Congress creates massive tax loopholes, shocked Apple uses them


To no one’s surprise, Senators took advantage of the opportunity to wag their fingers at Apple’s Chief Executive Tim Cook on Tuesday, criticizing the company’s efforts to drastically cut tax obligations on its overseas profits.

“Isn’t it obvious that you’re not bearing the same tax burden as (you would) in the United States, which then gives you some advantage over companies that are smaller and strictly located in the United States?” asked Senator John McCain (R-Arizona).

The practice is unquestionably egregious, helping the technology powerhouse to avoid U.S. taxes on some $30 billion in the last four years. But it also appears perfectly legal.

So let’s be clear: The people who have failed this nation on the issue of corporate taxes were on the wrong side of the inquisitors table this morning.

Apple was taking advantage of the very loopholes Congress wrote into the tax code, if only a little more creatively and brazenly than its peers. If Congress wanted to act on its issue, it’s had all the information needed to enact thoughtful reforms for years.

But that would take actual backbone, standing up to lobbyists, party leaders and anti-tax groups. Why do that, when you merely play tough on TV, grilling powerful figures while the news cameras roll?

Senator Carl Levin (D-Michigan), chairman of the Senate subcommittee holding the hearing, got in on the act too. He repeatedly pressed Cook and Phillip Bullock, Apple’s head of tax operations, on where certain overseas subsidiaries have tax residency, knowing full well by this point that the answer was nowhere. He interrupted Bullock several times, accusing him of not answering questions he had asked and of not giving straight answers.

He later got testy with Cook: “Of course you can bring (your overseas profits) home, if you pay the taxes on them. Of course you can bring them home.”

Congress was only prompted to take another look at this issue thanks to reporting by the New York Times last April on Apple’s tax practices. It detailed an avoidance strategy known as the “double Irish with a Dutch sandwich.”

It’s convoluted and confusing, requiring the Times to produce an accompanying three-column chart with arrows running through two Irish subsidiaries, the Netherlands and the Caribbean.

But it basically boils down to this: Apple’s overseas corporate taxes are largely beyond the reach of the Internal Revenue Service because the main entity overseeing those operations is physically set up in Cork, Ireland. Meanwhile, that subsidiary was outside the reach of Irish tax collectors because it was effectively managed and operated from outside Ireland, that is to say, from within the U.S.

But as Apple stressed during the testimony, that entity is a holding company that manages money produced by other overseas subsidiaries that have already paid local taxes in the areas in which they operate. Cook also pointed out that company paid $6 billion in U.S. taxes for its domestic operations last year, adding that Apple has become the largest taxpayer in America as far as they know.

“We pay the taxes we owe,” he said. “We not only comply with the laws, we comply with the spirit of the laws, we don’t use tax gimmicks.”

Should Apple be a better corporate citizen? Yes, of course, and on all sorts of levels.

But to expect them to do so on their own, when billions of dollars are at stake, is to ignore the long obvious undisputed history of how businesses operate.

Corporations maximize profits — and will step right up to the edge of the law in their efforts to do so. They can’t be relied upon to do the right thing, they have to be forced to.

This is why we have to have a tax code, environmental regulations and a Securities and Exchange Commission.

It’s abundantly clear that the U.S. tax code is horribly flawed and out of date. The principle problem when it comes to overseas profits is that companies face a huge tax bill if they bring home — or repatriate — money made overseas, generally 35 percent. As a practical matter, it means companies simply park their money offshore, using it to fund stores, products or manufacturing outside the United States.

Some companies, including Apple, have called for another tax holiday, briefly cutting that rate radically to encourage businesses to bring home the vast amount of money now stuck outside the United States. But clearly a longer term fix is required.

It could include a permanently lower rate more in line with what our companies’ overseas competitors pay, or other means of removing these incentives to play tax shell games. It also needs to be part of a broader overhaul that streamlines and simplifies the tax code, eliminating other obvious and unfair loopholes in the process.

But none of this is news. And none of this requires hauling Apple or any other companies before Congress, and staging a part public shaming, part shameless reelection campaign. It simply requires our legislators to do their actual jobs.



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