Apple to tell US Senate it pays every cent of its taxes

Dan Moren
21 May, 2013
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Tim Cook’s taking on the tax man. On Tuesday, the Apple CEO will appear before the US Senate’s permanent Subcommittee on Investigations to discuss that body’s look into multinational companies and how they pay taxes. As a special preview to those who really can’t wait to hang on Cook’s every word, Apple on Monday released its head honcho’s testimony.

Those searching for even the merest hint of Apple’s future plans will want to find another tree up which to bark: the 18-page testimony deals almost exclusively with the relatively dry subjects of Apple subsidiaries, the company’s corporate structure and its broad suggestions for overhauling the US federal tax system. Given that, it’s no surprise that Cook will be joined by Peter Oppenheimer, the company’s CFO (chief financial officer) and Phillip Bullock, Apple’s head of tax operations.

In its testimony, Apple begins by stressing that as one of the largest companies in the US, it provides a huge benefit to the economy. Included in the numbers the company tosses around are estimates of how many jobs it supports or has created in the US (approximately 600,000, including 50,000 of its own employees and around 290,000 related to the company’s so-called ‘App Economy’), the large sums it’s paid out to app developers (more than US$9 billion), and the company’s fiscal year 2012 tax bill (almost US$6 billion, which it estimates will rise to more than US$7 billion for fiscal year 2013). The last, Apple says, makes it likely to be the largest corporate income tax payer in the US.

Apple strenuously asserts that it pays every cent it owes, both to the US Government and to the governments of other countries in which it does business. The most significant of those is Ireland, in which Apple has five – count ‘em, five – subsidiaries, each of which the company says adhere to the letter and spirit of the law. Apple says it doesn’t use tax gimmicks, such as offshore accounts in the Cayman Islands or Caribbean nations, and its large foreign holdings are simply due to the fact that the majority of its revenue – 61 percent last year – is generated internationally.

Those Irish subsidiaries take up a lot of time in Apple’s testimony; the earliest of them, Apple Operations International (AOI), was founded in 1980, and features cost-sharing agreements made in that year that allow Apple to fund research and development jobs in the US. However, the company staunchly avows that AOI and its other subsidiaries do not reduce Apple’s US tax liability.

Throughout, the company stresses that all the decisions it has made are done to better serve its shareholders, both in terms of letting it easily (and cheaply) use foreign money to fund overseas operations, as well as by returning more money to its shareholders through its capital return program, which it recently expanded. In particular, the company addresses its much-criticised decision to issue a bond and take on debt to fund its ambitious capital return, rather than bringing its overseas cash back into the US:

If Apple had used its overseas cash to fund this return of capital, the funds would have been diminished by the very high corporate US tax rate of 35 percent (less applicable foreign credits). By contrast, given today’s historically low interest rates, issuing debt at a cost of less than two percent is much more advantageous for the Company’s shareholders. Because Apple was able to borrow at a cost lower than the cost of its equity, issuing debt lowered Apple’s overall cost of capital.

There is nary a bombshell in sight in the company’s testimony, to my admittedly layperson’s eyes. But perhaps the most interesting point is the final section, in which the company lays out its vision for corporate tax reform, which it describes as stemming from its belief “in the simple, not the complex”. As such, it offers four points of reform: first, the system should be revenue neutral; second, it should eliminate corporate tax expenditures; third, it should lower corporate income tax rates; and finally, it should implement a ‘reasonable’ tax to repatriate those foreign earnings.

Apple acknowledges that such an overhaul may mean it pays more, but says that it prefers an “overall improvement in efficiency, flexibility and competitiveness”. And, moreover, the company believes that the new system it lays out could bolster the country’s economy and help create new jobs.

Apple’s CEO will probably face questions from the subcommittee members after his prepared testimony on Tuesday, but don’t expect him to diverge substantially from the matter at hand. Even senators attempting to coax out details of Apple’s forthcoming products are unlikely to get Cook to stray.

by Dan Moren, Macworld

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