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Apple Tax Rate Ignores Profit Shifting Offshore

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 "Money Moves." (Source: Bloomberg)

Apple Inc. (AAPL) Chief Executive Officer Tim Cook provided a figure to Congress on Tuesday that U.S. companies rarely disclose: its federal tax bill. Apple paid $6 billion last year -- a rate of 30.5 percent.

“That’s more than $16 million each day,” Cook said. “We pay all the taxes we owe -- every single dollar.”

While nobody at the hearing questioned the figure, it provides a distorted picture of Apple’s total tax burden. Based on its public filings, the company pays just under 14 percent of its income in taxes worldwide, according to Scott D. Dyreng, an assistant professor of accounting at Duke University’s business school whose research specializes in the actual tax rates of large U.S. companies.

Cook’s statistical spin goes to the heart of the debate over corporate tax avoidance. By shifting income from countries where they operate to offshore tax havens, multinational companies such as Apple, maker of the iPhone and iPad, can manipulate their tax rates and boost their profit.

Apple’s calculation “ignores the issue of profit shifting, which is the central controversy that was the subject of the hearing,” said Martin Sullivan, a former U.S. Treasury Department economist and chief economist at Tax Analysts, a nonprofit organization. “Apple has shifted enormous amounts of profits from the United States to an untaxed entity overseas. That’s the issue.”

Photographer: Andrew Harrer/Bloomberg

Apple Inc. Chief Executive Officer Tim Cook speaks during a Senate Permanent Subcommittee on Investigations hearing in Washington, D.C. Close

Apple Inc. Chief Executive Officer Tim Cook speaks during a Senate Permanent... Read More

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Photographer: Andrew Harrer/Bloomberg

Apple Inc. Chief Executive Officer Tim Cook speaks during a Senate Permanent Subcommittee on Investigations hearing in Washington, D.C.

Transfer Pricing

Apple, Google Inc., Yahoo! Inc. and other companies cut their tax bills using “transfer pricing,” transactions between subsidiaries that allow them to move profits to tax havens and expenses to higher-tax countries. Such strategies cost the U.S. at least $90 billion per year, according to Kimberly Clausing, an economics professor at Reed College in Portland, Oregon.

The 30.5 percent rate asserted by Cook is based on Apple’s reported U.S. pretax income last year of $19 billion, about a third of the company’s worldwide pretax profits.

In fact, Senate investigators raised questions about whether Apple shifted billions of dollars offshore that should have been included in its U.S. income. Apple has attributed $30 billion in income since 2009 to an affiliate that is incorporated in Ireland, where it has no employees.

The company’s tax rate worldwide is driven down because Apple’s Irish affiliates pay taxes at a rate of just 2 percent, the Senate Permanent Subcommittee on Investigations found. Apple’s worldwide rate was just under 14 percent both last year and over the past decade, according to Duke University’s Dyreng.

Effective Rate

The 14 percent rate differs from the 25 percent effective rate reported by Apple in its annual report. That’s because the effective rate includes not just cash taxes actually paid to governments but reserves as well.

Steve Dowling, a spokesman for Cupertino, California-based Apple, declined to comment beyond Cook’s statements and Apple’s filings.

The disclosures about Apple’s low taxes abroad could raise consternation among government officials around the world who are paying more attention to corporate tax dodging. Governments are seeking to boost revenue during a dragging economy and, in some cases, as they face a backlash against austerity measures from angry citizens.

In December, the European Commission, the governing body of the European Union, declared war on tax evasion and avoidance, which it said costs the EU 1 trillion euros ($1.29 trillion) a year. In February, the Organization for Economic Cooperation and Development, a government-funded think tank, issued a report criticizing corporate profit shifting, at the request of the Group of 20 nations. The OECD is scheduled to submit an action plan to the G-20 by July.

Lowballing Profit?

In the U.K. last week, a parliamentary committee held its third hearing since November on tax dodging. It called back a Google executive to answer questions about whether the company was avoiding income taxes by lowballing its reported profit there.

The company paid income taxes of 6 million pounds to the U.K. in 2011 even though it had almost $4.1 billion in sales there. Last year, the committee questioned Google, Amazon.com Inc., and Starbucks Corp. (SBUX) over their offshore tax-avoidance strategies.

While Cook revealed at the hearing how much Apple pays the federal government, most multinational companies don’t disclose what they shell out in taxes to individual countries. Yet, there is an increasing call for just that, a process known as “country-by-country reporting.”

French President Francois Hollande recently said he wanted multinational companies to make public corporate profits, taxes paid, and other information on a country-by-country basis.

Apple’s 30.5 percent tax rate in the U.S. lags the statutory corporate tax rate of 35 percent. Items including a research and development tax credit and a deduction for “domestic production activities” lower Apple’s U.S. tax bill, according to its annual report.

To contact the reporter on this story: Jesse Drucker in Rome at jdrucker4@bloomberg.net

To contact the editor responsible for this story: Daniel Golden in Boston at dlgolden@bloomberg.net

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