find an american adult, they won't be repeatedly second-guessed in their hiring decisions, particularly high and individuals were two individuals with the same degree of the singers working are different and needed by different companies. so this is a good compromise. it will help of the bill forward and i want to thank my colleague from utah for the hard work and willingness to meet us in the middle on this. i support it. i hope my colleagues on both sides who supported us love and i'm sorry to take up that much time, but we spent a lot of time in the senate i wanted to explain. >> thank you, senator. >> undershirts agree with the immigration bill, which now moves on to the full senate. you can see all of today's session of the markup beginning at 11:40 eastern tonight on c-span 2. a senate hearing in the comp at apple and how it uses foreign subsidiaries to u.s. taxes.

.. >> warning everybody. before we begin, we are all hard

roben because of the tragedy in oklahoma and in those communities and all the families and individuals who are affected to know that they are not alone they are not going to face this alone. america mourns with you and will help you rebuild. the subcommittee meets today to hold a second hearing to examine how us-based multinational corporations use loopholes in the tax code to move profits to offshore tax havens to avoid paying u.s. taxes. in september we examined to case studies, a study of how microsoft corp. shifted process on u.s. sales to u.s. customers from the united states to an offshore tax haven and also a

study on how hewlett packard device tastes foreign loan program to repatriate offshore profits to the united states without paying u.s. taxes that are supposed to follow repatriation. today's subcommittee will focus on how apple effectively shifts billions of dollars in profits offshore, profits that under one section of the tax code should nonetheless be subject to u.s. taxes but are a complex process that avoids those taxes. our purpose with these hearings is to shine a light on practices that have allowed us-based multinational corporations to unmask an estimated $1.9 trillion in profits in offshore tax havens, shielded u.s. taxes. one study has estimated that offshore earnings stockpiled by

s&p 500 companies using these techniques have increased 400 are sent in the last decade. there is a direct relationship between this rapidly accelerating shift of corporate profits offshore on the one hand and on the other a worrisome federal deficit fed in part by a decline in the contributions that corporate taxes make to federal revenue. corporate income tax revenue is accounted for a smaller and smaller share of lateral receipts and today it's down to about 9% of federal revenue. that decline is in part due to the recent use of loopholes that so riddle our tax code that the average u.s. corp. pays an effective tax rate of 15%, less than the statutory rate of 35%. a recent study found that 30 of

our largest u.s. multinationals with more than $960 billion in profits paid nothing to federal income taxes over a recent three year period. these corporations use multiple offshore loopholes to give them significant control over how much u.s. income they will report and how much tax if any they will pay. despite the immense impact of these offshore tax practices that lead to the federal deficit and increase the burden on american families, few americans see the problem because of its complexity. the first step towards changes to

is at the heart of apple's tax avoidance strategy. more and more intellectual property is the dominant source of value in the global economy. it's also highly mobile, unlike more tangible physical assets

its value can be transferred around the globe often with just a few keystrokes. the secret to apples business success isn't in the aluminum and steel and glass in my iphone and other apple products. its profits depend on the ideas that bring those elements together in such an elegant package. that intangible genius is intellectual property that is nurtured and developed here in the united states. the key to offshore tax avoidance is transferring the profit generating potential of that valuable intellectual property offshore so that the practice is directed not to the united states but to an offshore tax haven. apple's tax avoidance strategy comes in two parts. first it executes a shift of the profit generating power that its intellectual property thus

directing the resulting income to the tax haven and of course to its wholly-owned corporations in that tax haven. next, it uses a number of tactics to ensure that once this income is offshore that it remains shielded from u.s. ex--- excuse me, u.s. taxes despite provisions of the u.s. tax law which are designed to capture that income as taxable. some of apple's techniques are staples of international tax avoidance. such as its use as what is known as a cost-sharing agreement between the parent company and its is offshore subsidiaries and its use of so-called check the box regulations and we will discuss those in a moment. but others are unique. apple has sought the holy grail of tax avoidance. offshore corporations it argues

are not for tax purposes resident anywhere in any nation and here is how it works. apple, inc. is created three offshore corporations entities that receive tens of billions of dollars in income but which have no tax, not in ireland where they are incorporated and not in the united states where the apple executives who run them are located. apple has arranged matters so that he can claim these ghost companies for tax purposes exist nowhere. another pays tax to ireland equivalent to a tiny fraction of 1% of its total income. the first of these companies is apple operations international or al eye. on this chart which we will put

up over here it shows apples offshore corporate network. al eye is at the top of the structure. apple is the sole owner. it in turn directly or indirectly owns most of apples other offshore entities. under irish law, a only companies that are managed and controlled in ireland are considered irish residents for tax purposes. apple says that although aoi is incorporated in ireland the company is not managed and controlled in ireland and therefore is not a tax resident in ireland. the tax law on the other hand generally turns out where the company is incorporated not where it is managed and controlled. apple says that since aoi isn't incorporated in the united states it is also not present in the united states for tax

purposes. magically it is neither here nor there. the separate corporate ghost is apple sales international or asi. asi as we will explore in a bid holds the economic rights to apples valuable intellectual property in europe, the middle east africa and in asia. in 2009 to 2012 its sales income amounted to $74 billion. apple has performed the same alchemy with asi as with aoi. it is incorporated in ireland operated in the united states but apple says its tax resident is in neither country. unlike aoi nasi has paid a small amount of tax to ireland. in 2011 for example it paid $10 million, $10 million in taxes and $22 billion in income.

that is a tax rate of 500 to 1%. it appears that this tiny tax payment may be related to activity and related to asi's main purpose which is to serve as a receptacle for profits generated by apples and celestial property in much of the world. apple has told the subcommittee that a third subsidiary, apple operations europe or al e. which sits between asi and aoi also has no tax home again using the same claims of irish and u.s. standards on tax residents. apple's ex-leaving an absurdity one in which we have so not seen another company use. and it certainly need not continue although the united states generally looks toward in entities incorporated to determine its tax it is

impossible to penetrate an entity's corporate structure for tax purposes. to collect u.s. taxes on its income if the entity is controlled by its u.s. parent to such a degree that the shell entity is nothing more than an instrumentality of its parent. it should be treated as the parent itself rather than as a separate legal entity. aoi aoe and asi sure seem to fit that description. take aoi. aoi has no owner but apple and apple aoi has no physical presence or any address. 30 years of existence aoi has never had any employees. aoi's general ledger and its major accounting records are maintained at apples u.s. service center in austin texas. aoi's finances are managed by graeber capital and apple, inc.

subsidiary in nevada. its assets are held in a bank account in new york. aoi's board minutes show that its board of directors consists of two apple, inc. employees who live in california and one irish employee of apple distribution international and irish company that aoi itself owns. over the last six years from 2006 through the end of 2012 aoi held 33 board meetings, 32 of which took place in cupertino california. aoi's loan director participated in just seven of those meetings six by telephone and none of the 18 board meetings between 06 and 2012. asi's circumstances are similar. prior to 2012 asi like aoi had no employees and carried out its

operations to the action of the us-based board of directors also for apple, inc. employees in california. of asi's 33 board meetings from 2006 to march 2012 all 33 to place in california. in short these companies decision-makers board meeting assets and asset managers and key accounting records are all in the united states. their activities are entirely controlled by apple, inc. in the united states. apple's tax director acknowledged to the subcommittee staff that it was his opinion that aoi is functionally managed and controlled in the united states. the circumstances with asi and aoi appeared to be similar. our legal system has a preference to respect the corporate forum. the facts here presents this issue and these offshore

corporations are so totally controllecontrolled by apple, inc. that their identity is separate companies is a sham and mere instrumentality of apparent and if so whether apples claims aoi nasi owes no taxes as a sham as well. aoi sits at the apex of the tax avoidance strategy. apple's claim that aoi and its other subsidiaries are not tax resident in any nation is the key element in his strategy to avoid taxes on its offshore income. how did that income end up offshore to begin with? that brings us to a second more common arrangement shifting income away from the united states to a low tax jurisdiction for what is called transfer pricing. many u.s. companies including apple use transfer pricing chu shift intellectual property rights to offshore affiliates and then direct income associated with that

intellectual property taxable income that would otherwise flow through the united states when the intellectual property was developed to the affiliates home jurisdiction which is typically a tax haven. now there are multiple ways to transfer intellectual property rights offshore but apple's primary method is through a so-called cost-sharing agreement. generally the cost-sharing agreement, a u.s. parent through one or more of its affiliates are assigned a designated funds and resources to be applied to the development of new products, products that in the case of apple are developed here in the united states. apple remains -- retains the legal title to all marketing rights to the developed property in north and south america and its offshore affiliates with marketing rights for the rest of the world.

that is the key part of the so-called cost-sharing agreement. it is sharing the cost so-called but also the offshore affiliate gets the marketing rights in the process for the rest of the world. apple setup said that this cost-sharing agreement with his irish subsidiaries. i use the term cost-sharing with some skepticism since it is obviously not an arm's length transaction although it is called an agreement. all the money supposedly changing hands belongs to apple and all the signatories are apple employees. agreement on its face allocates the cost of the -- to be shared among apple companies but since all of the cost of the melee, the same pocket in reality it's about shifting profits. the cost-sharing agreement enables apple to shift profits generated by its intellectual

property away from the united states where the intellectual property is developed and instead concentrates the lion's share of profits for most of the world to apple subsidiaries in ireland. again, intellectual property that generates apples profits was created in the united states but most of the profits are assigned to ireland. why ireland? another highly successful but until now hidden tax strategy is that apple is quietly negotiating with the irish government and income tax rate of less than 2%, well under the irish statutory rate of 12% as well as the tax rates from other european countries and the united states. well below the statutory rates and as we have seen the practice apple is able to pay a rate far below even that low rate.

in 2012 loan through the cost-sharing agreement essentially shifting profits from all apple sales outside of america to ireland nasi received $36 billion in income in a nation where it pays almost no income tax. additional facts make it even more clear how the cost-sharing agreement functions as a conduit to shift apple products offshore to avoid u.s. taxes. first, apples transfer of intellectual property rights through the cost-sharing agreement is not needed for apple to conduct its commercial operations. apple, inc. operates in numerous countries around the world without transferring intellectual property rights in each region or country. when interviewed apple officials could not explain why asi needed to acquire apple intellectual property economic rights in order to conduct business

abroad. interest in the party's agreement renewed the agreement several times most recently in 2009 and modify the agreement at any time. further evidence that this is not an any sense an arm's length transaction. second, 95% of apples are indeed the engine behind the success of apple products is conducted in the united states. figures provided by apple show that over a four-year period from 2009 to 2012, asi paid approximately $5 billion apple, inc. has its share of guaranteed costs. over that same period asi receipt profits of $74 billion. the difference between asi's cost of the projects is almost $70 billion is how much taxable

income the absence of apple, inc.'s cost-sharing agreement with its own subsidiaries and its use of other tax loopholes would otherwise flow to the united states. in comparison over the same four years, apple and paid $4 billion under the cost-sharing agreement and to clear profits of $38 billion for sales in the americas. a subsidiary in other words. asi its irish subsidiary received almost twice the profits for property developed by apple, inc. in the united states. common sense that says apple never would have offered such a lucrative arrangement and an arm's length deal with an unrelated party. it's hard to imagine apple offering such a lucrative deal to an outside party at any price. the fact that irish subsidiaries

pay his share of the r&d cost is irrelevant to the main goal which is concentrating profits offshore. even if the irish subsidiaries paid 100% of the r&d costs, this arrangement would still result in massive profit concentration in a tax haven and therefore massive tax avoidance. the cost-sharing agreements for-profit is generated a u.s. at two goodies begins their offshore journey. other loopholes keep these profits shielded from u.s. tax. apple exploits tax loopholes to protect its offshore income from being taxed under a part of it tax code known as sub part f which was designed to combat profits shifting by u.s. multinationals and to collect taxes on some of their income even when held offshore. sub part f was a kennedy era attempt to combat preemptive

offshore tax avoidance. it made certain types of offshore income subject to u.s. income tax even when that income wasn't brought back to the united states. including for example funds transferred between offshore affiliates in the form of dividends, royalties or -- in the 1990s the treasury department unwittingly opened a massive loophole in sub part f. it approved a regulation known as check the box which allows companies to declare to the irs what type of entity they are for tax purposes. simply by checking a box on the form. under check the box multinationals can clear offshore subsidiaries as disregarding for tax purposes making it appear as if complex change of offshore entities are one big corporation.

that made it, the funds being transferred among those offshore entities not taxable under sub part f. circumvention of sub part f became easier when in 2006 congress passed what is known as the look through rule which simply shields offshore income from taxation under this subpart f. apple is one among use -- many u.s. nationals exploiting these tax loopholes. it strategies are complex and are outlined more fully in the memo that we have issued but the net effect is huge. apple argues it is one of the biggest corporate taxpayers in america and in 2000 alone it paid $6 billion in taxes. what apple doesn't say is that also in 2012, it shifted

$36 billion in worldwide sales income away from the united states and paid no u.s. tax on any of it. in fact, the data provided by apple indicates that through its cost-sharing agreement of check the box, in 2012 loan apple avoided the payment of $9 billion in u.s. taxes. that works out to avoiding $25 million a day, more than $1 million an hour in taxes. apple executives want the public to folks in -- focus on the u.s. tax the company has paid but the real issue is the billions in taxes that it has not paid thanks to offshore tax strategies whose purpose is to tax avoidance pure and simple.

today we will ask apple executives as well as apple experts from the treasury and irs officials about these tax avoidance strategies. as we listen to their testimony was you keep in mind the context for which we meet. the offshore tax avoidance tact spotlighted by the subcommittee do real harm. a disadvantage to u.s. domestic companies that aren't in a position to reduce their tax bills using offshore tax. they offload apples tax burden onto other taxpayers particularly working families and small businesses. the last -- lost tax revenue feeds a -- it is led to round after round of budget slashing and the ill-advised sequestration that threatens our economic recovery. because of those cuts children across the country not going to get early education or headstart

and many seniors will go without meals. fighter jets sit idle on tarmacs because her military lacks the funding to keep pilots trained. apple and the other companies exploiting tax loopholes depend on the safety, security and stability provided by the united states government and by this nation. their economic existence depends on the us u.s. government's energetic protection of intellectual property, property which they develop here and keep under the protection of the u.s. legal system while shifting the income it generates overseas. nearly 30 years ago ronald reagan placed a tax system similarly open to exploitation of loopholes and when president reagan's treasury secretary told him that dozens of america's most profitable companies pay no income tax, president reagan was stunned. armed with that information he went before the american people

to decry quote individuals and corporations who are not paying their fair share or for that matter any share in the said quote these abuses cannot be tolerated. and he did not tolerate them. the question that each of us should ask should ask today it should be closer justified tax loopholes and dedicate the revenue to educating our children, protecting our nation, building its future and reducing its deficit? closing these kinds of unjustified loopholes that provide hundreds of billions of dollars to reduce the deficit and to avert damaging budget cuts to our defense, to our schools, to our roads and the safety of our food supply and other important priorities and we should close these loopholes. they are unjustified. we should dedicate the revenue that it generates to these other important priorities. whether or not we reform the overall tax code.

