Tim Cook Senate Hearing: Are Apple's Tax Avoidance Schemes Savvy Or Scummy?

Impact

A few days ago, Timothy D. Cook, chief executive officer of Apple, testified at a Senate hearing focused on corporate tax loopholes. Floyd Norris, in his New York Times column on May 24, did a pretty good job outlining the salient issues, if you can ignore his cynical comments that are not germane to the real issues.

Every American multinational company benefits from a plethora of loopholes that enable it to reduce taxes. The specific loophole that was under scrutiny during the congressional inquiry was the deferral of income recognized in the U.S. Basically, Apple records most of its income generated in Asia, Africa, and Europe in Ireland, as Apple’s subsidiary in that country holds the company’s patents and trademarks for those regions. Because the Irish company is not an operating entity, it pays no taxes to the Irish government on the income it receives from other Apple operating entities.

The benefit of this tactic is Apple avoids reporting income from the aforementioned regions in the U.S., where taxes are very high. Theoretically, Apple will eventually pay U.S. taxes when accumulated earnings of the Irish subsidiary are repatriated to the U.S.

In actuality, Apple employees in America invest these funds for the Irish company in the U.S. in securities; the money belongs to the Irish subsidiary indefinitely. From time to time, the U.S. grants “tax holidays," which enable cash to be brought back to the U.S. at a significantly lower cost. In his testimony, Cook indicated that Apple would not voluntarily repatriate cash in this manner unless a tax holiday afforded a tax rate of a “single digit,” as compared to the normal corporate rate.

Ironically, Apple has chosen not to use the same technique to shelter income generated in the Americas, so the company pays significant U.S. taxes annually. Some say Apple has been derelict for not taking advantage of the current law for all of its operations.

Apple’s actions are legal under current tax laws. The congressional hearing did not question the company from a legal perspective. Rather, Sen. Carl Levin (D-Mich.) and Sen. John McCain (R-Ariz.) are furious that the U.S. is losing income because current tax law allows it. A further irony is that Congress created this situation.

What is Apple’s responsibility? Should it ignore loopholes that save it hundreds of millions of dollars? No, by most accounts. And yet, Apple has chosen to only use the loophole for parts of its operations, thereby paying taxes that could be avoided.

As a former businessman, I am puzzled by three things. One, why is Congress being critical of a company that is following the law and saving money for its shareholders? Two, why isn’t Apple applying the loophole to its entire operation and saving even more taxes? Three, why is anyone angry with Apple (including liberals) when Congress is responsible for the loopholes and can legislate them out of existence?

All of the blather about the company not paying its fair share is nonsensical. One’s “fair share” is what he, she, or it is required to pay according to current law. Why would anyone, rich or poor, pay more than what is mandated? Our government has chosen to skewer a company even though it is responsible for laws that allow the behavior being criticized. Levin and McCain should propose legislation to prevent future deferrals of taxes, if they think they can get a majority of colleagues to vote for such a measure.

Mr. Norris unfairly takes shots at Apple in his piece. He refers to Bain Capital and its partners’ ability to pay capital-gains tax on earnings rather than ordinary income-tax rates. This issue was a political ploy during the 2012 elections to discredit Mitt Romney. Paying capital-gains rates, like sheltering income offshore, is a legal practice that can be changed at any time by Congress.

Norris points out that Levin and McCain said multinational companies have an advantage over domestic companies and individuals. Of course they do. It is built into the tax code. Norris quotes McCain, who is no economic maven, as saying, “The general American public should not have to make up the balance as corporations avoid paying billions in U.S. taxes.” Again, the “avoidance” referred to is permitted by law. McCain should stop whining about an issue that he has the power and influence to change.

At the hearing, Sen. Rand Paul (R-Ky.) defended Apple because it would “probably be malpractice” for a chief financial officer not to do everything [legally] possible to minimize the corporate tax bill.” Norris responded by saying that Cook admitted that he is not using every loophole and should be censured.

This essay is not intended to be a defense of corporate tax loopholes. It is however a criticism of our government as it tries to demonize outstanding companies like Apple. Frankly, I would be supportive of eliminating certain corporate loopholes including those that allow companies to shelter income offshore. Instead of using hearings to accuse others for being legally and financially savvy, Congress should use them to fix what it believes is broken or unfair.