The U.S. Senate’s Permanent Subcommittee on Investigations released a 40-page bipartisan report yesterday unveiling that Apple has been using legal loopholes in the United States and Ireland to skirt additional taxes. Senate investigators are reporting that Apple sheltered $44 billion in offshore, taxable income between 2009-2012.
“What we intend to do is to highlight that gimmick and other Apple offshore avoidance tactics so that American working families, who pay their share of taxes, understand how offshore tax loopholes raise their tax burden and how those loopholes add to the federal deficit,” said Sen. Carl Levin (D-Mich.), the chairman of the Permanent Subcommittee on Investigations. The panel initiated the probe with the backing of its top Republican, Sen. John McCain of Arizona.
Legal findings from the Senate panel show that Apple used non-tax resident subsidiaries in Ireland to funnel significant international profits.
The main issue at hand is Apple’s giant and complex corporate structure. Apple Inc. deals with the operations in the Americas. On the other hand, in respect to the international market, there are a group of affiliates in Ireland that control Apple’s operations.
For example, the Senate panel exposes Apple’s use of its affiliates to “shift part of the costs of its research and development to Ireland, even though it conducts ‘virtually all’ of the work in the US.”
Accordingly, Apple’s international profits are funneled through Ireland because of the low corporate tax rates.
Apple “through negotiations” with Ireland secured a special, lower corporate income tax rate, according to the Senate panel’s report, at about 2 percent. This 2 percent tax rate lands lower than the mandated 12.5 percent under Irish law and significantly below the 35 percent under U.S. law.
Apple Operations International is Apple’s top “offshore holding company” and does not have official tax residency internationally. “Without residency, it’s able to exploit ‘the gap between the two nations’ tax laws’ — allowing Apple, for example, to rake in income of $30 billion between 2009 and 2012 without filing a corporate income tax return anywhere,” the report concludes. AOI has board meetings in the U.S.; however, it has neither a physical presence nor any employees there.
The company noted that AOI didn’t meet the criteria to declare residency in Ireland, while arguing its dividends have “already been subject to tax in accordance with the laws of the countries where they were earned.”
Additionally, according to the Senate panel, another Apple international affiliate, Apple Sales International, took advantage of foreign loopholes to “pay a tiny $10 million in global taxes on about $22 billion in income in 2011, possibly because it’s not reported the full amount of income on its Irish tax returns.”
Peter Vale, a tax expert with Grant Thornton in Dublin, told the Financial Times that under Irish tax law an Irish incorporated company can avoid being treated as Irish tax resident provided that another group company has Irish operations. “Clearly Apple ticks the box here with its substantial Cork site,” he said.
Apple, underneath its 30.5 percent federal cash tax rate, has remained stern that it has done its due part in paying $6 billion in income taxes in the U.S this past year.
Apple has said continuously that the IRS penalizes companies for bringing foreign earnings back to the U.S. Apple’s tactics, combined with the likes of Hewlett-Packard, Google, Facebook and Microsoft, add to the continued pressure for an overhaul of the U.S. tax code. CEO Tim Cook will be testifying in front of the Senate panel today in a push for the repair of the system.
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