senator mccain and his staff have made an extraordinary contribution to this bipartisan effort and i thank them for their great work and for your partnership senator mccain on the subcommittee. thank you senator mccain. >> thank thank you very much mr. chairman and i want to thank our witnesses who are here today, two expert witnesses professor harvey and professor shay and also i would like to express my pushy asian to the government witnesses and mr. sub four and is to executives who are here to defend their position and we will obviously listen very carefully to their testimony. i think it's important that all of us make it very clear the admiration that we hold for apple the incredible changes that apple has caused in our

lives and the spread of information and the capabilities to share information and knowledge throughout the world has been phenomenal both by mr. cook and his predecessor mr. jobs. however, apples corporate tax credit strategy reflects a flawed tax system and it is a system that allows large multinational corporations to shift profits offshore to low tax jurisdictions. for years apple has opted to forgo fully can shoot adding to the u.s. treasury and to american society by shifting profits and circumventing u.s. taxes. in the last four years alone apple has avoided paying taxes on $44 billion in income. with over 145 and dollars cash on hand apple is one of the wealthiest multinational corporations in the world.

given its annual and take apple executives enjoy reminding the public that the company is likely the largest corporation corporate taxpayer in the united states. however these same executives fail to mention another less attractive fact, apple is also one of the biggest tax avoiders in america. today apple has over $100 million, more than two-thirds of his total profits stashed away in an offshore account. that's over $100 billion that are not currently subject to u.s. corporate income taxes and therefore cannot be used to ease the deficit or help and that great -- invigorate the same american commie that fostered the large corp. the first place. the shadow of sequestration approaches on hard-working american families and is unacceptable that corporations like apple are able to exploit tax loopholes to avoid paying

fees and taxes. apples corporate tax strategy is fueled by the company's fixation on reducing u.s. tax payments. apple scheme enables the company to shift billions of dollars in global profits to oversee subsidiaries without having to pay u.s. taxes. although apple is by all accounts an american company is holding company in ireland currently retains the bulk of its profits are the subcommittee's investigation has uncovered a disturbing truth. apple apples three primary irish entities hold 60% of the company's profits but claim to be tax residents know where in the world. it's completely outrageous that apple has not only dodge payment of u.s. taxes but it has managed to evade paying taxes around the world through its convoluted and pernicious strategies. specifically, from 2009 to 2012,

apple operations international received roughly $30 billion in dividends from other apple subsidiaries around the world. that made up 30% of apples total worldwide net profits over the last few years however apple operations international did not pay corporate income taxes to any national government. furthermore, apple operations international company with tens of billions of dollars in cash has never had any employees and appears to be completely directed by apple in california. perhaps maintaining a semblance of legitimacy apple sales international another subsidiarsubsidiar y with no tax residents and employees through it 2011 began employing 250 people in 2012 however with $22 billion of income in 2011, asi apple sales international,

only paid one 20th of 1% in irish taxes. as apple funnels millions of dollars through its numerous irish entities even those entities that do pay taxes enjoy a negotiated tax rate of less than 2%. apple contends that none of the subseries in the island reduce its u.s. tax liability by 1 cent. this statement is demonstrably false. for one thing the very method by which apple divides the world serves to deprive the united states of substantial revenue by centralizing worldwide profits outside the americans and ireland apple is able to shelter its profits from the u.s. tax authorities. furthermofurthermo reapple has taken its most valuable asset its intellectual property and divided it between its legal and economic rights. the company left 100% of its legal rights in the united states but transferred a portion of these economic rights to its

irish entities there by shifting aliens of dollars in profits to ireland despite the fact that 95% of apples research and development takes place right here in the united states of america. the majority of its profits or elsewhere. apples irish subsidiary is profiting in an amount far in excess of its research and development contributions. by engaging in these elusive corporate strategies aimed at reducing tax payments apples tax department has given a new meaning to the company's old slogan quote think different. in my few loopholes like these which multinationals like apple aggressively employed are harmful in that they provide large corporations huge competitive advantages over smaller domestic companies. these domestic companies pay a higher tax rate as that they cannot use overseas operations to lower their effective corporate tax rate.

it is problematic with small and emerging thing companies while larger corporations maneuver around full tax payment. in the massive budget cuts under sequestration that it impacted our nation's most vital interests of u.s. corporate nations cannot continue to avoid paying their appropriate share of taxes dared our military can't afford it. our economy cannot endure it and the american people will not tolerate it. america's tax system is broken and uncompetitive and i've long supported efforts to modernize it, however i will not allow that to be used as an excuse to turn a blind eye to the highly impressionable tax strategies used by apple. the general american public does not have to make up the balance this corporations avoid in paying u.s. taxes. the gracious loopholes that exist in the tax code must be close so that the nearly one

gillian dollars in untaxed overseas profits can come back to the united states here it it is past time for american corporations like apple to reorganize their tax strategies to pay what they should and invest in the american economy. tim cook the ceo of apple before the subcommittee said though he has no immediate intentions of repatriating apples foreign cash the company does have plans to grow many manufacturing in the united states and create more american jobs. this is a step in the rejection and we must have a tax system that encourages this objective. mr. chairman finally as ronald reagan used to say facts are stubborn things and i would like to repeat again the following facts. 95% of the research and development of apple takes place in the united states, less than 1% in ireland. apples irish subsidiaries, apple

operations in europe apple sales incorporated and apples operations international pay our tax resident nowhere in the world. apple has negotiated a tax rate in ireland of less than 2%. apple used loopholes to defer paying taxes on $44 billion taxable offshore income. asi paid .05% in global taxes in 2011. $10 million in taxes on $22 billion in earnings. asi from 2009 to 2012 country be today little more than half of the cost-sharing payments to apple, inc. but pocketed twice the earnings from apple, inc.. $74 billion compared to $39 billion. apple operations international

received $30 billion in dividends from 2009 to 2012 and paid zero taxes. $102 billion of apples $145 billion in cash on hand is overseas. thank you mr. chairman. >> thank you very much senator mccain and we have senator johnson bird opening comment. we welcome you. >> frankly i'm offended by the tone and tenor of this hearing. i'm offended by a $4 trillion government bullying, parading and badgering one of america's great success stories. tell me one one of these politis have here who doesn't minimize their taxes. tell me a chief financial officer you would hire if he didn't try to minimize your

taxes illegally. tell me what apple is done that is illegal. i'm offended by a government that uses the irs to bully tea parties but i'm also offended by government it contains a hearing to bully one of america's greatest success stories. i am offended by the spectacle of dragging and executives through an american company who is not doing anything illegal and if anyone should be on trial here it should be congress. i frankly think the committee should apologize to apple. i think that the congress should be on trial here for creating a bizarre and byzantine tax code that runs into the tens of thousands of pages for creating a tax code that simply doesn't compete with the rest of the world. this committee will admit that apple hasn't broken any laws yet we are forced to sit on apple is forced to sit through a show trial at the whims of politicians when it if fact congress should be on trial for

chasing the profits of great american companies overseas. i say instead of apple executives we should have brought in here today a giant mirror, okay? so we can look at the reflection of congress because this problem is solely and completely created by the awful tax code. if you want to assign blame the committee needs to look in the mirror to see you created this tax code that is chasing american companies overseas. our corporate tax code is double candidates. i never thought i would be complementing canada's tax code. ours is double canada, double a lot of europe. instead of complaining that theirs is to low why don't we set about to work that our sister you hide. apple has 600,000 jobs american jobs and we want to drag him them before this committee to chastise them?

