TOPICS > Economy

Congressional Hearing on Apple Tax Practices Puts Spotlight on Legal Loopholes

May 21, 2013 at 12:00 AM EDT
Tech giant Apple has avoided paying billions of dollars in taxes to the U.S. or any country by using a complex web of Irish subsidiaries. But Apple is not alone, and none of the practices are illegal. Margaret Warner talks to Charles Duhigg of The New York Times for more on corporate tax loopholes.
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JEFFREY BROWN: And next: tech giant Apple on the hot seat on Capitol Hill for tax practices that saved the company billions.

Margaret Warner has that story.

SEN. CARL LEVIN, D-Mich.: Now, Apple executives want the public to focus on the U.S. taxes the company has paid, but the real issue is the billions in taxes that it has not paid.

MARGARET WARNER: Chairman Carl Levin laid out the findings of his Senate panel’s investigative report today, that giant Apple, maker of the iPhone, iPad and other popular devices, has for years used a complex web of Irish subsidiaries to avoid paying billions of dollars in taxes to the U.S. or any other country.

That strategy meant Apple paid little or no corporate taxes on at least $74 billion dollars in the past four years, according to the report.

Ranking member John McCain showed the outrage was bipartisan.

SEN. JOHN MCCAIN, R-Ariz.: Today, Apple has over $100 billion dollars, more than two-thirds of its total profits, stashed away in an offshore account. That’s over $100 billion dollars that are not currently subject to U.S. corporate income taxes and therefore cannot be used to ease the deficit or help invigorate the same American economy that fostered the creation of this large corporation in the first place.

MARGARET WARNER: After being sworn in, Apple CEO Tim Cook said his company is America’s largest corporate taxpayer, and he offered a vigorous defense of the company’s practices.

TIM COOK, Apple: We pay all the taxes we owe, every single dollar. We not only comply with the laws, but we comply with the spirit of the laws. We don’t depend on tax gimmicks.

MARGARET WARNER: Nobody was alleging that Apple has done anything illegal, and Apple’s overseas sales now outstrip its revenues from sales at home. Rather, today’s hearing was meant to spotlight how Apple and other multinational corporations exploit loopholes in U.S. tax laws, loopholes Cook said he believes need to be fixed.

TIM COOK: Apple has always believed in the simple, not the complex. It is in this spirit that we recommend a dramatic simplification of the corporate tax code.

MARGARET WARNER: Levin closed the hearing, the second to examine this issue, by saying one way or another the current loopholes cannot remain in place.

And more now on the Apple tax story and the wider report.

Charles Duhigg has been covering all this for The New York Times and joins me now.

And, Charles, welcome back.

First, explain to us, how did Apple structure itself so that it could avoid paying taxes on its overseas income to any government? I mean, Sen. Levin accused Apple of using ghost companies.

CHARLES DUHIGG, The New York Times: Apple took advantage of loopholes that exist in our tax system and every tax system.

For instance, the United States says that a company should be taxed where it’s based. For instance, if you have a subsidiary in Ireland, then Ireland should collect taxes on your revenue. Ireland, on the other hand, says that a company should be taxed based on where it’s controlled out of. So, even it’s a company in Ireland, incorporated in Ireland, if it’s run by people in California, then the United States should tax you.

Apple was able to take advantage of these conflicting philosophies and say, we have got a company that’s technically incorporated in Ireland, it’s run by people out of California, and so there’s no taxing authority. And, as a result, many of its — many of its subsidiaries don’t pay any taxes on tens of billions of dollars of revenue, and, in fact, don’t even file tax returns to anyone on Earth, because they slip through these cracks.

MARGARET WARNER: Now, the atmosphere at that hearing with a couple of — I think one exception was pretty much very critical of Apple. What was Apple’s defense, Tim Cook’s defense, other than, we do everything — we pay what we legally owe?

CHARLES DUHIGG: Well, that’s exactly Tim Cook’s defense and Apple’s defense is to say, listen, we follow the law. We pay what we’re supposed to in every country. It’s not our fault if you don’t like how the law is written.

