It was a lovefest.
Tim Cook, the CEO of Apple, was welcomed to Washington Tuesday like a conquering corporate hero, not the boss of a firm that has found all sorts of ways to dodge the US Tax Code.
According to a Senate investigation released the night before Cook’s testimony, Apple paid in between 0% and .06% in taxes on $104 billion in income earned outside of the Americas over the past four years. While Apple claims to pay around a 30% effective tax rate, the Senate found that its effective tax rate for U.S. corporate income taxes is 20.1%. Overall, it is believed that the Cupertino, California company has stashed around $100 billion overseas to avoid paying the 35% US corporate tax rate.
Ranking Republican in the subcommittee John McCain of Arizona called Cook an “outstanding” CEO. He emphasized that Apple had not engaged in “wrongdoing” but that “Apple’s tax department has given new meaning to the company’s old slogan, quote: ‘think different.’” He said that Apple was an “egregious” tax offender, but ended on a light-hearted note: “What I really wanted to ask was why the hell do I have to keep updating the apps on my iPhone all the time?” Cook laughed, then responded, “Sir we’re trying to make them better all the time.”
Other senators bobbed for Apple.
Sen. Kelly Ayotte (R-NH), according to the Atlantic, met Cook during a hearing break, and opened with, “So nice to meet you. I have an iPad.” During the hearing, Ayotte asked Apple what Congress should do to fix the tax code. Cook said it would be “materially better” to have permanent comprehensive tax reform than a one-off repatriation tax holiday, which Congress passed in 2004 to attract jobs, but instead only boosted stock prices.
Sen. Rob Portman (R-OH) agreed, arguing that Apple would have a better shot against its Korean rival Samsung if the country supported some of his comprehensive tax reform proposals. “Your investment options are a lot more limited,” Portman told Cook, because “you can’t bring the money home.” Portman then expressed his wish for a 25% corporate tax rate and some aspects of a territorial tax system (taxing businesses on profits only in the country where they were earned), which most OECD companies use. “I’m a recovering lawyer, but you don’t need more lawyers, you need more engineers,” Portman told Cook.
Subcommittee Chairman Carl Levin of Michigan did point out that Apple could bring its money home if it wanted to. “You made a decision to do it…Don’t kid ourselves to the implications to what this means to America’s revenue,” said Levin in one of the day’s harshest rebukes. But Levin then pointed out that he too had an iPhone, saying, “My granddaughter even knows how to use it.”
The point of the hearing, Levin said, is “to examine how U.S.-based multinational corporations use loopholes in the tax code to move profits to offshore tax havens and avoid paying U.S. taxes.” The Senators spent the day repeating that what Apple did was legal, that it wasn’t wrong for Apple to move funds abroad, but that it is wrong that the current laws encourage such action. The question now after the Apple-Senate love fest is, what can corporations and Congress agree on for tax reform?
Apple advocated for a revenue neutral structure that eliminates all corporate tax expenditures, lowers corporate income tax rates, and implements a “reasonable” tax on foreign earnings. Cook told the senators that he has “no current plan to bring them (foreign, post-tax income) home at the current tax rate,” ensuring that senators can use Apple’s earnings as leverage in getting a tax deal done.
The hearing seemed to squash the idea of returning to a repatriation tax holiday, a temporary, one-time maneuver lowering corporate tax rates dramatically to get US companies to return their cash. Sen. Rand Paul said there are 70 Congressmen who would be for a 5% repatriation tax holiday, even though he already proposed his idea with no cosponsors this congressional cycle. In 2011, a bipartisan bill to resurrect the holiday was defeated with the memories of 2004 still fresh. And, as Cook told Ayotte, other options are preferable. Cook’s testimony followed a first panel, in which J. Richard Harvey and Stephen Shay, law professors at Villanova University School of Law and Harvard Law School, advocated against the tax holiday in favor of a permanent comprehensive approach.
Tax reform is a bipartisan issue whose congressional power players are motivated to get something done by the midterm elections. White House Press Secretary Jay Carney said in Tuesday’s press briefing that Obama has “championed” a minimum tax on foreign earnings. Chairman of the House Committee on Ways and Means Dave Camp and Max Baucus, the chairman of the Senate Finance Committee, have both advocated for tax reform. Baucus, a Democrat, is retiring in 2014 and Camp, a Republican, will lose his committee gavel. Still, Congress is a ways away from putting something substantial on the floor.
For Apple, even if tax reform doesn’t come, the status quo remains as sweet as the senators.
During the testimony Sen. Rand Paul answered one of his own questions about America’s corporate tax rates. “Who are we punishing?” he asked. “We’re punishing ourselves,” he answered.