Apple CEO Cook Rebuts $9 Billion Tax-Avoidance Claim

Apple Inc. Chief Executive Officer 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.

“We pay all the taxes we owe -- every single dollar,” Cook said in testimony today to the Senate Permanent Subcommittee on Investigations. “We not only comply with the laws, we comply with the spirit of the laws.”

Senator Carl Levin used the hearing to say Cupertino, California-based Apple used “loopholes” to avoid paying $9 billion in U.S. taxes in 2012.

“Apple executives want the public to focus on the U.S. taxes the company has paid, but the real issue is the billions in taxes it has not paid,” said Levin, a Michigan Democrat. Apple employs “offshore tax strategies whose purpose is tax avoidance, pure and simple,” he said.

Today’s hearing was called to air accusations the iPhone, iPad and iPod maker has created a web of offshore entities to avoid paying U.S. taxes. Other large U.S. companies also keep profits offshore but Apple was the focus of the Senate probe.

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.”

Irish Profits

In almost two hours of testimony, Cook sat before television cameras and fielded questions from senators, at times sparring with them.

“You point out, and accurately so Mr. Cook, that 95 percent of the creativity that goes into those products is in California,” Levin said. “But two-thirds of the profits, in Ireland.”

“Senator, we’re proud that all of our R&D or the vast majority is in the United States,” Cook said.

“I know, but the profits that result from it are sitting in Ireland in corporations that you control that don’t pay taxes,” Levin said. “You ought to be proud!”

Cook left the hearing surrounded by an entourage and reporters, and offered no comment aside from a thumbs-up sign when asked if he had a chance to make his case.

Earlier, Cook called the tax issue “a very complex topic.” “I’m glad that we’re having the discussion,” Cook said. “Honestly speaking I don’t see it as being unfair. I’m not an unfair person. That’s not who we are as a company.”

Senate Dissent

In the last four years, Apple has avoided paying taxes on $44 billion in income, said Senator John McCain, the panel’s top Republican. 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.”

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.

“I’m offended by the spectacle of dragging in executives from a company that is not doing anything illegal,” Paul said. “I frankly think the committee should apologize to Apple.”

Levin said there would be no apology. “Apple’s a good company but no company, no company should be able to determine how much it’s going to pay in taxes,” Levin said.

Paul called Apple “a great American company” and said it had sought to minimize its tax burden legally. “It would probably be malpractice for them not to do so,” Paul said.

Presidential Support

White House Press Secretary Jay Carney said Levin and McCain did an “important” job raising questions about companies that “shift profits and their jobs offshore.”

President Barack Obama “has long argued that the tax code is tilted against companies that want to create jobs in America while it rewards companies for shipping jobs and profits overseas,” Carney said today.

Obama wants to make sure that companies “cannot use offshore profit-shifting to avoid paying taxes,” including levying a minimum tax on foreign earnings, he said.

The administration wants to work with Levin and McCain to overhaul the tax code, Carney said.

Apple Response

Cook and two other executives -- including Chief Financial Officer Peter Oppenheimer -- appeared before the subcommittee. The panel, led by Levin, in a report yesterday said Apple’s subsidiaries include three entities that have no home country for tax purposes.

Apple said its cash is largely held in U.S. banks in dollar-denominated assets, segregated into a portion that can be used for domestic operations and a portion that can be used only for international investments, the company said. The company doesn’t use foreign subsidiaries or gimmicks to avoid U.S. taxes, said the testimony.

The company also said the Irish subsidiaries, which are cost-sharing arrangements, have helped fund Apple’s research and development activities and taken on risks, leading to bigger profits and higher-paying jobs in the U.S.

Apple shares dropped $3.27 or 0.7 percent, to $439.66 at 4 p.m. New York time.

Microsoft, Hewlett-Packard

The Senate committee has been examining companies that use various maneuvers to reduce their tax bills, in addition to Apple including Microsoft Corp. and Hewlett-Packard Co.

Some of the largest U.S.-based companies -- including those in technology, energy and pharmaceutical industries -- expanded their untaxed offshore stockpiles by $183 billion in the past year, increasing such holdings by 14.4 percent, according to data compiled by Bloomberg.

Microsoft , Apple and Google Inc. each added to their non-U.S. holdings by more than 34 percent as they expanded on prior tax maneuvers to earn and park profits in low-tax countries. The build-up of offshore profits -- totaling $1.46 trillion for the 83 companies examined -- has increased because of incentives in the U.S. tax code for booking profits offshore and leaving them there. This has complicated attempts by Congress to overhaul the corporate tax system.

Apple has said in filings with the U.S. Securities and Exchange Commission that it has $40.4 billion in earnings outside the U.S. on which it hasn’t paid U.S. taxes. If Apple brought that money back to the U.S., the company would owe $13.8 billion, according to the filings.

‘Case Study’

The panel’s report is designed to be a “case study” of how a company is able to pay an effective tax rate much lower than the 35 percent U.S. corporate rate, according to staff members on the subcommittee.

The bipartisan probe found Apple, through cost-sharing arrangements, has transferred offshore the profits powered by economic rights to its patents and other intellectual property - - aspects like licensing and sales. At the same time, the legal rights to its patents remain in the U.S., the panel found.

Apple’s relationship with the offshore affiliates isn’t arms’ length, the probe found. Apple has $102 billion in offshore accounts and shifted billions in profits out of the U.S. into affiliates based in Ireland, where it negotiated a tax rate of less than 2 percent, according to a report by the panel. Levin today labeled them “ghost companies.”

Before it's here, it's on the Bloomberg Terminal.