Apple CEO Tim Cook came all the way from Cupertino, Calif. to Washington this week to explain why his company did not pay taxes on tens of billions of dollars last year, as a new report alleges. Cook, two of his fellow Apple executives and a host of experts testified before the Senate Permanent Subcommittee on Investigations Tuesday to answer those questions and more.
This week, Sen. Carl Levin, D-Mich., the committee chair, released a report blasting Apple for owning two offshore subsidiaries that have paid little to no taxes on over $100 billion in income in recent years. The report also charged that the company used loopholes to avoid paying an additional $10 billion in U.S. taxes last year.
The hearing lasted all morning and well into the afternoon. To save readers from plowing through hours of C-SPAN footage, U.S. News has boiled it down to five key quotes that explain what happened in Tuesday's hearing.
"Apple has sought the Holy Grail of tax avoidance: offshore corporations that it argues are not, for tax purposes, resident in any nation." — Sen. Carl Levin, D-Mich., in his opening statement
Levin led the charge at the hearing, pressing Cook and his compatriots on companies Apple created in Ireland. Levin explained in his opening statement that because Ireland taxes companies on where they are managed, and because Apple's subsidiary, AOI, was not managed in Ireland, it was not required to pay taxes there. And as AOI isn't incorporated in the U.S., it is not liable to U.S. tax law, either. "Magically, it's neither here nor there," said Levin.
"I about fell off my chair when I read that." — J. Richard Harvey, Professor at Villanova University School of Law, on reading Cook's testimony that Apple "does not use tax gimmicks"
Harvey was a bright spot in the hearing, an academic who managed to cut through the technicalities of the U.S. tax code. Did Apple do anything illegal? Not that he could see. But did they engage in some financial wizardry to avoid paying tax on some income? Absolutely.
"Apple has been a powerful engine of job creation in the U.S." — Apple CEO Tim Cook, from his prepared testimony
Cook and his fellow executives defended the company, and a significant portion of their defense involved boasting about the company's success. Cook explained that his company creates innovative products in addition to jobs, and furthermore added that it pays "an extraordinary amount in U.S. taxes." According to Cook, Apple paid $6 billion, or $1 of every $40 paid in U.S. corporate income tax last year. Then again, Apple is the sixth largest company in the U.S., so the argument could be made that it will naturally shoulder a large tax burden.
"If anyone should be on trial here, it should be Congress." — Sen. Rand Paul, R-Ky.
Not everyone took Apple to task. Paul was the friendliest to the Apple execs, arguing that the committee should apologize to Apple for putting them into what he called a "show trial" and complimenting the company on its job creation. Paul said the problem at hand was Congress', not Apple's, since Congress made the tax law that is full of loopholes. The libertarian-leaning senator then exhorted lawmakers to enact business-friendly corporate tax reform. One policy Paul favors is a low tax rate of 5 percent on repatriated profits.
"I feel very good to be participating in this, and I hope to help the process." — Cook
Wait, what? Fielding senators' questions isn't exactly a feel-good moment for anyone. But Cook had his reasons to grin and bear it, including the opportunity to personally pitch his idea for tax reform. Many corporations call for a "territorial" tax system, in which they would pay taxes only on domestic earnings. However, some tax experts argue that such a system only makes tax-dodging easier. In his testimony, Cook never uttered the T-word, but he did argue for a "reasonable tax on foreign earnings."
Cook may not get his wish, but there is broad agreement that the corporate tax system is broken. Currently, the U.S. corporate tax rate is 35 percent – the highest rate in the world. However, loopholes substantially lower the effective tax rate for many companies. An April report from the advocacy group Citizens for Tax Justice found that 10 Fortune 500 companies together paid a negative effective tax rate in 2012.