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Sen. Levin's Subcommittee Harasses Apple

May 21, 2013. The Senate Homeland Security and Government Affairs Committee's (SHSGAC) Subcommittee on Investigations, chaired by Sen. Carl Levin (D-MI), held a hearing titled "Offshore Profit Shifting and the U.S. Tax Code - Part 2 (Apple Inc.)". (Parentheses in original.)

Sen. Carl LevinSen. Levin (at left) harangued and harassed Apple, and its CEO, Tim Cook. However, neither Sen. Levin, nor anyone else at this hearing alleged that Apple has violated any tax or other laws of the U.S. or any other nation.

In contrast, Sen. Rand Paul (R-KY), a member of the Subcommittee, apologized to Apple at the hearing for the conduct of the Subcommittee and the Senate. See, related story in this issue titled "Sen. Paul Defends Apple".

The SHSGAC does not have jurisdiction over the Internal Revenue Code (IRC) or Internal Revenue Service (IRS). The Senate Finance Committee (SFC) does. Moreover, neither Sen. Levin nor Sen. Paul are SFC members.

Nevertheless, this and similar hearings serve several purposes. First, they add rhetorical support to the defenders of the current level of federal spending. That is, this type of hearing bolsters those who argue that the government does not need to reduce spending, because greedy corporations are the problem. This type of hearing also provides politicians the argument that they are not over taxing ordinary citizens; rather, they are forced to tax citizens to make up for tax dodging multinational companies. Moreover, for some Senators, demagoguery about the evils of free markets, profit seeking companies and low taxes is an end in itself.

Also, this particular hearing, on this date, served to divert attention from misconduct by the IRS in targeting tea party groups, to alleged corporate avoidance of the IRS.

Finally, unintended consequences of this type of hearing may include disincenting foreign multinational companies from investing in the U.S., and further incenting U.S. companies to move their investments, operations, jobs and profits abroad.

Sen. Levin wrote in his opening statement that "Apple effectively shifts billions of dollars in profits offshore, profits that under one section of the tax code should nonetheless be subject to U.S. taxes, but through a complex process avoids those taxes."

He argued that companies like Apple are contributing to "worrisome federal deficit" through the "use and abuse of loopholes that so riddle our tax code that the average U.S. corporation pays an effective tax rate of 15 percent, less than half the statutory rate of 35 percent".

He also asserted that practices that shift profits offshore to jurisdictions with lower corporate tax rates "deepen the federal deficit and increase the tax burden on American families".

Sen. Levin continued that "Apple Inc. has created three offshore corporations, entities that receive tens of billions of dollars in income ... ghost companies" that only pay taxes in Ireland, if at all, and not much there.

Sen. Levin said to Tim Cook that Apple has monies "stashed away in these three Irish companies". He asked, "will you bring them home"?

Cook said that "I have no current plan to bring them back at the current tax rate".

Cook said in his opening statement that "We pay all the taxes we owe -- every single dollar. We not only comply with the laws, but we comply with the spirit of the laws. We don't depend on tax gimmicks. ... We don't stash money on some Caribbean island."

He also addressed two practices that the IRS witness, Samuel Maruca, identified in his prepared testimony as problems with some other companies. Cook said that "We don't move intellectual property offshore and use it to sell products back into the U.S. to avoid U.S. taxes", and "We don't borrow money from our foreign subsidiaries to fund our U.S. business in order to skirt the repatriation tax."

However, Sen. Levin asserted that "Sending valuable intellectual property rights offshore together with the profits that follow those rights is at the heart of Apple's tax-avoidance strategy."

Apple's Cook wrote in his prepared testimony that "Apple safeguards the capital entrusted to it by its shareholders with prudent management that reflects the Company’s extensive international operations. Apple complies fully with both the laws and spirit of the laws. And Apple pays all its required taxes, both in this country and abroad."

Apple "supports comprehensive tax reform as a necessary step to promote growth and enable American multinational companies to remain competitive with their foreign counterparts in both domestic and international markets."

Mark Mazur (Assistant Secretary for Tax Policy at the Department of the Treasury) wrote in his prepared testimony that for globalized development by numerous subsidiaries spread across many countries of products such as software, it is not easy to determine "where the income from this product is earned". He also explained the U.S. laws and regulations that enable U.S. multinationals such as Apple to legally shift profits to other countries.

He also acknowledged that the U.S. corporate income tax rate of 35% is "now among the highest in the developed world" and has therefore created an "economic incentive for the shifting of profits".

Mazur also stated that "the statutory corporate income tax rate may also affect the decision to invest in one country rather than another, especially where the investments are independent and highly profitable."

He also wrote that "Estimates of the potential revenue loss to the U.S. government from profit shifting cover a wide range, from $10 - $20 billion to well over $80 billion per year."

Finally, he reviewed the laws and rules that enable this shifting, efforts by the Obama administration to limit this shifting, and some further proposals under consideration.

Richard Harvey (Villanova University law school) explained in his prepared testimony how Apple allocates income to its tax haven subsidiary in Ireland, and how this is allowed by U.S. laws and regulations. He also suggested numerous changes that the U.S. might make to make such strategies more difficult, and increase corporate taxes paid to the U.S. by multinational companies such as Apple.

(Published in TLJ Daily E-Mail Alert No. 2,564, May 21, 2013.)