The Senate hearing, titled “Offshore Profit Shifting and the U.S. Tax Code” was actually the second leg of a previous hearing that took place last September, when the subcommittee sought to examine how and why U.S. multinational corporations stored their profits offshore in countries with more pliable tax codes.
It is important to note that the agenda for the first meeting, according to the subcommittee’s website, was looking not only at how corporations park their money abroad, but also how “such activities are affected by the Internal Revenue Code and related regulations”. That hearing focused on two other tech giants, Microsoft (MSFT) and Hewlett-Packard (HPQ), along with representatives from Ernst & Young and the IRS.
The agenda for the Apple hearing on Tuesday was similar if not identical. The committee alleged that Apple had circumvented paying $9 billion in taxes in the U.S. in 2012 with the assistance of a vast and complicated tax structure involving countries like Ireland, where tax regulations are famously more pliable, particularly when it comes to the presence of high-profile companies.
Tim Cook, meanwhile, maintained that the company pays “all the taxes we owe,” has done nothing illegal, and does not plan to bring any of the money back. And while Apple does save quite a bit of money by keeping some 60 percent of its profits in Ireland, Cook defended the practice not only by citing Apple’s compliance with the existing tax code; he was also clear in his criticism of that code, calling for a more streamlined alternative that would make it attractive for companies to bring their profits back in to the country.
The most vigorous defense of the company came from an actual member of Congress. Libertarian-leaning Kentucky Republican Senator Rand Paul noted the deficiencies of the tax code, and did not miss the opportunity to trumpet his extreme pro-business orientation, rather dramatically declaring that the company “has done more to enrich people’s lives than politicians will ever do”, and even going as far at one point as to say that Congress should be on trial for “chasing the profits of American companies overseas” in the first place.
Cook defended his company by reminding the panel of the $6 billion in tax payments made last year, making Apple one of the nation’s largest taxpayers. Many companies have been vocally critical of the 35 percent corporate tax rate that is currently in place in the U.S. for companies seeking to repatriate foreign earnings.
The hearing also highlighted the fact that while there are plenty of different ideas floating around, there is currently no consensus on what to do about the tax code, whether in Washington D.C. or in the business community. Recently, President Obama has suggested that the rate be cut from 35 to 28 percent, while Republicans on the whole have sought an even greater reduction. On the one hand, cutting taxes on corporations is a move that does not hold much in the way of appeal for people on Main Street, who continue to struggle economically, while they see corporations and stocks doing better than ever. Making an exception for big companies without modifications to the larger overall tax structure in the U.S. would be both impractical, and a hard sell.
The hardest questions for Cook came from Senators John McCain (R-AZ), and Carl Levin (D-MI). Both men have made populist moves over the last few months. Less than two weeks ago, McCain proposed legislation that would effectively break up the monopoly of the big cable television companies and service providers, while Levin back in March made headlines with his relentless, four-hour long questioning of JPMorgan Chase (JPM) executives during a hearing about the $6 billion in losses resulting from the “London Whale” scandal at the bank’s London trading office last year.
For Apple, the hearing could not have come at a worse time. The company looked as though it was finally emerging from the most turbulent period of its recent history. The death of its iconic founder Steve Jobs in 2011 was followed by anxiety with regard to the company’s lack of new innovations and groundbreaking products, a continuing problem, and shares have lost more than 16 percent of their trading price since the beginning of the year as companies such as Google (GOOG) and Samsung are beginning to provide substantial challenges to the formerly unquestionable dominance of Apple’s mobile devices and iOS platform on which these devices run.
On top of that, 2013 kicked off with a brazen attempt on the part of billionaire hedge fund manager David Einhorn of Greenlight Capital to strong-arm Apple to release some of its famous billions of cash to investors. That issue was only resolved after Apple’s earnings report on April 23 confirmed fears about a slowdown in growth at the company, prompting it acquiesce, and announce $100 billion in share buybacks as well as a massive dividend increase funded in part by a $17 billion bond offering, that made it the largest payer of dividends.
The hearing was also not the first hot seat Cook has seen this year. In early April, the CEO had to make a very public apology to the company’s Chinese customer-base after a relentless campaign of criticism against Apple’s phone warranty program and customer service shortcomings.
And while Senator Levin did acknowledge that Apple was not the only company to exploit loopholes in the current tax code, he insisted that the company was unique in its efforts. Senator McCain weighed in with the accusation that Apple had sidestepped paying up on $44 billion in income over the last four years.
Still, it is difficult to see why Apple was singled out, and including the first part of the hearing back in September, why tech companies were singled out. It has been a well-known fact for some time now that General Electric (GE), for instance, who paid little-to-no U.S. taxes of any kind in 2010 despite massive profits, currently holds $108 billion of its net income in similar overseas arrangements.
To be sure, no former Apple CEO has served as an economic adviser to the current president as did GE’s Jeff Immelt, who, incidentally, has also criticized the tax system in the U.S. All the same, it is difficult to avoid the conclusion that Apple to some extent is being made the public face of a practice that is as controversial as it is commonplace among large U.S. corporations.
The hearing on Tuesday does not, so far at least, seem to have had a significantly negative effect on the company’s stock, however. Apple’s shares were up about 0.85 percent on Wednesday, to $443.41.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer