Apple's $100 billion overseas tax headache

Apple is under investigation for tax fraud in Italy, where it's alleged to have concealed more than €1 billion (about $1.34 billion) from tax authorities, reports Reuters. Though few other details have been revealed, a judicial source with knowledge of the investigation tells Reuters that "the Apple investigation is under way." Apple has been the subject of much scrutiny for its tax policies lately. In particular, those accusations have focused around Apple's use of Ireland as a tax haven — something that Ireland itself has considered ending.

The tax fraud allegations were first reported by the Italian publication l'Espresso, which includes additional details on the allegations. According to AppleInsider, l'Espresso reports that Apple's offices in Milan have been searched as part of this investigation. It also says that the authorities are taking issue with Apple's use its Irish holding company, alleging that more of its revenue should have been reported as having come from business inside of Italy. Reuters did not confirm those details, however, which appear to only be reported by l'Espresso for now.

Huge companies like Apple, Amazon, and Google have come under fire in recent months for their practice of keeping large portions of their profits overseas in countries that are more tax-friendly — Apple alone has a $100 billion overseas cash hoard that isn't subject to US taxes. As noted during Tim Cook's testimony to the US Senate this spring, the UK, and Ireland in particular, have been particularly tax-friendly to Apple. The Ireland-based Apple Operations International (AOI) is a holding company that pays no income taxes in the US and a very low tax rate in Ireland — but that's something that could change before long.

Ireland's Department of Finance just released a report (PDF) detailing the country's international tax strategy, and within it was a note about a potential change as part of Ireland's 2014 Finance Bill. The country says that it will consider a "change to our company residence rules aimed at eliminating mismatches — that can exist between tax treaty partners in certain circumstances — being used to allow companies to be ‘stateless' in terms of their place of tax residence." As noted by The Street, this potential change could remove the favorable tax status Apple currently enjoys.

Apple paid no corporate taxes in the UK last year, and a tax rate of just 2 percent on overseas profits, in a series of loopholes that lessen the companies international tax burden, according to a Financial Times report. Apple was able to pull this off by way of tax deductions from share awards to employees that offset the taxes owed, and the sheltering of money into offshoots in countries with lower-tax rates, such as the British Virgin Islands, the FT report said. Apple's actions are completely legal, the report said, but they might bring the company under even more scrutiny over its tax practices.

In May, Apple CEO Tim Cook testified before a US Senate panel, defending the taxes the company pays, while also calling for tax reforms. At the hearing, Cook said that "Apple pays all its required taxes, both in this country and abroad." Apple has been accused of avoiding billions of dollars in taxes by Senate lawmakers. The company admits that about $100 billion in overseas profits haven't been taxed in the US, but insists that it does not break any tax laws. In the US, Apple faces a corporate tax rate of about 35%, while in the UK — where the company operates three subsidiaries: Apple UK, Apple Retail UK, and Apple Europe — the tax rate is nearly 24 percent. In its offshore operations, Apple pays tax rates of about 2 percent, the FT said.

Apple CEO Tim Cook and several other executives were not shaken by inquiries from the US Senate over their company's $100 billion in overseas profits that aren't taxed in the US, defending the strategy in a high-profile hearing in Washington, DC, today. "I'm not an unfair person, that's not who we are as a company or who I am as an individual," Cook said after questioning from Senator John McCain (R-AZ).

Leaders of a US Senate subcommittee looking into Apple's offshore cash holdings of over $100 billion began a hearing today featuring Apple CEO Tim Cook by blasting his company's strategy, which they likened to tax avoidance. "By engaging in these elusive corporate strategies aimed at deferring and reducing tax payments, Apple’s tax department has given new meaning to the company’s old slogan: ‘think different,'" said Senator John McCain (R-AZ.), reading from his prepared testimony this morning. Cook and Oppenheimer are testifying now, watch a live stream here.

A few hours after Apple released testimony defending itself against allegations that it avoided taxes by shifting assets offshore, a Senate probe has concluded that it employed elaborate and extensive measures to exploit loopholes in the tax code. In a hearing tomorrow, the Senate Permanent Subcommittee on Investigations will examine numerous accusations, including claims that Apple created offshore subsidiaries in Ireland but did not declare a tax residence in either, paying no corporate taxes in either Ireland or the US for years.

"Apple claims to be the largest US corporate taxpayer, but by sheer size and scale, it is also among America's largest tax avoiders," said Senator John McCain (R-AZ), referencing Apple's testimony, in which it said it had paid $6 billion in taxes during 2012. "I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America."

Apple has has officially released the statement CEO Tim Cook will give before Congress on May 21st, defending the company's tax practices and asking for an overhaul of the system. The Senate hearing is meant to illuminate the issue of companies shifting funds offshore to avoid taxes, though Cook has denied his company has done anything wrong. "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," the statement says. "These payments account for $1 in every $40 in corporate income tax the US Treasury collected last year." It puts its tax rate at roughly 30 percent.

The company describes itself as a major driver of economic growth, both through its direct sales and the "app economy" that has grown up around its phones and tablets. Among other things, it mentions its North Carolina data center and the upcoming shift of some Mac production to the US, something Cook referred to in an interview ahead of the hearing. "Apple complies fully with both the laws and spirit of the laws," the testimony says. "And Apple pays all its required taxes, both in this country and abroad."

Aside from the tax dispute, Cook also provided Politico new details on what Apple is working on in terms of hardware, specifically revealing that the new computer to be manufactured in the US is "a new version of a current Mac product," according to Politico — and that many of the internal components will also be manufactured in the US, specifically in the states of Arizona, Texas, Illinois, Florida and Kentucky. “We’re going very deep in this project,” Cook said in the interview. We'll have to wait till the hearing next week to hear what else Cook reveals about Apple's finances and products to the US Senate ahead of WWDC in June, but for now, the new details are illuminating on their own.