Apple CEO Faces Senate Panel's Accusations Of 'Tax Gimmickry'

By John Ydstie

Published May 21, 2013 at 4:24 AM EDT

Apple CEO Tim Cook speaks during an introduction of the iPhone 5 in San Francisco on Sept. 12. The Senate Permanent Subcommittee on Investigations says Apple is paying billions of dollars less than it should in taxes each year, taking advantage of technicalities in U.S. and Irish tax laws.

Giant technology firm Apple is paying billions of dollars less than it should in U.S. taxes each year, according to a report by the Senate Permanent Subcommittee on Investigations. In a hearing Tuesday in Washington, D.C., Apple CEO Tim Cook will defend the company.

The subcommittee's report says Apple avoids the tax payments mainly by shifting profits to three subsidiary companies in Ireland. The investigation found Apple is taking advantage of technicalities in U.S. and Irish tax laws to avoid paying any tax on a huge portion of its profits.

"They've created corporations that don't exist anywhere for tax purposes," says Sen. Carl Levin, a Michigan Democrat who is chairman of the subcommittee. "That is right at the epitome of creative tax gimmickry."

U.S. law says because the companies are incorporated in Ireland, they aren't required to pay U.S. tax. But Irish law says the companies are controlled by Apple in the U.S., so that's where they should be taxed. The bottom line is the Apple subsidiaries pay very little tax at all despite billions in earnings.

"I've never seen anything like this," Levin says. "We don't know of anybody who has seen anything like this — where corporations don't exist anywhere for tax purposes."

Levin's committee has also investigated and criticized tax avoidance methods used by Microsoft and Hewlett Packard.

In testimony Apple released in advance of the hearing, CEO Cook defends Apple's practices. He says the company does not use tax gimmicks, and the reason it pays taxes overseas is because it sells overseas. But the Senate investigation found that the main subsidiary in Ireland, a company that includes Apple's retail stores throughout Europe, has not paid any corporate tax in five years.

In its defense, Apple says it paid $6 billion in U.S. corporate taxes last year. Sen. John McCain of Arizona, the ranking Republican on the investigations subcommittee, says that may be true.

"Apple executives like to boast that their company is the highest corporate taxpayer in the U.S.," McCain says. "But what they often leave out of the story is the second part of the story, and that is that Apple is one of the largest corporate tax avoiders."

While Apple's estimated tax payment for 2012 is $6 billion, the Senate investigators estimate that Apple avoided paying another $9 billion in taxes last year.

McCain called Apple's tax practices egregious and outrageous: "Apple has $145 billion cash on hand. Guess where $102 billion, or two-thirds of that total, sits — offshore."

During his testimony, Cook is expected to say the U.S. should lower its corporate tax rate on foreign earnings to encourage companies to bring profits back to the U.S.

The top U.S. corporate tax rate is among the highest in the world at 35 percent. Republicans want to lower it, and so does President Obama. Both Sens. Levin and McCain, however, said Congress shouldn't wait for a tax overhaul to close loopholes like the ones Apple is exploiting.