just in my state we have $700 million. they make the guerrilla class. they were virtually out of business. in the 1990s apple struggled. if i had to guess and i didn't guess enough to invest in apple but the thing is in the 90s people were worried they might go out of his nest. one computer wasn't doing well and all of a sudden it came about and we want to bring them forward and chastise them for their success? a couple of years ago we did repatriation of foreign capital. if we want that capital to come home don't double tax it. let's tax it at 5% iva bill that would repatriate profits of 5% and put it into per structure. you were not going to get it at 35%. let's make it 5% and create infrastructure funds. there are probably 70 posts for that bill in congress but nobody will bring it up.

why? they say it's a sweetener for overall tax reform which is elusive and never seems to get here. why not -- what what do you think people are frustrated with congress? because we don't have the right thing. everybody admits and even those who want to drag apple before the committee of myth that our tax code is part of the problem and if we have repatriate haitian at 5% they would bring money home. why don't we just passive? just passive if it's the right thing to do. i would say that what we really need to do is apologize to apple complement them for the job creation they are doing and get about doing our job. look in the merron let's make the tax code that are fair and more competitive worldwide. money goes where it is welcoming currently our tax code makes money and not wealth in this country. thank you mr. chairman. >> thank you senator paul. the subcommittees about

investigating the tax code that is not working with the american people and is not working for businesses in this country where some businesses decide how many taxes they will pay but they will leave offshore profits hooking up all kinds of her interest to avoid paying taxes. apple is a great company and no company, no company should be able to determine how much is going to pay in taxes how many profits they're going to keep off sure how they will bring it back home using all kinds of gimmicks to avoid paying the taxes that should be paid to this country. they made use of this country, the user law system and they have the right to lobby or whatever they want and they to lobby but they don't have a right to decide in my book how many taxes they are going to pay and to whom they are going to pay them. avoiding paying taxes in this country to me is not right and the american people know it's not right if you want to hold up a mirror you can hold up a mirror to anybody you want and you can apologize to anyone you

want. the subcommittee is not going to apologize to apple. we did not drag them in front of the sub county. they have come here willingly to explain their system and we attempt to hear from them and we are also going to hear from some experts. those experts are now going to testify in front of us and i know would like to call our first panel of witnesses this morning. professor richard harvey from villanova university school of law villenova pennsylvania. visser stephen stephen shay of harvard law school in cambridge. we appreciate both of you being with us this morning. professor shay i would like to welcome you back. you testified at a previous hearing on this matter in september of last year and professor harvey we welcome into the subcommittee. we appreciate both of you sharing your legal and tax expertise today. we look forward to your testimony and your perspective on offshore profits shifting. pursuant to rule six witnesses

who testified before the subcommittee are required to be sworn. at this time i would ask you both to please stand, raise your right hand. do you swear the testimony you're about to give to the subcommittee will be the truth the whole truth and nothing but the true so help you god? we will use a timing system today. please be aware that one 11 minute before the red light comes on you're going to see the lights change from green to yellow giving you an opportunity to conclude your remarks. while your written testimony will be printed in the record be in its entirety we have to limit your testimony to more than -- no more than 10 minutes. professor harvey we are going to have to to you go first and after we have heard your testimony all of the testimony from both witnesses they will then turn to questions. professor harvey you may proceed. >> thank you mr. chairman and also thank you ranking member mccain and members of the subcommittee. thank you for the opportunity to speak this morning.

this is the issue surrounding transfer pricing and shifting profits to multinationals off sure is a very important issue and specifically one of the text makes that apple uses to accomplish that result. my professional background is described in my written testimony in summary currently a professor at villanova school of love graduate tax program. i've been a managing partner retired partner of an accounting firm and a senior iris official and was also on the treasury department for tax policy during the 1986 tax reform act. with the chairman's position i want to submit my written testimony for the record and i will summarize my major observations orally. >> it will beam made part of the record along with your testimony. >> i plan to make a few general remarks about apples tax planning and then i want to discuss briefly how apple

accomplish the shifting of income offshore and then i want to close with thumbs tax policy recommendations that hopefully you will consider. let's start with my general comments. this is obviously going to be a little bit of an apple bashing day i suspect that i would like to start off with some good news for apple. the first good news is after reviewing their structure i suspect although i haven't done a detailed audit and i will leave that to the irs but i suspect what apple has done is within bounds of what is acceptable under current international law. that raises issues that will and i will talk about that in a minute. i guess the second thing i want to mention is that apple was able to allocate 64% of its 2011 income into ireland, the company is you folks have indicated that basically has no employees, had no real activity, basically an entity on paper. the scary thing is apple

allocated 64% of its global income into the shell corporation. their other multinationals that probably would have allocated even more so when some extent apple isn't as aggressive as others but nevertheless apple is still shifting a substantial amount of income, 64% of its 2011 and come into an entity with no employees and with no real activity. in my opinion the issue today is not whether apples current structures are legal. it's not whether they're them most regressive multinational company on the planet but the real question is whether it made sense for apple and other companies like apple and i'm talking about this is a global issue so it's foreign multinationals as well. an entity that has no employees in no real hippity.

that is the real question that i think we need to focus on. again, i think there is congressional action we can take if congress so chooses. now let's turn to how apple was able to afford so much income in its entity apple sales international and i've focused mostly on 2011 during my reviews on 2011 they recorded $22 billion in pre-tax income and apple sales international and i will call it afi. the question is how did they do that and accomplish a .05% tax rate? before i go into that, i guess i would like to directly address apples testimony that they made public yesterday and specifically the testimony said that apple does not use tax -- i about fell off my chair when i read that because when i think

about tax and certainly some of the techniques that apple uses that could in general be considered gimmicks but i will let the committee decide for themselves whether apple used gimmicks that resulted in $8 billion over four years being included to an irish subsidiary with no employees and 250 employees in the last year and paying essentially no tax. so i i think as you listen to today's today's hearing i would ask you to think about whether these are gimmicks or maybe techniques or tools, but i would also think about what we should be doing about it. critical factors that allow apple to accomplish this result and chairman levin and ranking member mccain have already discussed some of them so i will just quickly summarize. but the first technique is under

