Live Blog: Apple and Corporate Taxes

And with that, the first two panels are over and we’re going to sign off from the live blog. The next panel is with two government officials, Mark J. Mazur, an assistant secretary for tax policy at the Treasury Department, and Samuel M. Maruca, of the I.R.S.

— JOSEPH PLAMBECK

Mr. Cook repeats that all profits made in United States are taxed in the United States. But Senator Levin says Apple made a decision and signed an agreement in 2008 and 2009 to shift most of its profit so that it was not taxed. The result is most of the profit is in Ireland. Senator Levin says “in order to change it, we need to understand it, not deny it.” He says the committee needs to recognize that what is going on is “a huge loss of revenue.”

— BRIAN X. CHEN

Senator Levin reiterates that Apple made a decision to shift its “crown jewels” in terms of economic value and rights, despite the economic implications on American revenue. Mr. Oppenheimer repeats that Apple originally went to Ireland to sell computers overseas, and that continues. But Senator Levin says that two-thirds of Apple’s profits are in Irish companies.

“That’s because of the way we set ourselves up 30 years ago,” Mr. Oppenheimer says.

— BRIAN X. CHEN

Senator Levin asks Mr. Cook if it is true that Apple has no plan to bring its overseas profits home unless American tax rates change. Mr. Cook responds, “I have no current plan to bring them back at the current tax rate.”

Senator Levin says there is an agreement to shift economic rights to three Irish companies that pay no taxes. “That’s the golden goose, your crown jewels.” Apple has $100 billion in profit sitting there, he says, and Apple does not think it has to pay taxes on it. Mr. Oppenheimer says he disagrees with the characterization that the economic rights were shifted.

— BRIAN X. CHEN

Senator Levin says that of course Apple can bring its profits home. “You bring them home from South America, don’t you?” he says. Mr. Bullock says there is a selling profit in Brazil, Canada and Mexico and other countries. He says those profits are generated by Apple Inc., as opposed to “bringing the money home.”

Mr. Levin says that three people working at Apple signed an agreement to ship its “crown jewels” to Irish companies. Mr. Cook and Mr. Bullock say they disagree with Mr. Levin’s characterization. “You shifted the economic rights to the most valuable thing you own, intellectual property,” to those three Irish corporations you own, Senator Levin says. “That’s the facts. And now those profits are abroad.”

Of course Apple can bring the profits home, if it pays the tax on them, he says. “The only reason you’re not bringing them home is because they were transferred to these three Irish companies,” he said. “That’s the reason why they’re there. It’s your decision not to bring those profits home, so now $100 billion plus is stashed away in those three Irish companies that you control but is nonetheless in their legal name. The question is, will you bring them home?”

— BRIAN X. CHEN

Senator Rob Portman, an Ohio Republican, begins his line of questioning. He asks whether Apple’s biggest competitor is Samsung, and Mr. Cook confirms it is a major competitor. Mr. Portman says Apple and Samsung pay about the same global tax rates — about 14 percent for both companies. But Mr. Oppenheimer points out that there is a difference, in that Samsung, based in South Korea, is able to freely move its money home. Mr. Portman agrees that it’s worse for Apple because it can’t bring its foreign money home.

— BRIAN X. CHEN

Senator Ayotte asks Mr. Cook about Apple’s challenges in China, and how do address those challenges.

Mr. Cook says Apple has faced more significant challenges in countries other than China. The American court system, he said, makes it is very difficult to get the protection a technology company needs because business cycles are very fast but the court system is very slow. That allows foreign competitors to take certain intellectual property and quickly built it into products that can be sold before a court rules. He says Apple would like to see companies worldwide strengthen intellectual property globally. “I would love the system to be strengthened in order to protect it,” he says.

Because of an editing error, an earlier version of this entry misstated what Mr. Cook said Apple wanted to see strengthened globally. He said the company wanted intellectual property strengthened, not Internet Protocol.

