Lawmakers grill Apple execs over tax strategy


WASHINGTON — Apple Inc. Chief Executive Tim Cook was supposed to face a hostile Capitol Hill crowd but instead he wielded the company's popularity like a shield to deflect some of the most aggressive questioning over the company's controversial tax practices.

A handful of heated exchanges erupted in the hearing Tuesday before the Senate Permanent Subcommittee on Investigations as lawmakers pressed Cook and two other Apple executives to explain how the company used its Irish subsidiaries to avoid paying billions of dollars in taxes.

At the same time, several senators went out of their way to praise the company for being innovative while professing to be fans and users of its products.

The hearing illustrated a conundrum for some legislators: They're critical of Apple's tax avoidance practices but recognize the company is a job-creating giant that produces some of the world's most popular gadgets.

"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 it has not paid, thanks to offshore tax strategies whose purpose is tax avoidance, pure and simple," subcommittee Chairman Carl Levin (D-Mich.) said during the hearing.

The hearing came one day after the subcommittee released a blistering report that detailed how Apple used an elaborate web of offshore subsidiaries to avoid paying at least $15 billion in U.S. taxes on $44 billion in foreign income from 2009 to 2012.

Apple has been cooperating with the subcommittee and was prepared with its own rebuttal Monday, releasing a 17-page statement that highlighted the $6 billion in taxes the company paid in 2012 and the hundreds of thousands of jobs it had created.

The hearing came amid growing concern that U.S. companies are stashing their foreign earnings abroad to avoid U.S. taxes. Though the strategies are legal, Apple's aggressive use of them has drawn the attention of the subcommittee.

Of Apple's $145 billion in cash as of April, about $102 billion is overseas. By keeping profits offshore, Apple reduced its effective tax rate to as low as 24.2% in 2011.

One of the Irish subsidiaries, Apple Operations International, which has no employees but reported $30 billion in income over the four years, has not filed an income tax return in any country for the last five years, the subcommittee investigation found.

Both Levin and Sen. John McCain (R-Ariz.) had expressed outrage over the apparent unfairness of the practices. And on Tuesday, they were expected to grill Cook, along with Apple's chief financial officer, Peter Oppenheimer, and tax head Phillip Bullock.

However, Cook seemed to blunt much of the outrage by simply making the decision to appear. Wearing a business suit, with a white shirt and powder blue tie, Cook delivered remarks aimed at portraying Apple as a company bound by lofty ideals, a strong moral compass and a recognition of its impact on the world.

"I love Apple," said Sen. Claire McCaskill (D-Mo.). "I harassed my husband until he converted to a MacBook."

Sen. Rand Paul (R-Ky.) went a step further, by coming to Apple's defense.

"Frankly, I'm offended by the tone and tenor of this hearing," Paul said, calling the session a "show trial." He noted that Corning Inc. makes the Gorilla Glass for Apple products in Kentucky.

Cook, when asked by McCain later whether he felt bullied into appearing, said that was not the case. Instead, Cook said he wanted to use the forum to press the case for broader tax reform that would bring the kind of simplicity Apple is known for to the tax code.

"I feel very glad to be participating in this," Cook said. "I think it is important to tell our story. And I would like people to hear directly from me. I was not dragged here."

During the session's final 15 minutes, Levin conducted a more heated cross-examination on the details of the Irish subsidiaries, interrupting executives and expressing his exasperation with the lack of clear answers.

"You shifted the economic rights to the most valuable thing you own, your intellectual property," Levin said of Apple's transfer of rights for its product sales in Europe, Asia and Africa to subsidiaries in Ireland. "In order to change it, we've got to understand it, not deny it. ... And what is going on is a huge loss of revenue to the United States."

Cook insisted that the tax arrangements were not just legal, but fair because they reflected the global nature of Apple's business rather than some underhanded scheme to cut its tax bill.

"We don't depend on tax gimmicks," Cook said. "Honestly speaking, I don't see it as unfair. I am not an unfair person. I would not preside over that."

Edward D. Kleinbard, a USC law professor, said he thought Apple was a bit tone-deaf for not acknowledging how its tax avoidance strategies might look to the average person. But Kleinbard said the hearing ultimately was less about making Apple look bad and more about building a case for tax reform in Congress.

"It's goal is to shine a spotlight on Apple as an exemplar of a system that is producing nonsensical results," Kleinbard said. "And in doing so, put pressure on the Senate Finance Committee to write more sensible legislation."

Following his testimony, Cook exited the hearing chambers, where many corporate executives usually leave chastened and sullen, with a smile and a thumbs up to reporters before being whisked into a car.

Levin told reporters after the hearing that he thought Cook did a good job in explaining the company's point of view, even if he did not agree with it. He added that the company's popularity probably helped Cook weather the hearing.

"Every company that has a huge presence, that has a huge number of employees, that pays a lot of taxes, that produces really good products, obviously that has an impact on people's thinking," Levin said of himself and his Senate colleagues. "But it's important that we focus not just on the profits they pay taxes on, but on the greater percentage of profits that they don't pay taxes on. And how do they avoid it?"

O'Brien reported from San Francisco; Puzzanghera from Washington.

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