arm's length tracing. the u.s. has the concept of arm's-length pricing so the idea is that too affiliated entities can enter into a transaction and as long as it said in arm's-length pricing will be respected for international tax purposes. this is true whether the transaction is a relatively simple service or whether it involves the cure for cancer or the development of an ipad or an ipod or an iphone. now as a result apple because of its arm's-length pricing what apple did as they entered into a cost-sharing agreement for they transfer their development rights to operations outside of the americas to the ireland subsidiary and cost-sharing agreements are legal under u.s. tax law so i think one question for members of the committee and

ultimately members of congress to consider is whether it makes sense for a company like apple to be able to enter into an agreement that transfers its crown jewels to a foreign affiliate with no employees and very little activity. that was the first fact year. the second factor, if the u.s. has so called subpart f. rules those rules are designed to passing, and apple was able to avoid those. they avoided mostly through check the box regulations and cfc look for rules. the check the box regulations allow entities or allow apple to make an election to treat entities as though they don't exist. as results transactions disappear. now when my children were younger and i have got for adult boys but when they were younger they were big into magic and they might characterize check the box as making things go

poof. some of us in the tax trade referred to check the box regulation as a tool for avoiding sub part f. rules however i suspect most others may view it as a gimmick in the sense that you're able to make an election and make transactions disappear under the u.s. tax law. the third critical factor in apples planning was they were able to avoid paying any material irish tax. it's not clear to me whether they cut specific deals with the irs taxing authority and that is what i was led to believe by some of the testimony they apparently gave to members of staff but at the last minute in the last 48 hours we became aware that they have entities in ireland that are not managed and controlled in fact all of their major entities are not managed and controlled and are not tax

residents in ireland but be that as it made the may the bottom line is they have substantial amounts of income, $78 billion over four years recorded in ireland and they paid essentially no tax. the fourth critical factor in this is really important for the rest of the world in that apple halves rossley 60% of its global sales outside the u.s. and outside of ireland. but they only allocate roughly 6% of their profit to the rest of the world. the way they accomplish that is by having a very minimal sales commission being paid to entities that operate in those countries. i'm not suggesting that this in any way illegal but that is the end result of their planning, is they pay a sales commission to sell to those particular countries in the world and 78 billion income can end up being retained by the irisin today.

i suspect there will be some interesting publicity around the world surrounding the lack of irish taxes being paid. so let me move on because i'm running out of time here but the real question here is what to do about this. the more important question is should anything be done and if so, what? i would say executives multinational companies almost everyone i speak to would agree that something needs to be done when so much income can be allocated into an entity that has no substance of any significance so it seems kind of crazy to allow that result. although there is general agreement that something needs to be done there isn't a general agreement to exactly what should be done and their different scenarios. one scenario would say wait for some sort of global consensus to arrive. the oecd is studying this particular issue and is due to issue some thoughts within the

next month or two but typically my experience is that oecd does not move very quickly. second another alternative is for the u.s. to act in a laterally and unilateral actions may be something that is needed in this particular case if only to jumpstart was going on around the rest of the world. by basic recommendations are in the short-run congress should consider tightening the subpart f rules so potentially restricting check the box regulations for foreign entities potentially go look for rules and limiting contract manufacturing regulations which i haven't spoken about because apple really didn't take advantage of this. in addition i think we need short-term congress should be thinking about increased transparency. there should be additional reporting done by u.s. multinationals that show where they record their income for the county and tax purposes as well as where they record tax expense

and where they pay tax and other factors that might be useful in allowing tax around the world. in the longer-term there still needs to be a solution because to the extent there is in arm's-length pricing model you will always have companies have the opportunity to shift income so i would strongly suggest in the long run the u.s. continues to monitor what's going on in the oecd and assuming a global consensus cannot be reached, then i would not recommend the u.s. adopt a worldwide tax system unless the u.s. reduces its corporate rate down to 15%. since i don't think that's going to happen anytime soon we could probably reject that alternative but if the u.s. does keep the arm's-length standard by recognize imposing in minimum tax on foreign earnings and especially those with tax havens but this tax needs to be

designed to be administrative. as a former tax adviser in the private sector as well as the government official it needs to be administered bull and died make specific recommendations in my written testimony. .. members of the subcommittee, thank you for the opportunity to

testify for shifting profits offshore by multinational corporations. under professor of practice. an express or my own personal views. i've also served to the treasury department and practiced for over two decades. i have a large law firm is international tax partner. the subcommittee should be commended for pursuing this investigation, protecting existing u.s. tax base gives the congress and administration was watchable for the fiscal health of the country. the revenue loss for tax raiser version is hard to estimate, but there is compelling evidence the amount to substantial. this revenue loss exacerbates the deficit and undermines public confidence in the tax system. restoring revenue to regression would support investing in job creation and short term and reducing the long-term. my written testimony provides

taxation of income of professional international jury controlled pricing. edward is certain information does the subcommittee staff planning and consider how elements of your stack that contribute to key element and make a limited number of observations regarding the implications for tax changes. it's a remarkably successful company. i will refer the information into an elaborate in the most recent because separate information on that was made available to the subcommittee staff for fy 2011. the apple company included two participants in the cautionary power-sharing agreement that was long-standing with apple for the rights to sell products that i

north and south america. based on financials about eliminations for each of these companies, in 2011, apple's irish company earned approximately $22 billion before tax or approximately 64% of total global ebt. of that 22 billion, 18 billion was income for reasons i mentioned in the testimony enough secret dbt for most of my members. >> what is ebt click >> earnings before tax. the apple irish company's earnings before tax was 46% in 20% for apple in the u.s. the average effect to push trade was well below 1%. although apple listed there vote location for tax purposes as higher disclosures to the subcommittee, i was advised on

sunday night at the principle companies in terms of earning income directly from apple operations to an apple sales international are not tax resident in ireland. apple operations and apple sales international as a result only pay irish accent or business carried out in ireland. ireland does not make a claim to taxing nonresident irish company and not irish income. it is not clear where the income attributable to the car shared intangibles is treated as the apple from the information provided. it appears to be allocated away from ireland for tax purposes. presumably it is only referred to by international tax partner's assertion in come. it would be difficult to achieve

a less than 2% effective tax rate is not income are subject to irish tax at 12.5% for trading income for 20% rate otherwise. over the three-year period, 2009, 2011, apples irish car shared participants pay 3.32 billion apple ui is. that is a very large number of the same. apples irish affiliates before tax so with a car sharing arrangement, apples irish affiliates have been unrelated. to answer yes in my view. the 2011 u.s. tax was likely

over $10 billion. the ability to reinvest those tax savings is a valuable tax benefit. the terms and pricing us to achieve mutual treatment of related and unrelated party transactions. the ability of multinational businesses to take advantage between related persons in different countries are in this case in no country strongly favors structural transaction took affiliates to shift income to low tax countries are no country. it's an advantage that is largely unavailable to purely domestic businesses including almost all small business enterprises. you small business individuals must make up the last taxes. the benefit of the income shifting is enhanced when deductions are incurred in the united states to earn this low tax income differed from u.s.

