Apple CEO Tim Cook Faces Senators on Tax Avoidance Issues: Great Reality TV

By Peter Bernstein May 22, 2013

I have a confession to make. Watching congressional testimony is a passion I developed many years ago as a telecom industry lobbyist. For those of us of a policy wonk persuasion, this is great entertainment. It is like watching one of the wildly popular reality TV shows. Unfortunately, the performance by Apple CEO Tim Cook, company CFO Peter Oppenheimer and Apple tax chief Phillip Bullock before the U.S. Homeland Security & Government Affairs Permanent Subcommittee on Investigations was just that -- entertaining. And, as the fine coverage of hearings by my colleague Ed Silverstein highlights while illuminating as a lesson in tax planning by a major multi-national, the carefully scripted kabuki dance was little more than entertaining.  

Role playing

What I have learned from having participated in congressional hearings is that they are much like a Mark Burnett produced reality show. A close friend of mine’s daughter is a budding star on one of these shows and in a cameo appearance he was informed by the director that while there was no direct script they needed to “stay in character” and that “we can make you appear however we see fit to engage our audience.” The same is true of hearings. Witnesses provide prepared statements that defend themselves, and questions are asked based on pre-briefings with senatorial and committee staff so that there are no surprises but wiggle room is left for dramatic effect.

Here is my take on the choreography of the Apple testimony.

First, Apple was called because it has become the poster child of “tax avoidance” by shielding its overseas profits from U.S. taxes through its Irish subsidiaries. In other words, Apple is the bad guy.

Second, the characterization of Apple as the embodiment of evil allowed supporters of its behavior, like Senator Rand Paul (R. Kentucky), to say the hearings were nothing more than an attempt to “bully” the company and hurt this American icon’s reputation. Paul also got a chance to talk about how not letting U.S.-based multi-nationals take advantage of favorable tax laws on overseas profits was their own competitive protection from a burdensome system in the U.S. that hurts our ability to compete and thus stymies domestic job creation. 

It also gave critics like subcommittee chairman Senator Carl Levin (D. Michigan) a chance to make the case about companies like Apple using their unique position to in essence game the system and not pay their fair share of taxes and use their resources to do things other companies cannot get away with.

Third, Apple, for its part, got the opportunity to look like the good guy.  CEO Cook denied being bullied and said he was glad to testify in the hopes that it would enable Congress to reform the tax code. He also noted that Apple pays a tremendous amount of taxes to the U.S. in proportion to the amount of business it does in this country and abides by the tax laws here and overseas. This gave Senator John McCain (R. Arizona) the chance to chime in and note that Apple is also near the top of the list of companies that avoid paying U.S. taxes on their overseas operations which led to an interesting discussion over several questioning periods about tax law minutia regarding things like, control of subsidiaries, ”territorial taxation,” and restrictions in the U.S. law about reinvestment of overseas profits in the U.S.

Fourth, Apple also got the chance to say that all it has done is act legally and in the best interests of its shareholders in the great American tradition of paying everything it owed but not a penny more. The Apple crew even noted that they are ready willing and able to work with Congress on not just legislation that would allow U.S. tax laws to be more equitable (everyone should pay something on their overseas profits) but also on cutting U.S. domestic corporate tax rates (the highest in the world) and on resolving tricky intellectual property issues that are hampering innovation. 

I could go on, but hopefully you have gotten the point. This was theater. Everyone involved got to play a part. They played their parts well. Indeed, my suspicion is that Steve Jobs would have been proud of the Apple performance.  Plus, by all means check out Apple’s formal prepared testimony for a great history of the company and why we all should be so proud of them.  

Some things we did not know

This is not to say there were not some interesting tidbits that came out of the testimony. Included on my list were:

  • The size of the Apple stash overseas is estimated at $100B.
  • The revelation during questioning by Senator Levin that Apple does pay U.S. taxes on its profits from operations in Latin America, Mexico and Canada led to the Senator to say that this is why the use of Ireland as a tax haven is so outlandish in his view.  
  • As the Silverstein article chronicled, the issue that Apple pays taxes on profits earned in other parts of the world led to a direct question to Cook as to whether the Irish profits should be repatriated. This is where the unscripted drama came out when Cook said he had no plans at this time to do so. 
  • Apple and Samsung on an averaged basis for their global operations pay almost the same overall tax rate of roughly 14 percent.
  • Apple plans to actually manufacture products in the U.S.

It is complicated

What the hearings did highlight is the convoluted nature of U.S. tax laws, the ability for large companies to use their resources to do employ legal “tax planning” strategies that others cannot, and the need not just for U.S. tax reform but international cooperation to level the playing field. In fact, as reported by Reuters, as a result of the hearings, Ireland is already feeling the heat from various quarters about its lenient rules from European neighbors who are none too fond of the country being a place for multinationals to avoid paying their countries’ taxes. The UK and France in particular are not pleased, and it will be interesting to see if Ireland’s economy get hurt as part of the collateral damage that is possible now that the U.S. in equally miffed.

Figuring out how to balance the needs of U.S.-based multinationals as they compete globally, getting them to invest domestically and getting interested parties to agree on the best path forward is a minefield of enormous proportions. As Senator Rob Portman (R. Ohio) pointed out, the tax laws on this subject have not been visited for decades and now is the time for reform. That was a fact and not a blast to the cheap seats that everyone agreed on. It is complicated.

Theater of the absurd?

 Did the hearings change anything? Given everything else going on in Washington, D.C. these days the prospects for tax reform remain problematic to say the least. The disingenuity of all involved was palpable. 

Apple wisely took advantage of loopholes to avoid paying taxes on a whole lot of profits and cannot sugarcoat it based on historical practices. In addition, while politicians rail against U.S. corporate taxes being the highest in the world, reality, as the Apple and Samsung comparison shows, is that no big corporation pays the 39.5 percent U.S. rate. Indeed, there a plenty of examples of major U.S. companies who pay nothing. On the congressional side of the slate, Senators saying shame on these companies when they write the tax laws would be the subject of a comedy and not a drama if this were not such a serious matter.

What the hearings left me with was a really serious case of envy. I wish there were more loopholes in the U.S. tax laws that would allow me to reduce what I owe. Senator Portman got that right.

Since we are not likely to get more theatrics on the subject of tax avoidance, we are going to have to look elsewhere for reality TV policy shows. In that respect, immigration reform should be even more entertaining than Apple’s turn on the hot seat. I can’t wait to see how that is scripted.




Edited by Rich Steeves
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