— BRIAN X. CHEN

Senator Ayotte asks: “If you were in our position and thinking about tax policy, and making sure our country remains competitive, how important do you think it is that we change the tax code to ensure this remains a good place for investment?”

Mr. Cook says the United States would have a much stronger economy if the government updated the tax code, and that it would create more jobs and encourage investment. “I put my whole weight and force behind that,” he says.

— BRIAN X. CHEN

Senator Kelly A. Ayotte, a New Hampshire Republican, asks Mr. Cook what the repatriation rate should be — not only for Apple but for multinational corporations around the world.

Mr. Cook says the rate would need to be in the mid-20s, as all the expenditures are dropped out. He said he thought it would need to be a single-digit rate to persuade a large number of companies to bring back foreign earnings. “It would be great for growth in this country,” he said. “That’s the reason I feel so adamant about doing this.”

— BRIAN X. CHEN

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In response to questions about offshore tax allocations, Mr. Cook says that everything Apple sells in the United States is taxed in the United States. Mr. Bullock reiterates that 100 percent of anything sold in the United States is fully taxed in the country. There are no outbound payments going offshore.

Generally Apple’s Mac business has a larger percentage of its sales in America than internationally, Mr. Cook says. The iPhone has a larger percentage of international sales than domestic sales. The iPhone has higher margins, he says, so it’s natural that Apple has a more profitable product mix internationally than in the United States.

— BRIAN X. CHEN

Senator McCaskill says Apple borrowed $17 billion and issued bonds to shareholders fairly recently – and that she doesn’t judge Apple for that. But she asks, “Should you be able to deduct interest on those? Would that be one of the corporate expenditures to do away with?” Mr. Cook says it could be. It’s something that the Congressional committee should talk about in terms of doing comprehensive tax reform, he says.

— BRIAN X. CHEN

Senator Claire McCaskill, Democrat from Missouri, asks Mr. Cook for some feedback on American tax reform. Mr. Cook says the United States has “such enormous advantages.” But the barrier right now in terms of repatriating cash is that it is repatriated at the 35 percent level, he says. He says his proposal is to eliminate all corporate tax expenditures into a really simple tax system and have a reasonable tax on bringing money back overseas. “Then many companies would bring back capital to invest in the United States.”

— BRIAN X. CHEN

Mr. Cook is asked why Apple Operations International exists, and he replies that it was created in 1980, before the days of the iPod, iPhone and Mac.

The relationship between Apple and the Irish government is still there today, he says. Mr. Cook says Apple has built a significant skill base there of people who understand the European market and serve their functions well. A.O.I., he says, “is nothing more than a holding company — it’s not an operating company.” The dividends that go into this have been taxed appropriately in their local jurisdiction, Mr. Cook says.

A.O.I. “is nothing more than a company that has been set up to provide an efficient way to manage Apple’s cash from income that’s already been taxed,” he says.

“In my view A.O.I. does not reduce U.S. taxes at all,” he says.

— BRIAN X. CHEN

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In his statement to the Senate panel, Mr. Cook made several questionable assertions. Here are some examples:

1) “We don’t rely on tax gimmicks.” The precise definition of the word “gimmick” may be debatable, but Apple’s use of two Irish entities, which it claims are stateless (and help it sidestep $10 billion per year in taxes, according to the Congressional report) would seem to qualify.

2) “We don’t move its intellectual property into offshore tax havens.” Apple’s intellectual property is held by its Irish subsidiary, Apple Operations International, which has no employees or physical presence in Ireland, has received $30 billion in income since 2009 and paid no income tax to any government for the past five years, according to Congressional investigators. Ireland is not on the official list of tax havens compiled by the Organization for Economic Cooperation and Development, but it is offshore and Apple’s special deal with the country allowed the company to enjoy rates lower than some companies that shelter income in the Caribbean. What’s more, Apple’s unique agreement hinges on its ability to take advantage of a wrinkle in Irish tax law that allows it to avoid Irish taxes by holding a fraction of its ownership in a shell company called Baldwin Holdings Ltd. in the British Virgin Islands.