tax. has described him it appears apple's general sales and marketing expenses are disproportionate in the united state. by that, it's not they should be incurred here, but they don't appear to be charged against low tax income in ireland. allowing a current deduction for whatever portion of expenses attributable in irish companies effectively as the u.s. tax subsidy for those differed are. this is often referred to in exemption countries by seduction dumping. another is coming deductions in the home country can achieve low tax exempt in from outside the home country. our system of deferral creates an exemption system and irresistible shifting the low tax. it was understood among its

referred to 1962 content is seen as a vital backs african pricing by reducing incentives to be shifted to lower zero tax countries. apple international structure takes full advantage of loopholes in existing anti-deferral rules. with third parties and in most cases for u.s. tax purposes to third parties. by using chat box disregarded entities and company transactions up in the group of companies that are classified as disregarded simply disappear. with respect to dividends to look through rules of 954 c. six to commish is the same result except to deduct the payments offset in come that would not be

current u.s. tax. if all of this works, our tax euros allow apple to allocate billions of dollars to nowhere when i rules presumed that in order to achieve deferral, some country has jurisdiction to taxing income. that to me is that we learn on sunday night. no country is making that claim them we are allowing deferral. our international tax rules are out of balance. they are too generous to foreign income and not strong enough in usb solution space pirate come these investing in and carry business in the united states. in the context of current law if you're not going to get tax reform and an i.d. repeal of deferral, changes still may be made to limit the scope for

profit shifting. most promising us a minimum tax imposed on the u.s. shareholder control form corp. you should not be your final tax. it should be deemed distribution as current domain u.s. tax to be collected when the earnings are distributed with the stock is sold. they should be accompanied by taking away the thin edge companies that invested united states. measures include imposing withholding tax for restricting deductions for deductible payments income paid to beneficially on by related persons not effectively taxed on the income. in doing this, the united states to take away substantial advantage for foreign companies structured investments in the united states. third, the united states should strongly supported my passwords. i've described elsewhere if

taken by the united states with provide an incentive to adapt complementary roles -- or conversely to address income shifting clicks exposed in as the row word for light practices not easily discernible in the financial statements. thank you and i'd be pleased to answer any questions. >> thank you, both. the 70 minute first-round of questions for the members of the set committee. professor shay, as we've all said this morning, we have

learned these to irish subsidiaries of apple or not tax residents anywhere in the world and the majority of apple's profits worldwide are not being taxed anyway. the evidence indicates that asi and osi subsidiaries controlled out of the u.s. then they started to mchugh, professor shea. does that make sense to have apple treat this as a private entities have no tax residents? if you could repeat your conclusion. >> when deferral is established and i think it's on the premise is another country has asserted a claim or could potentially assert a claim even if it chooses not to with respect to that income. ireland by treating these companies as nonresident has affirmatively said it is asserting no jurist diction over the income that is not

attributable to the irish business operation. it seems to me that is inconsistent with the premise of deferral because there is no come to me that has tax residents anywhere else that making the claim. so to me, that is in coherent. it is an incoherent tax system that permits that to occur. >> we've also seen that asi, which is apple sells international signed a car sharing agreement with apple that they have no tax residents anywhere in the world. they have no employees at all until 2012. they currently claim to irish tax authorities that asi is not managed or controlled in ireland and the board of directors is composed primarily of apple employees. they hold their meetings in california. asi fans include funds manage controlled and invested by apple

employees and a nevada subsidiary. the decision is made by apple executives in california. we also know -- only that it appeared professors, from a policy perspective, doesn't make sense for a company located in a foreign jurisdiction in name only collectivities are controlled in the united states to be used as a tool to shift profits in direct tax liabilities away for a the united states. professor shay. >> mr. chairman, i don't think that makes sense, but putting a broader, we talk about globalization. we are aware we now have a digital economy. we have different ways of earning an come to no longer

have the kind of traditional physical nexus to a country they once did. it simply is to rethink our rules and the premise i would start with is we should no longer be oblivious to what happens in the other country. if another country is not taxing income, for example, we should get a deduction with respect to payments to the country because that is essentially or in this case to no country, that is subsidizing activity that is unnecessary. we need to rethink our rules on the cross-border contacts to be more aware of how other jurisdictions are taxing the income. the

>> assessor shay, has apple in their car sharing agreement affect rudely shifted profits overseas and they shipped their economic value of intellectual property offshore quakes >> yes. by entering into an agreement that had its origin long-ago although it's been renewed a couple times or amended a couple times and agreed to pay his share of the research and development expenses, they have then taken the first of that and possibly the streets of more than those expenses are likely based on the numbers and earned outside the united states and that clearly is this older shifting the profits. >> overseas. >> overseas.

>> now, they deny that they shift profits overseas in your testimony as they are shifting profits overseas through this mechanism. the way to test the reality of apple's car sharing agreement is to ask is you did weather would have entered with an annotated their party. you either live testified testified, professor shay had to say yes to that question strains credulity. can you tell us why it would strain credulity of? >> i tell you they would enter into this kind of cautionary and proper shifting agreement with the independent party. >> it is important to look at outcomes and the law authorizes us to do that in 1986.

one way of thinking about this is if you are investing in apple and the apple management came to you and said look, we want to partner with somebody who has fewer nonemployees that has money and they're going to pay a share of our d. and not servers will, we will give a rest of the world outside of north and south america profit for that amount. is that a good deal? another way is howard mr. einhorn back of that? would he be pleased with that arrangement? thinking about it that way doesn't seem credible to me. apple correctly says in her testimony, they said it's management origins many many years ago it did and that raises

the question of should that ever have been revisited? when you look at the numbers up on the chart, $4 billion in exchange for 74 billion of earnings before tax or 72 billion, whatever it was and not contacts you would really question whether it arm's-length that would not have been amended sometime between 1980 and now. >> so the last two years, is that correct wakes >> it was in order and confident and identifies them, but it appears clear they amended it in order to stay within a grandfather clause under prior, much more relaxed car sharing rules that allow them to perpetuate the arrangement. >> in that arrangement, you say that arrangement with never be

entered into in the last two years at an arms length as an independent party. it strains credulity to use your words. >> there are bad deals up there. this would be a whopper. >> against apple click >> against apple. would you have a stack of seven gave away your income? >> of apple can create companies with no tax evidence and create profits and most companies, and if that is tolerated, could not u.s. multinationals in the fact do the same thing, eliminate the corporate tax for multinationals and allow them to not even be freeloaders, but also offer taxes on domestic competitors, small business of working people? if they can do if i could never multinational do the same thing?

>> apple points out in her testimony correctly that they only did this for their international sales. their international sales are very large. >> i mean -- >> any multinational could do it for sales, but there's nothing preventing it from being done as we saw with microsoft for domestic sales. again, this is not an apple bashing exercise. this is saying where are we -- how can they possibly be in a situation today where the law permit and can be allocated to a company resident nowhere and not be taxed anywhere in the united states say forget it, don't worry about it that's fine. >> thomas question. he said you must fail if your chair when you read apple says they don't use the next buddy jewell must follow after chair?

