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Last updated: May 21, 2013 12:12 pm

By James Politi in Washington and Richard Waters in San Francisco

Tim Cook, Apples chief executive, faces a grilling by a US

Senate committee on Tuesday over claims that the
company exploited loopholes to avoid paying billions of
dollars in tax.
Mr Cook and two other executives including Peter
Oppenheimer, Apples chief financial officer will appear
Reuters
at 9.30 Washington time at a hearing set to shine a harsh
political spotlight on the US technology group.
On Monday the Senate permanent subcommittee on investigations released a 40-page report on
Apples international tax structure which accused the company of using Irish subsidiaries that are
not tax residents of any country.
Apple sought the Holy Grail of tax avoidance, said Carl Levin, the Democrat who chairs the panel
and will lead the hearing. It has created offshore entities holding tens of billions of dollars, while
claiming to be tax-resident nowhere.
Apple, in testimony prepared for Tuesdays hearing, denied it used tax gimmicks to lower its
payments and claimed to be the largest payer of corporation tax in the US, accounting for $1 in
every $40 paid last year.
The company also denied that Apple Operations International (AOI) was a shell company,
arguing that the entity had been set up to manage its global flow of funds and that its activities
did not reduce Apples US taxes.
Apple also defended its practice of shifting part of the costs of its research and development to
Ireland, even though it conducts virtually all of the work in the US a technique that was
attacked as a tax-avoidance scheme by the committee. The arrangement was authorised by US law
and complies with all US regulations, Apple said.
Mondays Senate report said Apples elaborate use of loopholes for international profits allowed it
to save US tax on $44bn in otherwise taxable offshore income in the past four years. But the

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committee said there was no indication Apple had done anything illegal in attempting to minimise
its tax bill.
This is the definition of a tax loophole, technically something which may be in compliance with
the law but violates the spirit of the law, Mr Levin said.
Staff for the committee said the most surprising findings included the use of the non-tax resident
subsidiaries in Ireland, through which the bulk of Apples international profits are funnelled.

FT series
Great tax race

As the G20 pledges to crack

down on multinational tax
avoidance, the FT examines
how and why governments help
companies reduce their tax
burden

One of them, Apple Sales International, paid virtually no taxes on

sales of $74bn between 2009 and 2012. In 2011, it paid $10m in
taxes on $22bn in profits, or a rate of 0.05 per cent, according to the
panel.
Another unit with no tax home, AOI, did not file an income tax
return in any country over the past five years, despite income of
$30bn between 2009 and 2012, the investigation found. Established
in 1980, AOI holds board meetings in the US but has no physical
presence or employees.
I have never seen anything like this, we dont know of anyone who
has seen anything like this, Mr Levin said.

In addition, the investigators found that Apple cut a special deal with
Ireland to apply a tax rate of less than 2 per cent on any profits that
are taxable in the country, well below the 12 per cent Irish corporate tax rate.
Apple is the third big US technology group to face scrutiny from the Senate investigations panel
after Microsoft and Hewlett-Packard and committee staff said Apple did co-operate with the
probe.
A company that
found remarkable
success by harnessing
American ingenuity...
should not be shifting
its profits overseas to
avoid the payment of
US tax

The disapproval of Apples tax practices was bipartisan. John McCain,

the subcommittees top Republican, told reporters Apple had
orchestrated a tax scheme that was egregious and outrageous.
A company that found remarkable success by harnessing American
ingenuity and the opportunities afforded by the US economy should not
be shifting its profits overseas to avoid the payment of US tax,
purposefully depriving the American people of revenue, Mr McCain
said.

- John McCain, top Republican on

the Senate permanent
subcommittee on investigations

The scrutiny of Apple may spark further debate on the structure of the
USs tax code. Congress and the White House are debating whether to

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lower the 35 per cent corporate tax rate.

It could also stoke further discussion about international co-ordination to stem tax avoidance,
which is expected to be a major theme at the upcoming G8 summit in Northern Ireland.

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