3) “We don’t stash money on some Caribbean island.” While perhaps true, this is not necessarily a strong defense. The tens of billions of dollars that Apple does not pay taxes on because they are classified as “permanently invested offshore” are actually held in New York banks. They are managed by Braeburn Capital, a subsidiary Apple opened in Reno, Nev., to avoid some state taxes in California and other states.

4) “These foreign earnings are taxed in the jurisdiction where they are earned.” Apple booked more than $74 billion in sales from dozens of countries around the world to its subsidiary Apple Sales International over the last four years. Although the subsidiary is based in Ireland, Apple accountants and corporate executives contend that, for tax purposes, it is not a resident of any country.

— David Kocieniewski

— DAVID KOCIENIEWSKI

Apple pays 30.5 percent of its profits in taxes in the United States, Mr. Cook says. He says he doesn’t know where it stacks up compared with other companies but it must be “extremely high” on the list. He says it does have low tax rates outside the United States, but that those rates are for products that it sells outside the United States. “There’s no shifting going on that I see at all,” he says.

— BRIAN X. CHEN

Senator McCain begins his questioning of Apple. He congratulates Mr. Cook for his success at Apple, and asks whether Mr. Cook feels bullied or harassed, as Senator Paul had implied earlier. Mr. Cook replies, “I feel very good to be participating in this.” He says he hopes to help comprehensive tax reform to pass, and Apple is ready to help in any way it can.

— BRIAN X. CHEN

Mr. Bullock confirms that Apple Operations International is incorporated in Ireland. It is not a tax resident, he says — though he said tax on the interest that it earned was paid in full by Apple Inc. The income of the subsidiaries has been subject to tax in the countries where they operate, Mr. Bullock said. There is no American tax on the transfer of those balances to A.O.I. The income earned by Apple Sales International and Apple Operations Europe has been subject to Irish tax in full, he said, in accordance to its agreement in Ireland.

— BRIAN X. CHEN

In response to questioning from Senator Levin, Phillip A. Bullock, Apple’s head of tax operations, confirmed that Apple owns the foreign subsidiaries Apple Operations International (A.O.I.), Apple Operations Europe (A.O.E.) and Apple Sales International (A.S.I.). Mr. Cook confirms that A.O.I.’s central operation is based in the United States. Mr. Bullock confirms that A.O.E. is functionally managed and controlled in the United States.

Mr. Cook says Apple has significant employment in Ireland. He confirms that A.S.I. is functionally managed and controlled in the United States.

— BRIAN X. CHEN

Mr. Oppenheimer says Apple employs almost 4,000 people at its subsidiary in Ireland, and that there have been thousands of workers there for many years.

He says if Apple had used foreign earnings to return capital, the funds would have been diminished by the American tax rate of 35 percent.

— BRIAN X. CHEN

Mr. Cook says, “We recommend a dramatic simplification of the corporate tax code,” comparable to Apple’s appreciation for simplicity.

Peter Oppenheimer, Apple’s chief financial officer, begins his statement. He says Apple pays taxes to federal, state and local government on full profits from sales. He says that the company sells the iPhone and iPad in over 100 countries, and that Apple must follow the laws and regulations in each region where it operates.

— BRIAN X. CHEN

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Mr. Cook’s full prepared testimony. Other prepared statements are also available on the subcommittee’s Web site.

— JOSEPH PLAMBECK

Mr. Cook says Apple does not use tax gimmicks — a statement that the earlier experts had criticized. He says Apple uses earnings to finance Apple retail stores around the world, among other activities. “Unfortunately the tax code has not kept up with the digital age,” he says. He adds that the tax system handicaps American corporations in relation to foreign competitors who don’t have restraints with the free movement of foreign capital.

— BRIAN X. CHEN

Mr. Cook says Apple has enjoyed unprecedented success over the last 10 years, and the worldwide popularity of its products has soared. Its international revenue is now twice as large as its domestic revenue.

“As a result I’m often asked if Apple still considers itself an American company,” he says. “My answer has always been an emphatic yes. We are proud to be an American company and equally proud of our contributions to the U.S. economy.”