>> to check the box regulation certain with the practical effect is a gimmick to make transactions. >> about about corporations that don't exist anywhere? >> did you ever hear of that before? >> certainly that is the goal of my tax plan are scum and utopian goal tax planners try and obtain and create an entity tax nowhere. so apple through the structure was able to substantially accomplish that. >> have you heard of that being done in other cases? >> there are situations where it arises. >> senator johnson, you came in taxpayer not sure who is first. >> i got here first. thank you, mr. chairman. professor harvey companies dated according to your calculations, apple's overseas income was 64% of total income in sales for

roughly 60%. it was straight as a somewhat fair allocation of income to sales. what is it more fair allocation between recognition of income? >> first of all the 64% of the amount of income recorded in ireland. there's another 6% recorded in other foreign countries. the statistics out of the account with the 30% of the global income in the u.s. and roughly 39% of global sales in the u.s. >> figures are 39% global sales and 32%. there's a greater allocation of income. how should income be allocated? >> i think that is a question. the key question is for technology developed in the

united states, how should that be taxed? most economists all you could develop the u.s., the u.s. would expect the lion share of substantially all the come. >> how is that handled the two states in the u.s.? let's say new york is to manufacture in texas, where is the income tax allocated on the basis? >> some states are separate company states and son are global. >> if you manufacture texas even a producer product in their, texas may be wrong. the sea was calm. >> not necessarily. it depends for the type knowledge is located. what i wanted to say to finish up what is important for you to hear because it makes your

heading is a legitimate question for congress to ask how should technology and can be allocated and if congress decides it wants to have them sent over to knowledge and come not taxed in the u.s. and they should affirmatively do it as opposed to the regime that is a self-help regime that taxpayers decide. >> in the end, apple is selling a product and talking about manufacturing in come. we can split this different ways. at some point, how should income be allocated between countries, states, jurisdictions is a difficult question to answer. >> absolutely. when you're 64% in a country like ireland with no employees in the substance, that's a

serious issue and you have to decide what i should be taxpayer >> , we've been trained to solve this tax code click >> this existed basically continuously for decades. >> you think there is a fix to a click >> yes, i believe there fixes that congress should take. the subpar growth have been significantly relaxed that it's open season for taxpayers to do whatever they want. >> at her business manager and let's say the u.s. passed a law to claim income and tax for 305%, what did he do whoop-de-do with overseas operations? >> as i indicated, i don't recommend we tax income at the full u.s. tax rate. i recommend would only tax up with a minimum tax on foreign

earnings as something less than the full rate. >> what would that be? >> the number thrown around by folks is 15% in that range. >> what the business manager felt those onerous and on the set and you've got a smaller u.s. come to me or a larger overseas company. this unintended consequences to do anything here come is in their? >> a competitive issue in the u.s. multinationals have free reign to have income offshore. as professor shay indicated you can move all your income offshore. you have to balance those issues amended the difficult issues that make some tough policy goals. >> i understood the point of disadvantage of the domestic competitor that is not good overseas when the multinational

corporations overall effective tax rate is lower because the overseas taxation issues. in general, who benefits from a lower tax rate on corporate structures such as apple? >> certainly has tax planning, shareholders are the beneficiary. >> or the shareholders of apple? >> whoever is the stock. >> denote the breakdown is? >> i'll ask apple management. in fact, the people the benefit our union pension funds to shareholders. is assumption because apple made a good deal with overseas taxing authorities that is somehow bad for america. in fact, would we be better off if ireland or germany -- would

americans be better off? >> to the extent you get a more fair allocation of income, ultima and the launch of americans to be better off. >> could be better odie butterfat photopaint corporate profits in germany? they be better for america? >> in the long run, we need to come up with the appropriate taxation of international income. is indicated in my testimony, my preference would be a reduction in the corporate tax rate in total for domestic and foreign companies to 15% and replace that with some sort of alternative funds, whether dat or something else. i don't think that'll happen anytime soon. if that's not theoretically possible come you have to dress a difficult issue about competition between domestic companies and most u.s. nationals versus foreign and

insensitive to that. it's an issue between u.s. and multinationals, but also between competitors of u.s. domestics versus the u.s. multinationals. >> if you are global manufacture was to manufacture the u.s. market and that's one of the things we have going. the manufacturer. wouldn't dream of manufacturing domestic customers and their other than u.s. if your global college be more lately in toronto at 15% or detroit or 35%? will be the rational thing to do? >> the rational thing from a corporate perspective is to clearly locate. >> would need to make sure we are competitive globally competing against tax jurisdictions willing to cut deals, shouldn't corporations take advantage of that? quite honestly when apple is responsible for 600,000 jobs in

america, all the application developers multiplied a $50,000 worth of payroll. that's a lot of taxes flowing as well, isn't that? >> under that theory, or not we eliminate? one braves capturing the income. my business pastor and come here by not taxed corporate income at the shareholder level? root of the many problems we? >> how would you propose to tax-deferred pension funds and foreign shareholders? which he tax that? >> if it passed through to the taxpayer, but if you're a high-tech's individual you'll pay higher tax.

you could eliminate dividend income and capture all worldwide income of corporations would eliminate the can had a good advantage of different taxing jurisdictions. >> avesta congress decides to do it wants to replace a 250 to 300 million a year to sit in your prerogative to do so. >> i would eliminate the inability. the inability for decades of trying to capture this income is just ships around the world and reacts to byzantine tax structures. >> there's no question the u.s. tax laws complex. one thing you didn't say whether the u.s. hacksaw puts multinationals at a competitive damage. there are pros and cons. my purse abuse u.s. tax law favors u.s. multinationals. >> thank you, mr. chairman.

>> thank you, senator carper. >> another hearing in the finance committee dealing with the irs and i apologize for the same your testimony, but thank you for joining us and welcome. i think you maybe put this hearing and the ranking member for other witnesses coming. i'll put it in context if they could. our country congressional budget office recorded the high-speed by 1.4 trying dollars. the osterman was $840 billion. cbo has said closer to $650 billion amassing brute way too much. one of our former colleagues,

kent conrad b.c. budget committee told his colleagues last year if you added the tax expenditures tax breaks, tax loopholes and credit that it added for the next 10 years something like $15 trillion as i recall what her friends erskine bowles and alan simpson did was to propose and breakdown the tax rate from 35 to 25% to 20%. they propose reducing significantly the tax expenditures america to forget that we be more in line with the world and called for moving to a territorial tax system. let me just ask either of your

both of you to share your views made out, which the recommendations say i was dead on arrival. my hope is it gives us a roadmap that will follow. >> you are referring to simpson/bowles? >> your. >> is an important start to the discussion. there's been a variety said in the realism about tax expenditures is somewhat overstated. i don't think it's going to happen. >> i don't think anyone suggest

will get rid of all of them. a nice to get to 25% to 20% is what they recommended. a number of the recommendations -- the reason this hearing an issue is in porton is because part of those recommendations included with into a fairly unspecified extension system. i think that's a source of great concern for the reasons we've been discussing this morning. they would be even fewer restrictions, even more beneficial to shifting, brad and less significant protections are in place or some form of a minimum tax, something none of that nature. speaking more broadly, to

rethink the direction of tax reform should be to broaden the base? my own view is we can use our revenues. i wouldn't put all the lowering rates, but i think that's a very sensible way forward. we need to bring the discussion on the level of broad generalities down to specifics. one of the reasons i testified as i think that's going to take time. i served in the treasury department for 1982 to 1997 during the reagan administration. i served throughout tax reform. we started before the election in 1984 to prepare the treasury proposals at the end of the year. we spent 1985 going through the house. they first became the presidents proposal and that is a significant pretty light

frankly. that process is looked back on today with great affection and seems to be viewed as a great process. it's so came out with a product far from perfect, even though it took three years. in order to do a tax reform that's responsible, we need the full involvement of the treasury department. we needed to be done with the assistance of the office of tax analysis of cells the joint committee on taxation. this is difficult complicated stuff and doing it in broad brush strokes are a series of compromises will not get us where we want to be. sublet nayar at the simpson/bowles folks have done, we have a tremendous amount of work if we have a general effect of tax reform. in the meantime, we should not allow income shifting and base

emotion to to continue. very things we can do that would restore revenue that should be in the budget and could be contributed to purposes that on a bipartisan basis probably, mr. levin and senator mccain would agree on. >> out of it quickly i would concur with you michelle about professor shay says. if we got a territorial system, we need to have a clear base erosion principle to prevent that. chairman camp from the ways and means committee understands that in the proposals that are base erosion's proposals. >> the senate finance committee is going through a series of briefings. basically member only briefings particularly a corporate tax reform and bradley at the exemption that it is and trying to decide where it might make sense to make changes.

