"We pay all the taxes we owe - every single dollar. We don't depend on tax gimmicks."
- Tim Cook, CEO, Apple Inc.
If members of the Senate Permanent Subcommittee on Investigations thought they were going to embarrass the head of the world's most valuable corporation by revealing that it managed to avoid at least $3.5 billion in U.S. taxes in 2011 and nearly three times that last year, they were mistaken.
It's no secret that the U.S. tax code is so complicated that the lawmakers and bureaucrats can't keep up with the tax lawyers and financial professionals working for large corporations. Does anyone outside the world of high-flying financial gurus have any idea what a "credit default swap" is, despite its role in the recent Great Recession? How about a "collateralized debt obligation"?
Nor is it any secret that some states have been the beneficiaries of that complexity, taking advantage of the tax systems in other states to attract new, secretive subsidiaries such as Apple's investment group Braeburn.
What may have been surprising in the report issued by the subcommittee last week was how the tax codes in various nations around the world - Ireland, for example - come together in a kind of odd balance to ensure that smart companies can avoid paying taxes anywhere.
The answer isn't to demonize corporations that take advantage of the varying rules and regulations around the world. Rather, it's to simplify the U.S. tax code so that U.S. companies don't need to go looking elsewhere for a better deal.
Apple, also the nation's largest taxpayer, paid $6 billion in taxes last year. At the same time, it has more than $100 billion "stashed away in an offshore account," according to Sen. John McCain, R-Ariz., a member of the subcommittee.
Cook, who testified before a congressional committee for the first time, admitted that the company has no intention to bring that money back to the U.S. as long as U.S. corporate tax rates remain where they currently are.
According to the subcommittee's report, Apple uses five companies located in Ireland to carry out its tax strategy. Three of them aren't required to pay taxes in Ireland because none is managed or controlled there. (All five companies have the same address in Cork, Ireland, and share many of the same directors.) Since they weren't incorporated in the U.S., the five companies aren't tax residents of the U.S. either, however, making them essentially countries without a state.
How much all this rigamarole costs corporations to set up and keep track of isn't clear. What is clear, however, is that it's worth the time, energy and money they spend on this bizarre organization.
"America's tax system is broken and uncompetitive," McCain said at the hearing.
He's right, course. The only question is when Congress will work up the courage to actually do something about it.