Apple slammed by US over tax structure

Apple's tax structure means it has kept billions of dollars in profits in Irish subsidiaries to pay little or no taxes to any government, a US Senate report on the company's offshore tax structure said.

In a 40-page memorandum released a day before Apple CEO Tim Cook is scheduled to testify before Congress, the Senate's Permanent Subcommittee on Investigations identified three subsidiaries that have no "tax residency" in Ireland, where they are incorporated, or in the United States, where company executives manage those companies.

The main subsidiary, a holding company that includes Apple's retail stores throughout Europe, has not paid any corporate income tax in the last five years.

The subsidiary, which has a Cork, Ireland, mailing address, received US$29.9 billion in dividends from lower-tiered offshore Apple affiliates from 2009 to 2012, comprising 30 percent of Apple's total worldwide net profits, the report said.

"Apple has exploited a difference between Irish and US tax residency rules," the report said.

Apple said in a comment posted online it does not use "tax gimmicks." It said the existence of its subsidiary "Apple Operations International" in Ireland does not reduce Apple's US tax liability and the company will pay more than US$7 billion in US taxes in fiscal 2013.

Subcommittee staffers said Apple was not breaking any laws and had cooperated fully with the investigation.

Code overhaul sought

Tomorrow's hearing is the second to shed light on the weaknesses of the US corporate tax code. 

Lawmakers globally are closely scrutinising the taxes paid by multinational companies. In Britain, Google faces regulatory inquiries over its own tax policies, while HP and Microsof have been called to Capitol Hill to answer questions about their own practices.

The Australian Government has been investigating the tax structures of the local arms of global corporations and recently released a government paper seeking industry consultation on its findings that multinational corporations in Australia aren't paying enough tax. 

The work is being lead by Treasury and a specialist reference group made up of business, tax professionals, academics and the wider community.

Corporations must pay the top US 35 percent corporate tax on foreign profits, but not until those profits are brought into the United States from abroad. This exception is known as corporate offshore income deferral.

In submitted testimony ahead of tomorrow's hearing, Apple said any tax reform should favor lower corporate income tax rates regardless of revenue, eliminate tax expenditures and implement a "reasonable tax on foreign earnings that allows free movement of capital back to the US."

"Apple recognises these and other improvements in the US corporate tax system may increase the company's taxes," it said.

Large US companies boosted their offshore earnings by 15 percent last year to a record US$1.9 trillion, avoiding hefty tax bills by keeping the profits abroad, according to research firm Audit Analytics.

Scrutiny

Apple also uses two conventional offshore tax practices typical of multinational companies' tax-avoidance strategies, the report said.

Multinational corporations value goods and services moving across international borders from one corporate unit to another. Known as "transfer pricing," these moves are frequently managed to reduce corporations' global tax costs.

Apple's tax structure highlights flaws in the US corporate tax code so that Congress "can effectively close the loopholes used by many US multinational companies," Arizona Senator John McCain, the subcommittee's top Republican, said in a statement.

Legislation was introduced in February to close tax loopholes. McCain said he would co-sponsor the bill, calling Apple's tax practices "egregious, and (a) really outrageous scheme."

Similar legislation has been introduced in the House of Representatives.

Government tax officials from the Internal Revenue Service and Treasury Department also are scheduled to testify before the subcommittee tomorrow.