Senate Committee Poised to Beat Up On Apple

Steve wrote this morning about a hearing being held this week by the Senate Permanent Subcommittee on Investigations, in which Apple’s CEO, Tim Cook, will testify tomorrow. The subcommittee apparently is trying to highlight supposed tax avoidance on the part of American companies, as the Associated Press reports:

Apple Inc. employs a group of affiliate companies located outside the United States to avoid paying billions of dollars in U.S. income taxes, a Senate investigation has found.

The world’s most valuable company is holding overseas some $102 billion of its $145 billion in cash, and an Irish subsidiary that earned $22 billion in 2011 paid only $10 million in taxes, according to the report issued Monday by the Senate Permanent Subcommittee on Investigations. … The company’s tactics raise questions about loopholes in the U.S. tax code, lawmakers say.

So this is all about raising taxes. It is true that Apple is keeping approximately $100 billion overseas, rather than bringing the money to the U.S. Apple currently has about two-thirds of its sales and earns around two-thirds of its income outside the U.S., so it shouldn’t be a surprise that a lot of its money is located in foreign countries. If Apple brought that money to the U.S., it would have to pay our ruinous 35% corporate income tax on it, so it makes much more sense to invest the money somewhere else. It is my understanding that we are the only country in the world that imposes a full corporate income tax on money earned overseas, if a company is foolish enough to bring its foreign profits back home.

Apple put out a statement in advance of Tim Cook’s testimony, which you can read here. If our senators weren’t shameless, it would shame them:

Apple pays an extraordinary amount in US taxes. Apple is likely the largest corporate income tax payer in the US, having paid nearly $6 billion in taxes to the US Treasury in FY2012. These payments account for $1 in every $40 in corporate income tax the US Treasury collected last year. The Company’s FY2012 total US federal cash effective tax rate was approximately 30.5%.1 The Company expects to pay over $7 billion in taxes to the US Treasury in its current fiscal year. In accordance with US law, Apple pays US corporate income taxes on the profits earned from its sales in the US and on the investment income of its Controlled Foreign Corporations (“CFCs”), including the investment earnings of its Irish subsidiary, Apple Operations International (“AOI”).

Apple explains, probably more politely than I would have in their place, why it doesn’t make sense to repatriate $100 billion in foreign profits to the U.S.:

As a result of its international success, Apple has accumulated significant amounts of cash outside the US. As described in greater detail below, Apple carefully manages this foreign, post-tax income to support its foreign operations through a corporate structure that protects and promotes the interests of its shareholders. Current US corporate income tax law severely discourages the use of these funds in the US by imposing a 35% tax on repatriation.

Apple’s statement is worth reading in its entirety. It addresses in detail questions that have been asked about Apple Operations International and its Irish subsidiaries. But Apple, appropriately, didn’t make a final point that I would add: I don’t want Apple to pay corporate income taxes, certainly no more than is absolutely necessary. Apple is a far better and more efficient institution than the U.S. government. Apple’s money will do far more good for humanity if Apple spends it, than if the government spends it. To the extent that the government taxes Apple’s profits, it mostly wastes the money on regulatory agencies that depress economic growth, a Department of Justice that has run amok, moronic entitlement programs, and so on. Far better if Apple keeps its money and invests it in R&D and other operations, both here and abroad.

So let’s hope Tim Cook stands up to the bullies when he testifies tomorrow.

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