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Apple ‘tax gimmicks’: rotten to the core or sensible business?

Two senators on Tuesday plan to grill Apple CEO Tim Cook about the company’s tax practices, which they say cheat the US out of billions of dollars. Apple says it’s playing within the rules.

 While technology giants like Apple are esteemed by the public for their role as innovative engines of America’s economy, two influential senators will grill the tech giant Tuesday for what they see as a less sterling part of its resume: tax avoidance.

Sens. Carl Levin (D) of Michigan and John McCain (R) of Arizona will put Apple CEO Tim Cook to a congressional roasting before their Senate Permanent Subcommittee on Investigations, alleging that the company shielded as much as $10 billion in profits per year through creative accounting measures which, while legal, violate the spirit of American tax law.

Apple’s tax moves are “right at the top of the list of creative tax gimmicks,” Senator Levin told reporters Monday. “I had never seen anything like this, and we don’t know anybody who has seen anything like this.”

Apple isn’t alone in drawing the committee’s ire: Last year, fellow tech titans Microsoft and Hewlett-Packard were the focus of another hearing on tax avoidance strategies. Apple holds some $100 billion in cash overseas.

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The inquiry cuts right to the heart of several brewing debates in Washington. First are questions of equity in the tax system, where lawmakers find it hard to explain why a US-based company like Apple can negotiate a special 2 percent tax rate with Ireland for a chunk of its foreign profits, for example.

That question of tax fairness is of particular importance in today’s tight fiscal times, with lawmakers straining for ways to find new revenues in politically palatable ways or reduce spending without cutting into core government functions from military spending to the social safety net.

In the long run, the issue of how the nation should structure corporate taxation is a key piece of America’s global competitiveness, an issue often raised by tax reformers like Sen. Max Baucus(D) of Montana and Rep. Dave Camp (R) of Michigan, the chairs of the tax-writing committees in the Senate and House. They want to close tax deductions and lower tax rates for both individuals and corporations – and shift most corporate profits earned abroad into a lower tax threshold than the 35 percent rate that hits many private sector bottom lines today.

But Senators Levin and McCain are wary of focusing either on the comprehensive fix sought by Chairmen Baucus and Camp or the “grand bargain” pursued byPresident Obama and congressional leaders in years past, which they see as an excuse for delay.

“Every lobbyist in this town comes to my office and tells me, ‘We’re all for closing these loopholes, we know they are outrageous, but we must wait until we have a grand bargain … because revenues have to be balanced by entitlement reform.’ It’s a cop out. It’s an absolute cop out,” McCain told reporters Monday.

“Why should we continue to allow an egregious practice like this to continue on and wait until we have a grand bargain which may never happen,” he continued. “When you see egregious activity like this, why wait?”

In its prepared testimony, Apple disputes that anything egregious is going on at all.

The company reminds that it pays a notch over 30 percent in taxes on its US profits, putting it at the upper range of US corporate ratepayers, and that because of its massive size and profitability, its $6 billion in US income taxes made up 2.5 percent of all corporate Treasury receipts last year.

The company argues that it has substantial cash overseas because almost two-thirds of its sales happen outside the US. What the senators see as dodging tax laws, Apple points out, are IRS-sanctioned activities which the company has been engaged in since 1980.

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Apple also takes a swing at the US corporate tax system, pointing out that it can issue debt (as it recently did) at extremely low interest rates and use the resulting cash to repurchase stock or pay a dividend to its investors instead of repatriating cash held overseas and paying the 35 percent federal tax it would incur.

Instead of that 35 percent rate (which is higher than all America’s competitors in the developed world, although a bevy of deductions allow many companies to be a much lower rate), Apple suggests a “dramatic simplification” of the nation’s corporate tax scheme that doesn’t raise the revenue paid by all corporations but wipes out deductions and lowers tax rates proportionately.

“Apple supports this plan,” the company’s testimony says, “even though it would likely result in Apple paying more US corporate tax.”

But while that’s just the sort of comprehensive change that Levin and McCain support in theory, the two senators made it clear that they believe that holding out for a dramatic rewrite of all the nation’s tax laws is a dodge. It allows too much bad policy to survive in the interim.

Whether Levin and McCain move a stand-alone bill focusing on tax loopholes or not is “going to be governed by all kinds of forces that are swirling around here,” Levin said, adding that the two senators were in numerous discussions about how best to proceed.  

“But a lot is going on and this is a big part of what is going on,” Levin concluded. “We are determined to close these tax loopholes, one way or another.”