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Monday, May 20, 2013, 03:21 pm PT (06:21 pm ET)

Apple created offshore subsidiaries to avoid paying billions in US taxes, Senate panel says

Just hours after Apple published the full testimony which CEO Tim Cook plans to give to the Permanent Subcommittee on Investigations in the U.S. Senate, the government body issued its own findings on the company's offshore tax practices, saying subsidiaries were used to purposefully avoid paying billions of dollars in domestic taxes.

According to the subcommittee's report, Apple moved billions in profits out of the U.S. to affiliate corporations, like Apple Operations International in Ireland, where the effective tax rate is less than 2 percent, reports Bloomberg. Apple currently has $102 billion in offshore accounts.

Cork

Apple's Irish headquarters in Cork.


Of the three foreign subsidiaries Apple claims are not tax resident in any nation, primary affiliate AOI generated a net income of $30 billion between 2009 and 2012, the Senate report said. The other main Irish subsidiary, Apple Sales International, directed some $74 billion in profits away from the U.S. over the same period, and the paid a negligible amount in international taxes. For example, in 2011, ASI generated $22 billion and paid out $10 million in taxes, a rate of 0.05 percent.

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” said chairman of the panel Senator Carl Levin (D-Mich.). “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.”

Senator Levin's website outlines the probe into Apple's tax practices, three of which are expected to be discussed at Tuesday's hearing:
  • Using a so-called cost sharing agreement to transfer valuable intellectual property assets offshore and shift the resulting profits to a tax haven jurisdiction.
  • Taking advantage of weaknesses and loopholes in tax law and regulations to “disregard” offshore subsidiaries for tax purposes, shielding billions of dollars in income that could otherwise be taxable in the United States.
  • Negotiating a tax rate of less than 2 percent with the government of Ireland – significantly lower than that nation’s 12% statutory rate – and using Ireland as the base for its extensive network of offshore subsidiaries.

“Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among American’s largest tax avoiders,” said Senator John McCain (R.-Ariz.) in a separate statement. “A company that has found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue.”

For its part, Apple said in the testimony published on its website today that the Irish subsidiaries are cost-sharing arrangements which helped fund research and development, leading to new U.S. jobs and bigger profits. The statement also noted that Apple paid $6 billion in taxes last year, making it one of the largest taxpayers in the U.S.

The senate subcommittee is slated to further detail its arguments against Apple in a hearing on Tuesday, which itself is part of a broader probe into how other multinational corporations use offshore affiliates to reduce tax burdens. Scheduled to give testimony from Apple are Cook, CFO Peter Oppenheimer and Tax Operations Head Phillip Bullock.