Apple CEO Tim Cook is going to appear before Congress next week to talk about its overseas profits, cash, and taxation.
Ahead of his appearance, Cook is doing a round of interviews with political reporters to lay the groundwork for what he'll be speaking about.
Politicospoke with Cook and says he's going to offer some ideas for comprehensive tax reform, although it didn't detail what they might be.
He just told Politico, "I hope to make some clear recommendations, and I trust there will be receptive parties there."
Here are Cook's other quotes to Politico:
- "We don't have a large presence in Washington, as you probably know, but we care deeply about public policy and believe creative policy can be a huge catalyst for a better society and a stronger economy."
- “I can tell you unequivocally Apple does not funnel its domestic profits overseas. We don't do that. We pay taxes on all the products we sell in the U.S., and we pay every dollar that we owe. And so I'd like to be really clear on that.”
- "Apple is contributing in a lot of different ways to the economy, and we're very, very proud of it, particularly in the job creation area and the work we do to protect our environment."
Apple's taxes are under scrutiny after a big New York Times story from Charles Duhigg accused the company of dodging billions in taxes.
Per Duhigg, here are some of Apple's tax-avoidance tricks:
- Apple's first major move has been to find ways to allocate 70% of its profits outside the U.S., despite the fact that most of its executives and product designers are located here. The U.S. tax code was supposedly designed to tax companies on where most of their value is created, rather than where the products are made or sold, but Apple has found ways around that.
- The cash generated by Apple's U.S. business is not collected or managed by the company's headquarters in California. It's collected and managed by a subsidiary called Braeburn Capital located in Nevada. Why? Because California has a corporate tax rate of 8.84%, while Nevada has no corporate tax rate. Thus, Apple pays no taxes on profits generated by its cash. Braeburn also helps Apple reduce taxes in other states, which have lower rates for companies that manage their finances elsewhere.
- At the same time that Apple is avoiding California taxes by managing its cash in Nevada, it is getting tax credits from California for conducting "research and development" in California. Apple has benefitted from more than $400 million of R&D credits since 1996, Duhigg says.
- Internationally, Apple invented a tax-avoidance scheme known as the "Double Irish With A Dutch Sandwich," which is now used by hundreds of other companies. This scheme routes royalties and profits generated on U.S. inventions through subsidiaries in Ireland and the Netherlands and then to the Caribbean. On an accounting basis, Ireland "generated" one-third of Apple's revenue last year. Apple has also assigned some of the ownership of its Ireland operation to a subsidiary with no employees in the Caribbean, and routes other Irish profits through the Netherlands, which is also basically tax-free.
- Apple makes sure that salespeople located in high-tax countries are actually employed by Apple subsidiaries in low-tax countries. For example, a salesperson located in high-tax Germany might sell Apple products on behalf of an Apple subsidiary located in low-tax Singapore--and the sales in Germany are then taxed at low Singaporean rates.
- Apple has decreed that many global "iTunes" sales legally happen in Luxembourg, because Luxembourg offers tax incentives for companies that process transactions there. This dodges taxes in the U.S., France, Britain, and other countries that would charge much higher rates.
- And so on...
Now, all this, of course, is perfectly legal. And hundreds of other companies take advantage of many of the same sorts of tricks that Apple uses.
This is why Cook is going to be talking to Congress. It wants to figure out how to strike a balance between these tactics from Apple, and a better system that would result in higher tax revenue for the U.S.
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