Secondarily, what Mr. Cook and others say is, listen, when companies make money, when they get these revenues, they use them to create jobs and to create new products and to make the world a better place. And so we deserve to have that money so we can use it.

And finally what Mr. Cook says is that, at this point, a majority of Apple’s sales occur outside of the United States. And so as a result, it shouldn’t be subject to U.S. taxation. Now, that’s significantly different from what, for instance, the congressional panel, as well as the law of the United States says, which is that we — the U.S. believes that we should tax where economic value is created.

So if you buy an iTunes song in Portugal and it’s downloaded from a server that is in Greece and it’s created by a recording artist that lives in New York, and the program that made it work is by someone in California, the U.S. says, well, wherever that value was created — in this case, the United States — that’s where taxation should occur.

And there’s a fundamental difference of opinion on how that law should be interpreted.

MARGARET WARNER: Is it clear that all the money in, like, these three big Irish subsidiaries was, in fact, all at least earned overseas in terms of the sales occurred overseas?

CHARLES DUHIGG: I think it’s pretty clear that the sales occurred overseas. No one is saying that Apple is misleading about where the sales themselves occur.

The question is how that revenue is passed between subsidiaries. So one of the things that Apple does, as well as almost every other tech company, is that they sell their own intellectual property to one of their subsidiaries.

So Apple might invent iTunes in California, but then sell the intellectual property, the patents around it, to a subsidiary in Ireland. And then Ireland charges other parts of Apple for the use of the iTunes technology. And so, as a result, the money ends up in Ireland, in theory. And that’s where it’s either taxed or not taxed, depending upon how the laws are restructured.

MARGARET WARNER: Now, this is this isn’t the only company that this — that this committee has focused on. How widespread is the practice of — with overseas subsidiaries somehow avoiding U.S. taxes?

CHARLES DUHIGG: It’s incredibly widespread.

Now, what the congressional panel, as well as our own reporting, has indicated is that Apple is for more aggressive in this and uses either pioneers and creates tactics or uses tactics that we’re not aware of any other company using.

But, that being said, there’s general policy of particular tech companies trying to lower their tax bill by moving intellectual property and revenues around the world. Almost every single company does this. No CEO wants to say, I’m the one who volunteered the pay the most taxes.

And part of the problem here is that we have a tax system that was written — the last time it was really overhauled was in the 1980s, when the Internet basically hardly even existed, right?

It was written for an economy where you build machines and you sell cars, things that are hard to move across national borders. Today’s economy, the digital economy, deals in many ways and particularly Apple in things that don’t actually exist, computer programs, songs that you download, intellectual property.

And those things can flirt across borders without leaving a trace, which creates a challenge for today’s tax system.

MARGARET WARNER: So, Charles, briefly, is there consensus on the Hill that the tax code needs another overhaul in this area? And if so, is there any consensus on what the fix might be?

CHARLES DUHIGG: There’s absolutely consensus.

No one say that the tax system is — corporate tax system is working right now. Everything agrees that it needs to be changed. The big debate is over how it should be changed. There are some people on Capitol Hill, within the business community who say, listen, not only do taxes need to come down, but companies should hold onto a great deal of that money because companies use it much more efficiently than the government does.

We saw Rand Paul saying that today in the congressional hearing. There’s a number of others who say, listen, companies like Apple, they succeed because they’re in a country where they get to hire our university graduates. And those universities are funded by taxpayer dollars. They get to live in cities like Cupertino, which are these beautiful places, because the roads and the fire departments are maintained by our tax dollars, that the patent system that is funded by public taxpayer dollars supports their intellectual property, and that companies needs to pay a fair share.

There’s a big debate that is going to happen. Change is going to occur, but there’s a big debate over what a fair share means and who should be paying it.

MARGARET WARNER: Well, Charles Duhigg, New York Times, thank you.

CHARLES DUHIGG: Thank you.

GWEN IFILL: You can watch all of Apple CEO Tim Cook’s testimony on our YouTube page.