entities to avoid paying $9 billion and more in payments.

Defending Apple

In the last four years, Apple has avoided paying taxes on $44 billion in income, McCain said. He called the company “one of the biggest tax avoiders in America.”

Three entities set up in Ireland hold 60 percent of Apple’s profits and claim to be tax residents “nowhere in the world,” McCain said. “It’s completely outrageous.”

Another concern raised by lawmakers is that Apple paid lower taxes to the U.S. government than it reported to shareholders -- and the difference between those two amounts widened in recent years.

“While legitimate reasons may exist for differences between a corporation’s financial statements and its tax returns, the Subcommittee found large and growing differences in each of the three years it examined with respect to Apple,” according to the panel’s report.

Apple’s federal tax provision, cited in regulatory filings, was $6.9 billion in fiscal 2011, compared with $2.5 billion reported on the company’s U.S. tax returns, the report said. The difference that year was $4.4 billion, wider than $2.6 billion in fiscal 2010 and $1.4 billion two years earlier.

‘Awful’ Code

Not all lawmakers supported summoning Apple executives to the hearing. Senator Rand Paul, a Kentucky Republican, said Apple was dealing with an “awful” tax code.

Apple, in written testimony, denied any wrongdoing and said the company was one of the largest taxpayers in the U.S., having paid $6 billion last year.

Cook called for a simplified U.S. corporate tax code that would allow capital to flow back to the U.S., “fully recognizing that this would likely result in an increase in Apple’s U.S. taxes.”

The hearing “clearly raises the issue that we have a broken tax system,” said Claire Buchan Parker, spokeswoman for a newly formed coalition called LIFT America. The Washington-based coalition includes Cisco Systems Inc. (CSCO) and Honeywell International Inc. (HON), and advocates for a simplified U.S. tax code with rates comparable to other countries.

‘Clear’ Rules

“We need to have a tax code that allows these companies to compete and win internationally because that’s actually tremendously helpful for U.S. workers,” Buchan Parker said in a phone interview.

The coalition doesn’t have a formal position on what the U.S. tax rate should be on companies that repatriate foreign earnings. Rather, the group believes the current 35 percent corporate tax rate is too high and supports a hybrid system that has “clear, manageable rules to ensure that companies pay their taxes at home and abroad,” Buchan Parker said.

The Business Roundtable, based in Washington and representing international brand names like The Coca-Cola Co. (KO) and Microsoft Corp. (MSFT), has started a lobbying campaign called The Campaign for Home Court Advantage to advance lower rates.

Companies owe U.S. taxes on income they earn around the world after receiving credit for foreign taxes paid. Under U.S. tax law, companies can defer U.S. taxation of profits earned outside the country until they bring the money back. Then, they must pay corporate taxes of as much as 35 percent minus tax credits for payments to foreign governments.

Tax Holiday

The current system has led companies, including Google Inc. (GOOG) and Pfizer Inc., to keep foreign profits outside the U.S. Those companies and others lobbied Congress unsuccessfully in 2011 for a temporary tax holiday on repatriated profits.

“We can’t solve this problem on our own by punishing our companies,” said Robert Atkinson, president of The Information Technology and Innovation Foundation, a nonpartisan research group in Washington.

The chances for a broad tax deal may be as good as they’ve been, mainly because key lawmakers want it as part of their legacy, Atkinson said in a phone interview. “I do think the stars are aligned better than they’ve been in 25 years for corporate tax reform,” he said. “That doesn’t mean it’s going to happen.”

Good Timing

Senator Max Baucus, a Montana Democrat who heads the Senate Finance Committee, isn’t seeking re-election and Republican Representative Dave Camp of Michigan, who heads the House Ways and Means Committee, will lose his chairmanship because of term limits. Both men want to pass a tax-code revision package.

Political and institutional barriers complicate their efforts.

“Cutting taxes for corporations doesn’t sound really good politically” amid a “tight budgetary environment,” said Curtis Dubay, a senior tax policy analyst at the Heritage Foundation, a Washington-based group headed by former Republican Senator Jim DeMint of South Carolina. “Obama is just not going to sign into law a bill that cuts taxes for corporations,” Dubay said.

President Barack Obama has proposed a revenue-neutral tax overhaul that would lower the corporate rate to 28 percent from 35 percent. Republicans are pushing for a deeper reduction.

If an agreement can be reached on how much to cut the rate, that move would be paired with elimination of some other tax provisions used by companies to reduce their payments. U.S. corporations received $181 billion in income tax breaks in 2011, about as much as they paid in taxes, according to a report last month by the Government Accountability Office in Washington.

‘Political Differences’

Cutting tax preferences means “you have to take away some benefits that are currently there,” said Robert Pozen, a senior fellow in economic studies at the Brookings Institution, another Washington-based think tank.

There also are “big political differences” between lawmakers who want to impose a 35 percent tax on corporate income and those who want to adopt a territorial tax system that would impose a lighter tax burden on companies’ foreign income, Pozen said. “That’s a pretty big gap,” he said.

Camp’s committee this year will consider a measure that would implement a territorial tax system and also call for profits to return to the U.S. at a 5.25 percent tax rate.

No Consensus

The business community also lacks a consensus on how to amend the tax code. Companies that operate only in the U.S. have less interest in how overseas earnings are taxed than multinational corporations, especially those that secure favorable tax treatment through intangible properties like patents and intellectual property, Pozen said.

“There are a lot of differences among companies as to what’s the best strategy” for amending tax laws, he said.

While there’s a consensus that corporate tax rates should go down, the challenge is doing so in the context of a broader tax restructuring, said Edward Kleinbard, a tax law professor at the University of Southern California and a former chief of staff of the congressional Joint Committee on Taxation.

“What’s really hard is to do a corporate bill on a stand-alone basis when, at the moment, people see it as wrapped up in a larger tax reform package,” Kleinbard said.

To contact the reporters on this story: Greg Giroux in Washington at ggiroux@bloomberg.net; Chris Strohm in Washington at cstrohm1@bloomberg.net

To contact the editor responsible for this story: Jeanne Cummings at jcummings21@bloomberg.net

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