Apple's tax strategy portrayed by Senate subcommittee as a unique 'absurdity'

U.S. Sen. Carl Levin (D-Mich.) took particular issue with Apple Operations International, an Ireland-based entity owned by Apple that he said has paid no taxes. The issue comes from a loophole in U.S. tax law that Levin believes should be closed.

"Apple is exploiting an absurdity, one that we have not seen other corporations use," the senator said. "And the absurdity need not continue."

At issue are incompatibilities between U.S. and Irish tax laws. In Ireland, only companies that are managed and controlled in Ireland are considered tax residents. Apple Operations International is incorporated in Ireland, but is not managed and controlled there."Apple is exploiting an absurdity, one that we have not seen other corporations use. And the absurdity need not continue." — U.S. Sen. Carl Levin

But in the U.S., tax laws are based on where a company is incorporated, rather than where it is managed and controlled.

Apple has a total of three offshore corporations that allow it to reduce its effective tax rate to just 15 percent, which is less than half the U.S. effective tax rate of 35 percent, Levin said.

In singling out Apple, the senator said the iPhone maker has been a particularly egregious offender in exploiting tax law loopholes. The company currently has more than $100 billion in cash kept overseas.

Levin went as far as to call Apple's offshore tax practices the "holy grail" of tax avoidance. He has taken particular issue with the offshore transfer of "profit generating potential" from intellectual property.

The senator did praise Apple as an "American success story," and noted that he carries an iPhone in his pocket. He also acknowledged that many U.S. multinational corporations beyond avoid taxes by exploiting loopholes in the law.

Slamming Apple's use of "ghost" corporations, Levin called the company's practices a "sham." He said while Apple wants members of the public to focus on the "extraordinary amount" of taxes the company already pays, it does not excuse the taxes he believes the company should be paying.

"The real issue is the billions in taxes that it has not paid, thanks to offshore tax strategies whose purpose is tax avoidance, pure and simple," Levin said.

Joining him in criticizing Apple was U.S. Sen. John McCain (R-Ariz.), who said the company has avoided paying taxes on some $44 billion in income in the last 4 years alone.

"It's unacceptable that corporations like Apple are able to exploit tax loopholes to avoid paying billions in taxes," McCain said.

Taking a dissenting opinion on the subcommittee was U.S. Sen. Rand Paul (R-Ken.), who criticized his colleagues for "bullying, badgering and berating" a great American success story. He said that Apple has broken no laws, and is simply following the rules of an outdated U.S. tax code.U.S. Sen. Rand Paul took his colleagues to task for Tuesday's hearing, suggesting they instead apologize to Apple and thank them for creating American jobs.

"Congress should be on trial for chasing the profits of American companies overseas," he said.

Paul characterized Tuesday's hearing as a waste of time, both for the politicians involved and for Apple executives who were in attendance to testify. He also suggested that other members of the subcommittee do all they can to lower their individual tax rates as well.

Rather than criticizing Apple, Paul said the subcommittee should apologize to the company, and compliment them for their job creation.

"We should have brought in here today a giant mirror, so that we can look at the reflection of Congress, because this problem is created by the awful tax code," he said.

Following the opening remarks on Tuesday, Apple Chief Executive Tim Cook and Chief Financial Officer Peter Oppenheimer are scheduled to testify. AppleInsider will have ongoing coverage throughout the day.