— BRIAN X. CHEN

Apple’s chief executive, Timothy D. Cook, has now started his opening statement, talking about jobs and how Apple has created hundreds of thousand of them, and that the company has employees in every state.

He says, to his knowledge, Apple has become the largest corporate taxpayer in the United States. He said the company expects to pay even more taxes this year.

— JOSEPH PLAMBECK

The academics have been excused. Our coverage will continue when the hearing resumes.

— JEFF SOMMER

Professor Shay said, “Nobody is trying to vilify Apple. Nobody is trying to say they are wrong but frankly nobody is saying there should be no adjustments to their income.”

As far as he knows, he said, Apple’s tax returns have not been scrutinized by the committee and therefore, he cannot comment on whether they have acted properly. Mr. Cook is visible and frowning.

— JEFF SOMMER

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Senator Paul again defends Apple, saying it has quite rationally chosen to “minimize” its tax burden. “It would probably be malpractice for them not to do so,” said Mr. Paul, who, in addition to being a politician, is also a physician.

He said he objects to the hearings because they are not focused on granting a tax holiday for foreign corporations. “Money goes where it is welcome,” he said. “Everybody talks about tax reform. Just do it.”

Apple should be applauded, he said, not “vilified.”

— JEFF SOMMER

Both professors said they did not favor tax holidays. A substantial portion of tax profits held overseas belong in the United States, Mr. Shay said.

Over his left shoulder, one can now see Timothy D. Cook, Apple’s chief executive, shifting in his seat and clutching a water bottle. He is expected to testify shortly.

“Apple has violated the spirit of the law if not the letter of the law,” Senator McCain said. A great deal of the responsibility, he said, “lies with Congress.” It’s past time for a “comprehensive reform” of the tax system, he said.

— JEFF SOMMER

Senator McCain asked the two professors whether, by taking a tax deduction in a country in which Apple “has no employees,” Apple has put other companies at a disadvantage. The two professors said it certainly has.

And Professor Shay added that the global tax system was out of balance. Most of the creative work on Apple products is done in the United States but a proportionate amount of tax revenue, he said, is not flowing into the Treasury’s coffers.

— JEFF SOMMER

Senator Tom Carper, Democrat of Delaware, asked the tax experts to give their opinion on the recommendations of the Simpson-Bowles commission on tax reform.

Professor Shay said the “realism of eliminating all tax expenditures is somewhat overstated; I don’t think it’s going to happen.”

He said “we need more revenues” from taxes. Professor Shay, a former Treasury official in the Reagan administration, said that making significant changes in the tax code is likely to take “considerable time.”

Professor Harvey added that he would emphasize that it’s crucial to avoid tax “base erosion,” in which taxpayers, presumably like Apple, find ways of circumventing the tax code.

An earlier version of this update incorrectly referred to Senator Carper’s home state. He is from Delaware, not Wisconsin.

— JEFF SOMMER

Professor Harvey said, “When you have 64 percent of your income in a country like Ireland” with no employees there and minimal sales, there’s a serious problem. “Are you going to let us multinationals effectively have full rein to move all their earnings offshore?”

These are difficult issues, he said, but Congress needs to face up to them.

Meanwhile, my colleague Nelson D. Schwartz reports from the hearing room that Timothy D. Cook, Apple’s chief executive, has arrived and taken his seat in the witness section with an entourage from Apple.

— JEFF SOMMER

Professor Shay says that viewing Apple’s cost-sharing with its subsidiaries as anything other than tax avoidance strains credulity.

“There are bad deals out there,” he said. “This would be a whopper. A whopper against Apple.”

This deal was not an arms-length transaction between independent companies, he suggested. Consider this, he said: “Would you still own the stock if somebody gave away that much income?” The answer, he implied, was clearly no, but the deal makes sense because of its tax implications.

— JEFF SOMMER

“We talk about globalization,” Professor Shay said. “We are aware that we have a digital economy. We have ways of earning income that no longer have a physical nexus” to a specific country. “It is import to rethink our rules,” he said.

