Why Senator Levin's is Bent Out of Shape Over Apple's Taxes
The Misguided Accusations
Senator Carl Levin (D-MICHIGAN) has certainly been throwing around a whole lot of one-liners on Apple and their tax practices recently, but how many of them actually make sense? You can go read his blog to check out the narrative that he is trying to spin, but the actual facts don't match up with what he is saying. He also brought up a point about Apple not paying the amount in taxes that it calculates, which just shows how poorly he understands how corporate taxes work -- since the 2011 taxes are paid in 2012 (i.e.: corporate taxes are paid in arrears). Forbes points this out brilliantly in this article.
The Holding Company
Levin's biggest contention is that Apple has a holding company in Ireland. If you want to know what a holding company is you can check the definition on Wikipedia. Levin's beef is that AOI has no presence in Ireland and no employees in Ireland. This shows that he does not even understand what a holding company is. A holding company generally exists for the sole purpose of holding or owning subsidiaries. One of the largest holding companies is Berkshire Hathaway which owns a bunch of insurance subsidiaries. AMR Corporation exists for the sole purpose of owning American Airlines. Holding companies never have more than few employees and rarely have their own physical office. This is because their subsidiaries have the employees and the offices. In the case of Apple, the subsidiaries include 4000 employees and a campus in Cork (which is under expansion). These companies in Ireland serve as the basis for Apple's international operations. If you buy something from Apple outside the United States then it is likely fulfilled through an AOI subsidiary in Ireland. Holding companies need to exist or else subsidiary companies would otherwise be independent and every transaction done between them would be taxable to one side. Clearly businesses could not operate without holding companies.
Domestic versus Foreign Sales
Levin's biggest beef, however, came from the renewal of a 30-year old agreement between AOI (Ireland) and Apple, Inc (USA). Apple, Inc is not a subsidiary of AOI and therefore transactions between Apple, Inc and AOI need to be taxed. This is evidenced by Tim Cook pointing out that interest earned by AOI's investments of Apple's cash is taxed in the USA (presumably because the interest is being paid directly to Apple, Inc. or is being earned by AOI's domestic investments). The 30-year-old agreement (originally signed in 1980 and renewed in 2008 and 2009) calls for joint ownership of intellectual property developed by Apple, Inc as well as joint funding of the R&D. Levin kept trying to say that the agreement signed in 2008 somehow "shifted" things to save on US taxes while Oppenheimer maintained that the 2008 agreement was simply a renewal of the exact same agreement from 1980. I'm guessing the interest earned by AOI that is paid to Apple, Inc (and taxed) is to fund the R&D. The joint ownership of intellectual property allows AOI to sell an Apple product manufactured outside the USA, distributed outside the USA, sold in a retail store outside the USA to a customer outside the USA without paying a intellectual property licensing fee back to Apple, Inc. Such a licensing fee would obviously be taxable. Nothing about that seems nefarious in the least. Clearly, the iPhone that is built, shipped, sold and used outside the USA used none of the infrastructure within the USA to bring it into existence and therefore is not a burden on the United States in any way. Senator Levin wants Apple to pay taxes on that.
Supposed Funneling of Profits
But perhaps there is something more to Senator Levin's accusations, but he fails to prove these in the least. Senator Levin may think that AOI is licensing the IP back to Apple, Inc. in the USA. This would create a "cost" for Apple, Inc and thus reduce their profits in the USA and their tax base while increasing the profits of AOI which enjoys a very low (near zero) tax rate. It would be a cost paid to AOI which would essentially funnel money from US sales to a holding company in Ireland. Apple specifically responds to this in their statement (my emphasis):
Apple does not use tax gimmicks. Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands. Apple has substantial foreign cash because it sells the majority of its products outside the US. International operations accounted for 61% of Apple's revenue last year and two-thirds of its revenue last quarter. These foreign earnings are taxed in the jurisdiction where they are earned ("foreign, post-tax income").
The Media Circus and the Spotlight
Levin kept repeating that narrative after asking leading "Isn't it true" questions of Oppenheimer and then failing to let Oppenheimer respond. Levin would simply interrupt Oppenheimer after half a sentence and then Levin would simply reiterate his narrative. It was as if Levin was an opposing attorney in the court room without anybody to object to his actions and without a judge to make him stop badgering the witness. Personally, I'm not inclined to believe a lame-duck Senator who obviously does not understand that corporate taxes are paid in arrears and that a holding company by definition does not have any employees because they are employed by the subsidiaries. Levin ran this hearing like a media circus, using Tim Cook to draw the media, but ensuring that he was standing in the center ring shouting his narrative without even letting the Apple CEO or CFO do what they came to do: testify and respond to Levin's questions.
- Apple paid 30.5% taxes on their USA revenue last year. That is more than G.E. paid who exploited tax loopholes to pay zero taxes and even get a tax credit in previous years. This is because US tax law is designed to pick winners and losers among industries. At 30.5%, Apple is paying double the capital gains tax rate and probably double of what most US citizens pay in their taxes.
- Ireland brilliantly negotiated with Apple to get 2% tax on 100% of Apple's international sales rather than getting 15% tax on maybe 2% of Apple's sales in Ireland. If the US really wanted to get companies to base their international operations out of the USA, then maybe the government should rethink that 35% tax rate and take a page from Ireland's playbook.
- Apple states it paid taxes on profits from every sale made in the USA to the USA. Levin has no proof that Apple funneled profits overseas, just some wild accusations. Apple specifically refutes in a written testimony before Congress that revenue on US sales was shared with AOI. In fact, Apple states that IP ownership was shared between Apple, Inc and AOI, with AOI handling non-US sales and Apple, Inc. having rights to use Apple intellectual property in the USA.
There are certainly tax loopholes that allow some companies (e.g.: General Electric) to pay near-zero tax on their profits. Apple does not appear to be one of those companies. Further, it is no surprise to me that the tax code is so messed up when the senator over this committee does not understand that corporate taxes are paid in arrears and that a holding company has employees and offices indirectly via its subsidiaries.