Apple, the tech giant that has made a corporate bonanza by selling iPhones, iPads and iPods to consumers worldwide, has avoided tens of billions of dollars in U.S. taxes on its income and profits, according to a Senate report summary issued Monday and swiftly challenged by the firm.
The California-based firm has used a web of offshore entities - including three Ireland subsidiaries that it said don't have tax residency in any country - to cut some of its tax rates to 0.05%, the Senate Permanent Subcommittee on Investigations reported.
One of those Apple subsidiaries reported $30 billion in net income for 2009-2012, yet filed no corporate tax return and paid no income taxes to any government during those years, the panel reported in advance of a public hearing set for Tuesday.
Another affiliate received $74 billion in sales income over four years, but paid taxes "on only a tiny fraction of that income," the report said.
Apple also transferred economic rights for some of its intellectual property to its offshore affiliates in low-tax jurisdictions, saving tens of billions of dollars in levies, the Senate panel concluded in its latest look at corporate tax avoidance tactics.
The company then went a step further by using U.S. tax loopholes to avoid federal taxes on $44 billion in otherwise taxable offshore income from the intellectual property rights during the last four years, the report concluded.
"The secret to Apple's business success isn't in the aluminum and the steel and the glass of an iPhone," Sen. Carl Levin, D-Mich., the panel's chairman, said Monday evening. "The genius is the ideas that bring those elements together in an elegant package. That intangible genius is intellectual property ... nurtured and developed here in the United States. And yet, it ends up that most of the profits are shifted to a tax haven."
Arizona Sen. John McCain, the panel's ranking Republican, said Apple "should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue."
In written testimony filed with the subcommittee, Apple said "in accordance with U.S. law," the firm "pays U.S. corporate income taxes on the profits earned from its sales in the U.S. and on the investment income of its controlled foreign corporations."
Insisting it doesn't use "tax gimmicks," Apple said it does not move intellectual property to offshore tax havens and use that structure to sell products in the U.S., thereby ducking domestic taxes. The company, which reported $102.3 billion of its $145 billion in cash was held in offshore affiliates as of March 30, said it has that much money overseas "because it sells the majority of its products outside the U.S."
Apple CEO Tim Cook, CFO Peter Oppenheimer and tax operations chief Phillip Bullock are scheduled to testify at Tuesday's hearing. Cook told The Washington Post last week his testimony would include a proposed "dramatic simplification" of corporate tax laws that would encourage U.S. firms to bring foreign earnings back home for job creation and economic investment.
Apple said it paid $6 billion in federal corporate income taxes during its 2012 fiscal year and expects to pay $7 billion in the current year. Those totals make Apple "likely the largest corporate income tax payer in the U.S," the company said.
Tax-avoidance techniques are commonly used by many large U.S.-based global firms as a legal way to reduce government levies at home and abroad. In a separate study last fall, the Senate panel reported that two other domestic tech giants, Microsoft and Hewlett-Packard, used such strategies to avoid billions in federal taxes.
In its Apple study, the Senate panel reported that Apple for the last decade has operated in Ireland with a specially negotiated tax rate of less than 2%, well below the country's 12% statutory rate.
Apple has several Ireland subsidiaries, including Apple Operations International, its top-tier offshore affiliate, and two sub-affiliates called Apple Operations Europe and Apple Sales International.
Incorporated in 1980, AOI "has no physical presence" in Ireland "or any other address" and doesn't have any employees, the Senate report said. Its board meetings have almost always been held in the U.S., and its assets are managed by an Apple subsidiary in Nevada.
"According to Apple, AOI's net income made up 30% of Apple's total worldwide net profits from 2009-2011, yet Apple also disclosed to the subcommittee that AOI did not pay any corporate income tax to any national government during that period," the report said.
Apple said "it had not determined" whether AOI was managed and controlled in the U.S., which would make its profits taxable, the report said, noting that the subsidiary hadn't filed a corporate tax return in the last five years.
Apple Sales International, ranked below AOI on the corporate flow chart, in 2011 paid $10 million in global taxes on $22 billion of income, the report said. In 2010, ASI paid $7 million in taxes on income totaling $12 billion.
"Those Irish tax payments are so low ... they raise questions about whether ASI is declaring on its Irish tax returns the full amount of income it has received from other Apple affiliates," the report said.
ASI and Apple Operations Europe, the third Ireland affiliate, have research and development cost-sharing agreements with the U.S. parent company, giving them joint ownership of economic rights to Apple's intellectual property offshore, the report said.
That structuring enabled Apple to avoid having worldwide sales revenue related to the rights attributed to the parent firm. Instead, the company arranged for a large portion of the worldwide revenue to be attributed to ASI, which benefits from an Irish tax rate as low as 0.05%, the report said.
Apple also used a tax loophole in the U.S. tax code, the Senate panel said. By checking an IRS tax form box that designated its lower-tier foreign affiliates as "disregarded" entities, the IRS was required to treat the affiliates for tax purposes as part of Apple Operations International, the company's top overseas subsidiary.
Apple used this procedure for offshore affiliates in Europe, Asia and elsewhere, the report said. From 2009-2012, Apple reported that AOI received $29.9 billion in income, mostly from dividends paid by lower-tier overseas affiliates, the report said.
That passive income would normally be taxed. "But by using the check-the-box loopholes, Apple was able to designate the income as coming from disregarded entities. "Once they became part of AOI, their dividend payments ... were no longer taxable passive income," the report said.
The Senate panel recommended strengthening the federal tax code to eliminate incentives for U.S. multinational firms to transfer intellectual property rights to offshore affiliates in low-tax areas.
In other recommendations, the panel called for reforming "check the box" tax rules and imposing current U.S. tax on income earned by any overseas affiliate managed and controlled in the U.S.