Apple has avoided paying billions in income tax by holding money in off-shore accounts, according to a damaging U.S. Senate report.
An investigation by a Senate committee said the tech giant sought the 'Holy Grail of tax avoidance' schemes by not declaring tax residency in any country, which could be unique among international corporations.
The report, published yesterday by the Senate Permanent Subcommittee on Investigations yesterday, found that Apple holds $102billion of its $145billion in cash.
An Irish subsidiary that earned $22billion in 2011 paid only $10million in taxes,
‘Apple wasn't satisfied with shifting its profits to a low-tax offshore tax haven,’ Sen. Carl Levin, D-Mich., the subcommittee's chairman, said.
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‘Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere.’
The subcommittee's report estimates that Apple avoided at least $3.5billion in U.S. federal taxes in 2011 and $9 billion in 2012.
Apple uses five affiliate companies located in Ireland to carry out its tax strategy, according to the report.
The companies are located at the same address in Cork, Ireland, and they share members of their boards of directors.
While all five companies were incorporated in Ireland, only two of them also have tax residency in that country.
That means the other three are not legally required to pay taxes in Ireland because they are not managed or controlled in that country, in Apple's view.
The report says Apple capitalizes on a difference between U.S. and Irish rules regarding tax residency.
Horses graze over the road from the Ireland Apple headquarters on the edge of CorkSenator Carl Levin, right, said Apple sought 'the Holy Grail of tax avoidance' but company CEO Tim Cook, left, who is traveling to Washington on Tuesday, said they follow the letter and spirit of tax laws
In Ireland, a company must be managed and controlled in the country to be a tax resident. Under U.S. law, a company is a tax resident of the country in which it was established.
Therefore, the Apple companies are not tax residents of Ireland nor of the U.S., since they were not incorporated in the U.S.
The company, based in Cupertino, California, paid $2.5billion in federal taxes in 2011 and $6billion in 2012.
The strategies Apple uses are legal, and many other multinational corporations use similar tax techniques to avoid paying U.S. income taxes on profits they reap overseas.
However, the tactics have raised questions about loopholes in the U.S. tax code, lawmakers say.
The spotlight on Apple's tax strategy comes at a time of fevered debate in Washington over whether and how to raise revenues to help reduce the federal deficit.
Many Democrats complain that the government is missing out on collecting billions because companies are stashing profits abroad and avoiding taxes.
Republicans want to cut the corporate tax rate of 35 per cent and ease the tax burden on money that U.S. companies make abroad. They say the move would encourage companies to invest at home.
Apple CEO Tim Cook, the company's chief financial officer and its tax chief are scheduled to testify and explain the company's tax strategy at a hearing by the subcommittee today.
Apple's main headquarters are in California (pictured) but they have no apparent tax residency, the report saidThe company refuted the subcommittee's assertions in testimony prepared for the hearing and released to the public yesterday evening.
Apple said it employs tens of thousands of Americans and pays ‘an extraordinary amount’ in U.S. taxes, citing the roughly $6billion it paid in fiscal 2012.
Apple ‘complies fully with both the laws and the spirit of the laws,’ the testimony says. ‘And Apple pays all its required taxes, both in this country and abroad. Apple does not use tax gimmicks.'
The company insisted that it does not, as the subcommittee asserts, move its intellectual property rights into offshore tax havens and use it to sell products back into the U.S. to avoid taxes.
The company has made clear that given current U.S. tax rates, it has no intention of repatriating its overseas profits to the U.S.
Apple reiterated in its testimony its support for comprehensive tax reform as a way to support economic growth and boost U.S. companies' competitiveness.
The subcommittee also has examined the tax strategies of Microsoft Corp., Hewlett-Packard Co. and other multinational companies, finding that they too have avoided billions in U.S. taxes by shifting profits offshore and exploiting weak, ambiguous sections of the tax code.
Microsoft has used ‘aggressive’ transactions to shift assets to subsidiaries in Puerto Rico, Ireland and Singapore, in part to avoid taxes.
HP has used complex offshore loan transactions worth billions while using the money to run its U.S. operations, according to the panel.
Apple says it 'complies fully with both the laws and the spirit of the laws' and pays all required taxes
The subcommittee's inquiry and hearing are intended to shine a light on ‘offshore tax-avoidance tactics’ by Apple, Levin said at a news conference Monday with Sen. John McCain of Arizona, the panel's senior Republican.
Companies' use of such loopholes has the effect of raising the taxes of ordinary Americans and increasing the federal deficit, he said.
McCain said that while Apple claims to be the biggest U.S. corporate taxpayer, it is also ‘among America's largest tax avoiders.’
He called Apple's strategy ‘an egregious and really outrageous scheme that Apple has been able to orchestrate to avoid paying taxes.’
The subcommittee report also noted that Apple has been setting aside billions for tax bills it may never pay.
As previously reported by The Associated Press, the overlooked asset that Apple has been building up could boost Apple's profits by as much as $10.5billion. However, Apple has been lobbying to change U.S. law so it can erase its tax liabilities in a less conspicuous fashion.
In its second quarter ended March 31, Apple posted its first profit decline in ten years. Net income was $9.5billion, or $10.09 a share, down 18 per cent from $11.6billion, or $12.30 a share, in the same period a year ago. Revenue increased 11 per cent, to $43.6billion.
Apple said in April that it will distribute $100 billion in cash to its shareholders by the end of 2015.
The company is expanding its share buyback program to $60billion, the largest buyback authorization in history, and is raising its quarterly dividend by 15 per cent, to $3.05 a share.
In Monday's regular trading session, Apple's stock rose $9.67, or 2.23 per cent, to close at $442.93.
President Barack Obama has proposed using the tax code to encourage companies to move jobs back to the U.S. and discourage them from shifting jobs abroad.
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Investigations are currently underway in both the U.S. and UK into corporations who have a turnover of billions but pay a fraction of that in taxes.
In the UK, Google was accused of doing evil' by a Parliamentary committee after MPs claimed the internet giant by using 'devious, calculated and unethical' trucks to minimize its liabilities.
It paid just £7.3million in corporation tax last year despite having a UK turnover of £3billion.
Elsewhere, Amazon could be investigated by the UK Public Accounts Committee after paying just £2.44million in corporation tax on UK sales of £320million last year.
But the Seattle-based group told its investors that it actually made 13 times this amount, claiming the UK sales were actually more than £4billion.
Starbucks was one of the first companies to be accused of tax avoidance when the row erupted last year.
It has since agreed to pay £20million in tax voluntarily after a public boycott over revelations it had paid no corporation tax since 2009.
France has also said it will fight tax avoidance and President Francois Hollande has called for the 'eradication' of tax havens.
He told French banks last month that they must declare any foreign subsidiaries each year as he presented a draft law drawn up in response to the country's recent tax scandal.
