Senators Grill Apple Execs Over Tax Scheme

Apple's top brass faced off against a Senate panel today over tax practices that members of Congress claim has robbed the U.S. Treasury of billions in revenue.

In lengthy opening statements, Sens. Carl Levin and John McCain, chairman and ranking member of the Senate Permanent Subcommittee on Investigations, railed on Apple for a scheme that Levin called the "holy grail" of offshore tax avoidance.

Specifically, Levin took Apple to task for subsidiaries that the Michigan Democrat said exist solely to avoid additional taxation in the U.S: Apple Operations International (AOI), Apple Sales International (ASI), and Apple Operations Europe (AOE).

AOI, Levin said, has no employees, its finances are managed by a Nevada-based firm, and its assets are in a New York bank. Between 2006 and 2012, AOI held 33 board meetings, 32 of which took place in Cupertino. Still, the company is incorporated abroad. "ASI's circumstances are similar," Levin said.

Closing loopholes in the U.S. tax code that make this legal could means billions for the U.S. Treasury, Levin said, which could be dedicated to "other important priorities."

Apple CEO Tim Cook defended his company's operations, arguing that Apple gives plenty to the U.S. Treasury. When questioned by McCain about the management of subsidiaries like AOI, Cook maintained that everything was above board. Still, "I'd like comprehensive tax reform to be passed this year," Cook said.

Apple CFO Peter Oppenheimer and Phillip A. Bullock, head of tax operations for Apple, joined Cook at the hearing, and also defended the company's strategies.

Tuesday's hearing got rather heated when Sen. Rand Paul used his opening statement to say he was "offended" by the proceedings.

"Tell me what Apple's done that's illegal," said Paul, a Kentucky Republican. He accused the subcommittee of trying to "bully one of America's greatest success stories."

"If anyone should be on trial here it should be Congress," Paul said, who took his colleagues to task for "creating a bizarre and byzantine tax code ... that simply doesn't compete with the rest of the world."

"I frankly think the committee should apologize to Apple," Paul said.

Sen. Levin clearly didn't agree. "You're free to apologize," Levin told Paul sarcastically.

The point of the subcommittee, however, according to Levin, is to investigate tax codes that don't work. And there's no way to illustrate why U.S. tax codes need work than to highlight companies that are taking advantage of the existing system, Levin said.

"To characterize [the hearing] as vilification," misses the point, according to Levin.

As a result, today's hearing was basically a Catch-22. Apple's technically not doing anything illegal, so Congress can't really do anything. But Apple has developed a tax setup that's sketchy enough to attract Congressional attention. In the end, both sides called for tax reform, so it would likely behoove Congress to get cracking. But how better to drum up support for tax reform legislation than having three top Apple execs on Capitol Hill for some headline-worthy political theater?