— JEFF SOMMER

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Professor Shay says Congress shouldn’t wait for major systemic tax reform before addressing “income shifting” of the kind highlighted by the committee. And he applauds the committee for bringing to light international tax practices “that are not easily understood.”

— JEFF SOMMER

Professor Shay said the average effective book tax rate for Apple’s Irish companies was well below 1 percent. Although Apple has listed their “location for tax purposes as Ireland,” he said, he learned for the first time on Sunday night that two of Apple’s subsidiaries, Apple Operations Europe and Apple Sales International, actually “are not tax residents in Ireland.”

“It’s not clear” where taxes on most of their income is paid, he said. Their income is being designated as belonging nowhere. It appears, he said, to be what is “oddly referred to by international tax planners as ‘ocean income.’”

Professor Harvey raises possible long-term solutions, and says he does not recommend that the United States adopt a worldwide tax system unless it reduces its corporate rate to 15 percent, which he says he thinks is not likely. If the current system allowing “transfer-pricing” is retained, he said, it needs to be clearer and made more easily administrated. And he relinquishes the floor to Professor Shay of Harvard.

— JEFF SOMMER

Professor Harvey discussed various tax loopholes, including “check-the-box tax rules.” One of his children is an aficionado of magic tricks, he said. Using his son’s language, he said, “check-the-box” is a technique that enables Apple to “make its taxes go poof.”

— JEFF SOMMER

In 2011, Professor Harvey said, Apple allocated $22 billion in profit to Apple Sales International in Ireland, which enabled Apple to “accomplish a .05 percent tax rate.”

He said that he would digress for a moment to rebut Apple’s prepared testimony, which includes the assertion that “Apple does not use tax gimmicks.”

When he read that, he said, “I just about fell off my chair.” Any reasonable person would conclude that these are tax gimmicks, he said.

— JEFF SOMMER

Senator Levin has introduced two academic experts, Stephen E. Shay of Harvard Law School and J. Richard Harvey of Villanova University School of Law. Professor Harvey has started his testimony on transfer pricing and shifting of profits by multinationals offshore, and on Apple’s specific tax planning techniques.

Apple, he said, was able to allocate 64 percent of its income to Ireland, which, he said, is “really an entity only on paper.” He said that Apple “isn’t as aggressive as others.” What is “scary,” he said, is that many companies would have gone even further. He questions whether the current global system that allows such tax avoidance makes any sense.

— JEFF SOMMER

Senator Paul said he had proposed a bill to tax repatriated capital held overseas by American company at 5 percent, instead of at the statutory rate of 35 percent. Companies like Apple would then bring their cash back home, he said. (Apple has more than $100 billion in “offshore” cash, the company acknowledges.)

The returned cash would go into a fund for infrastructure reconstruction, he said, and then he returned the floor to Senator Levin.

— JEFF SOMMER

Senator Rand Paul, the Kentucky Republican, has taken the floor with a very different tone. He says he is “offended” by the hearings. Who, he said, doesn’t try to minimize their own taxes?

“Tell me what Apple has done that’s illegal,” he said.

He said he’s offended by an I.R.S. that bullies the Tea Party, and that he’s offended by a government that is trying to “bully” a great company, and called the hearing “a show trial.”

He continued along these lines on Twitter:

If there is anyone to blame here it is not Apple, it is Congress and the tax code it created.

— Senator Rand Paul (@SenRandPaul) 21 May 13

To US Senate: I say, instead of Apple executives, you should have brought in a giant mirror if you want to see who is responsible.

— Senator Rand Paul (@SenRandPaul) 21 May 13

I am offended by the spectacle of dragging in here executives from Apple using the brute force of government to bully a great success story.

— Senator Rand Paul (@SenRandPaul) 21 May 13

I am offended by a $4 trillion government bullying, berating and badgering one of America’s greatest success stories.

