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05/21/2013

Apple, tax bills and Ireland

Appledude
Apple CEO Tim Cook readies himself for a grilling by a U.S. Senate subcommittee on Tuesday. (Jason Reed/Reuters)

Nobody likes paying the tax man, especially big, multi-national corporations.

As governments struggle to manage out-of-control deficits, fight unemployment and pay for ballooning social programs, some billion-dollar companies reap profits beyond anyone's wildest dreams and then hides them.

Well, the U.S. Permanent Subcommittee on Investigations of the Senate has had enough.  They are upset. The latest target of their collective wonder and anger is the great American tech success story -- Apple.

The Senate wants to know why the tech giant holds $102 billion of its $145 billion in cash, overseas, and, how an Irish subsidiary could earn $22 billion in 2011 and paid only $10 million in taxes, according to the Associated Press.

The New York Times has done some incredible, dogged investigative work uncovering the core of Apple. They even won a Pulitzer prize for their journalism. But their reporting on how Apple allegedly dodges its taxes by a web of holdings in places like Ireland, that have lower tax rates than others, struck a nerve.

The Times said Apple paid $3.3 billion in cash taxes globally on $34.2 billion in profits last year, that is a rate of 9.8 per cent.

The subcommittee is trying to wrap its head around the "structures and methods employed by the multinational corporations to shift profits offshore and how such activities are affected by the Internal Revenue Code."

Or, put quite simply, how the heck do corporations explain marginally less tax bills when America is going broke and the average person is stuck with the bill?

Apple CEO Tim Cook is in the hot seat today before a subcommittee hearing. Cook, according to his written testimony released this morning, sees things quite differently. He argued the U.S. corporate tax system has "not kept pace" with the digital age and the "rapidly changing global economy."

Apple supports "comprehensive tax reform" as necessary to promote growth and enable American multinationals to remain competitive.

Apple is a good corporate citizen, he argues. They have created or supported 600,000 U.S. jobs, including 55,000 for Apple employees and another 550,000 in other linked industries. And, they are true to its California roots by being headquartered in Cupertino.

"Apple is likely the largest corporate income tax payer in the U.S., having paid nearly $6 billion in taxes to the U.S. Treasury in FY2012. These payments account for $1 in every $40 in corporate income tax the U.S. Treasury collected last year," his testimony read.

Cook absolutely denied Apple dodges taxes. "Apple does not move its intellecutal property into offshore tax havens and use it to sell products back into the U.S. in order to avoid U.S. tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands."

Over to the testimony of Richard Harvey Jr., a professor of practice at the Villanova University School of Law and Graduate Tax Program and former senior adviser to past IRS commissioner Doug Shulman.

Apple has been very successful in minimizing its global income tax burden, Harvey said.

Harvey, in his written testimony, noted Apple recorded approximately $22 billion of its 2011 pre-tax income in Ireland, as a result, 64 per cent of Apple's global pre-tax income is recorded in Ireland, where only 4 per cent of its employees and 1 per cent of its customers are found.

If Apple didn't have a cost sharing agreement in Ireland, its 2011 pre-tax income would have gone up by $22 billion, "resulting in an additional federal tax liability of approximately $22 billion x 35 per cent = $7.7 billion," Harvey's testimony read.

Tanya Talaga is the Star's global economics reporter. Follow her on Twitter @tanyatalaga.

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