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Cook's testimony at Senate hearing helps Apple defuse some tax tensions

Cook's testimony at Senate hearing helps Apple defuse some tax tensions

By Nelson D. Schwartz and Brian X. Chen, The New York Times | Updated: 22 May 2013 07:38 IST

Tim Cook came to the lion's den on Capitol Hill on Tuesday, prepared to face down lawmakers furious over evidence that Apple, the famous company he runs, had avoided paying billions in taxes. By the time Mr. Cook walked out, the big cats on a Senate committee were practically eating out of his hand.

Even the panel's fiery chairman, Senator Carl Levin of Michigan, after blasting Apple for creating "ghost companies" that diverted billions of tax dollars from American coffers and caused needy seniors to go without meals, had some kind words for Mr. Cook and his company.

"We love the iPhone and the iPad," Mr. Levin said, going on to commend Mr. Cook and two other executives for voluntarily appearing before the Senate Permanent Committee on Investigations. "I know it's not easy to come in front of a spotlight but it's important for us."

Other senators seemed even more mollified by Mr. Cook's low-key performance.

Senator John McCain, the senior Republican on the panel, who had earlier criticized Apple "as among America's largest tax avoiders," took pains to modulate his message. "You managed to change the world, which is an incredible legacy for Apple," he told Mr. Cook.

"You have to be a pretty smart guy and a pretty tough guy, too, and I say that in a complimentary way," he added.

Mr. Cook was especially disarming.

"It's important to tell our story, and I'd like people to hear directly from me," he told Mr. McCain and the other senators.

Apple, he testified, pays "all the taxes we owe -- every single dollar."

Mr. Cook joined Apple in 1998 as an expert in sales and operations, creating the efficient supply chain that helped catapult the company into the top ranks of the technology industry. He became chief executive in 2011.

While his predecessor, Steven P. Jobs, was famous for his creative vision and flamboyant performances at introductions of the company's products, Mr. Cook was known for his behind-the-scenes work -- particularly for his shrewd negotiating tactics with suppliers.

These skills seemed to stand him in good stead on Tuesday.

Apple, Mr. Cook said, was a victim of an outdated tax system. "Unfortunately, the tax code has not kept up with the digital age," he said.

"The tax system handicaps American corporations in relation to our foreign competitors who don't have such constraints on the free movement of capital."

Apple is hardly unique in seeking to legally shield tens of billions in profits from tax collectors in the United States and overseas, even if its tactics may have been unusually aggressive.

According to one study cited by Mr. Levin, 30 of the largest American multinationals, with more than $160 billion in profits, "paid nothing in federal income taxes over a recent three-year period. Zero."

Corporate tax loopholes, Mr. Levin said, need to be closed "whether or not we reform the overall tax code."

On Monday, Congressional investigators unveiled a detailed report showing how Apple subsidiaries -- based in Ireland but spanning other regions around the world -- had helped the company pay as little as one-twentieth of 1 percent in taxes on billions of dollars in income.

Mr. Cook sought to draw a sharp distinction between sales in the United States and those abroad, arguing that the company had complied with local laws everywhere.

"The way I look at this is that Apple pays 30.5 percent of its profits in taxes in the United States," he said. "We do have a low tax rate outside the U.S., but this is for products we sell outside the U.S."

Again and again, Mr. Cook said Apple was proud to be an American company, even if the majority of its sales took place outside the United States and were taxed at lower rates. "We are an American company, whether we are selling in China or Egypt or Saudi Arabia."

In the most spirited exchange of the hearing, Mr. Levin bore down on the fact that Apple's Irish subsidiaries manage to shelter much of the company's income in Europe, Asia and the Middle East while it pays a higher rate on sales in North and South America.

"Of course you can bring the profits home," Mr. Levin said during a back-and-forth with Peter Oppenheimer, Apple's chief financial officer. "You bring them home from Canada, Mexico and South America."

Before Mr. Cook and two other top Apple executives testified, other witnesses suggested Apple had indeed pushed hard to take advantage of loopholes in the tax code.

J. Richard Harvey Jr., a professor at Villanova Law School, estimated that Apple's legal maneuvering had saved the company $7.7 billion in potential American taxes in 2011.

"Apple is an iconic U.S. multinational corporation that has enjoyed extraordinary financial success," Mr. Harvey said. "In addition to demonstrating excellence in designing, building and selling consumer products, Apple has been very successful at minimizing its global income tax burden."

For example, he noted, 64 percent of Apple's global pretax income in 2011 was recorded in Ireland, yet only 4 percent of its employees and 1 percent of its customers were located there.

While Apple has repeatedly insisted it does not engage in "tax gimmicks," Mr. Harvey was unswayed.

"Apple does not use tax gimmicks?" he said rhetorically. "I about fell off my chair when I read that."

Despite the evidence gathered by investigators and prominently displayed on easels -- like the web of affiliates Apple used to help lower its tax burden -- several committee members joined in the chorus of praise for Apple's products.

"I love Apple," said Senator Claire McCaskill, a Missouri Democrat. "I harassed my husband until he converted to a MacBook. It's a huge part of my life."

The most ardent defender of Mr. Cook and Apple was Senator Rand Paul, a free-market Republican from Kentucky. "I'm offended by the spectacle of dragging in Apple executives," he said. "What we need to do is apologize to Apple and compliment them for the job creation they're doing."

Instead of "bullying" Apple executives, Mr. Paul said, "we should have brought in a giant mirror to look at the reflection of Congress. If you want to assign blame, look in the mirror and see who created this mess.

"Apple hasn't broken any laws, yet Apple is forced to sit through a show trial," he said. That was too much for Mr. Levin, who organized the investigation and the hearing.

"Apple is a great company," Mr. Levin said. "But they don't have a right to decide in my book how much in taxes they are going to pay and to whom they are going to pay them."

Mr. Cook's testimony before Congress was hardly his first public appearance since becoming Apple's chief upon the death of Mr. Jobs in October 2011. But it was a coming out of sorts.

Apple faces different challenges from the ones Mr. Jobs faced when he led the company. For one, Apple is larger, and under more pressure than ever.

Laurence Isaac Balter, chief market strategist at Oracle Investment Research, said he thought the Apple chief did a good job of treating the hearing as a constructive conversation about the problems with the business tax code and how it could be improved. And he gave Mr. Cook high marks for his performance.

"You could see Cook lean back in his chair and smile," said Mr. Balter, whose company has clients that own Apple shares. "He was totally relieved with some of the commentary."

© 2013, The New York Times News Service

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