— Senator Rand Paul (@SenRandPaul) 21 May 13

— JEFF SOMMER

From 2009 to 2012, Apple Operations International in Ireland received $30 billion in dividend income from other Apple subsidiaries around the world, Mr. McCain said. While the company held tens of billions of dollars in cash it appeared to have no employees.

He said that 95 percent of Apple’s research and development takes place in the United States. Less than 1 percent of it takes place in Ireland. And, he said, Apple’s Irish subsidiaries are a “tax resident nowhere in the world,” a nebulous legal status that allows the parent company to avoid taxes globally.

Senator McCain has concluded his statement.

— JEFF SOMMER

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While Apple says it paid $6 billion in federal taxes in 2012, Mr. Levin said, it also avoided $9 billion in United States taxes that year. That, he said, amounts to $25 million a day, or more than $1 million an hour.

After calling for a crackdown on tax loopholes, he gave the floor to Senator John McCain, Republican from Arizona, who also began his presentation by saying how much he admired Apple as a creator of great products. Senator McCain decried what he described as Apple’s “scheme” to avoid taxes.

— JEFF SOMMER

Senator Levin compares Apple’s earnings in the United States with its earning through its Irish subsidiaries. From 2009 to 2012, Apple Inc. in the United States paid $4 billion and declared profits of $38 billion. In other words, he said, its Irish subsidiary received almost twice the profits that its parent did from intellectual property developed by Apple in the United States.

“It’s hard to imagine Apple offering such a deal at any price” to an outside company, Mr. Levin said.

— JEFF SOMMER

Figures provided by Apple over a four-year period, from 2009 to 2012, show that one Irish subsidiary paid approximately $5 billion to the parent company in the United States as the subsidiary’s share of research and development costs, Senator Levin said. During that period, the subsidiary received profits of $74 billion. The difference, almost $70 billion, is how much taxable income would have otherwise flowed to the United States, he said.

— JEFF SOMMER

Mr. Levin has moved on to other tax avoidance strategies. He focuses on one that he said is more common among United States companies. That is “transfer pricing,” under which a company shifts intellectual property abroad, allowing it to shift taxable income to low-tax havens.

“Apple set up its cost-sharing agreements with its Irish subsidiaries,” he said. He added: “I use the term ‘cost-sharing’ with some skepticism,” because ultimately it is about shifting profits away from the United States and “instead concentrating the lion’s share of profits from most of the world to Apple’s subsidiaries in Ireland.”

— JEFF SOMMER

“Apple is exploiting an absurdity, one that we have not seen other companies use,” Senator Levin said.

But he added that this situation need not continue. “It is possible to penetrate an entity’s corporate structure for tax purposes and to collect U.S. taxes on its income,” he said. This can be done by showing that a part of the company created to avoid taxes is “nothing more than instrumentality of its parent company, a sham.”

Three of Apple’s subsidiaries “sure seem to fit that description,” he said.

— JEFF SOMMER

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Apple has created corporations in Ireland that enable it to avoid United States taxes, Senator Levin said. Apple Operations International is one of them. It is incorporated in Ireland. But, he said, “Magically it is neither here nor there,” as far as taxes are concerned.

— JEFF SOMMER

In his opening testimony, J. Richard Harvey Jr., a professor at Villanova Law School, estimates that cost-sharing agreements alone saved the company $7.7 billion in potential American taxes in 2011.

“Apple is an iconic U.S. multinational corporation that has enjoyed extraordinary financial success,” he will tell the committee, according to prepared testimony. “In addition to demonstrating excellence in designing, building and selling consumer products, Apple has been very successful at minimizing its global income tax burden.”

In 2011, 64 percent of Apple’s global pretax income was recorded in Ireland, where only 4 percent of its employees and 1 percent of its customers are located, according to Professor Harvey.

— NELSON D. SCHWARTZ

Senator Carl Levin, chairman of the subcommittee, begins the hearing by saying that like millions of other Americans, he uses Apple products like an iPhone. But, he said, Apple is seeking “the holy grail of tax avoidance” with tax strategies that are unique.

— JEFF SOMMER