sometimes folks in our jobs talk about creating jobs. presidents talk about creating jobs. we don't nurture for job creation that includes world-class workforce, access to capital and a reasonably good infrastructure. some certainty in the tax code. the tax code that among other things investment in workforce in r&d lead to products and services to commercialize and sell around the world panama need to provide certain to intersect a tax made ravinia simonetti mentioned that. the idea of a corporate rate to 15% in being able to supplement the lost revenue with the atr carbon tax are not think either of those will happen on my watch. having said that, we need to have the revenues.

the fur is not an administration had balanced budgets from 19.5 to 25% gdp. need to get close to something along those lines. thank you, mr. chairman. >> thank you, senator carper, chairman of the full committee. we appreciate your being able to get here despite these other commitments. senator mccain. >> thank you, mr. chairman. professor harvey and professor shay, thank you for being here and for your very important valuable knowledge and expertise. isn't it just a fact that east tax advantages that apple has either taken advantage of or in some cases and ideas, and then it the tax reduction in a

country that she had no employees. business but do not stick companies and corporations at a distinct disadvantage? >> yes. professor. >> yes. the objective of our tax euros should be to try and achieve a balance in this particular case i referred to my testimony to create particularly relations to transferring across activity from neutrality between what would happen if you are dealing with a third-party and what happens when you deal with an affiliate. our roles today favor using affiliate. that doesn't mean you always use affiliates. coming back to something senator johnson referred to. if i understand correctly, this

manufacture has not done by apple and that's true of many companies today. had some xbox, and other contract manufacturing third parties. companies today view themselves i believe and i don't believe there's any problem if it is fair allocators of capital. they're trying to allocate the capital to the highest after-tax use. our job and your job as designers attack systems is to find a way that wild on business to do his business, we are still taxing profits that this disturbs the decision-making and it seems very clear today we are off balance here. with a substantial amount in a country where very little is

done. it's not the u.s. where most of it probably belongs, but also not in the market countries are the customers are. we need to come up with rules that achieve the outcome of having a tax fairly. our fair share in the u.s., whatever their claim is assigned. right now is clearly not getting our fair share. r&d is done here. in the support of system. is supported with an r&d tax credit and a tax credit applies just as much to the car shared to the foreign location so long as it's performed in the united states. this imbalance. >> 95% of the r&d conducted by apple and i would imagine every other high-tech corporation is conducted here in the united states thank god.

professor harvey, apple has divided the two sections. earth and south america and the rest of the world. if a customer in brazil purchases and iphone apple corp. rated, receives a prophet. however if a similar customer purchases the same iphone of copenhagen denmark, the profit goes to apple ireland and no corporate tax accrues to any country. how is that possible no tax codes to any country? >> i believe some tax status go to the country the customers are located in, but it's a very small commission. >> .05 ireland. >> it's the ultimate tax rate. it might've been 5% sales, maybe% sales.

>> the moral of the story is at least in my view that apple has violated the spirit of the law is not a letter of the law. and i had agreed agreed to have a list of congress and the last time we did any meaningful reform was way back in 1986 and it's long overdue. perhaps his testimony today will motivate the congress of the united states to enact a comprehensive reform and to bring home its trillion or or trillion and a half amount of money that rests overseas, which is not brought back because of the 35% tax rate imposed on it. i guess my question to both of

you initiative be a permanent senate or should we have a one shot deal to say you can bring it home within the next year or two, you can have a 5% or 10% tax rate imposed on it. >> i respond first. i don't think another temporary deal makes sense. as a temporary deal in 2004, 2005. study suggests the vast majority were used to pay off debt or make dividend distributions. this really calls for a comprehensive tax reform to address this issue, but also issues addressed in the short-term. if congress decides to type up, it can do so. if congress wants to increase transparency it can do so. is a one-time tax holiday would always be there a policy essay.

>> senator, i'm not a fan of tax holidays. quite a substantial portion of the income although shorter should've been the united states in the first place if we were fully enforce the berkeley had transfer pricing rules that make sense. only talk about today is a portion of the afshar profits in a well-designed tax system would not have been offshore. when the decision was made to allocate to the low tax environment, it is done under the bushes crystal-clear. it is to furl, not exemption. there are proposals to use a holiday or low rate as inducement to bring back money, which essentially as they went off for the companies who aren't overseas under law but said it

was to furl. i understand mr. corp. is indicated to the subcommittee they would be no intention to bring back money at the current rates. so it is true that one contributes to push in mind, but they end keeping it verizon is to hold out the prospect of exemption, lower tax rates and so on. back from a policy point of view doesn't make a lot of sense to me. there is a sound economic argument that i'm not really arguing for today, but it says it started there. if he tax at the upper at home. their decision to bring it home analytically should be independent. if he tax it, but bring home. under the exemption system,

there is no incentive to bring money home, even with an exemption system if you're going to earn a higher tax return on those abroad. the notion that exemption is the key to having to come home and reduce the transaction at the time of repatriation. if he tax at the time card, don't go away. that is the plain answer as his divine exemption. >> so permanent tax reduction would be following your argument would be the answer. >> that would be a windfall of sure. though it probably would generally agree lower tax rate would be beneficial. >> thank you and thank you, mr. chairman. i think the witnesses. >> thank you to senator mccain. senator paul. >> would need to restate in the

clear neither this panel anyone on the committee is set apple broke any laws. they are harboring them believe because they try to minimize their tax burden legally. i would argue it would not crack is for them not to do so. in the mandate for your chief financial officers to maximize their taxes. i'm guessing i would be something the shareholder with accept. i don't know of any taxpayers to do that or anybody in the pan had tries to maximize their tax burden. my question for mr. harvey, do you take deductions on your taxes? >> obviously i do. >> you choose to maximize your tax burden or minimize your tax burden? >> minimize. >> do you think are bad person for doing that? >> absolutely not. >> advertising as an accountant

tax asked by a corporation benderman it was to do what was best for shareholders, which advised them to count profit at home at 35% or to try to do as much as they can legally to pay their taxes at a lower rate elsewhere? >> as i said in a written and oral testimony, certain what apple did does not appear to be illegal. the question is a policy question as to whether they should be allowed to do in the future. >> as a policy question, talking about taxes is an appropriate thing for congress. bringing an individual company vilifying them for doing something that is in every business has mandate is an objectionable and that's why object to these hearings because talking about policy is not to. for example, a weak data for one year in 5% were brought in $30 billion. with limited how much could come in. make it permanent, make it

though enough people do it. if you provided us a 5% the money will come home. but money goes for its welcome. if you want high taxes will continue. there were talks about tax reform. just do it. we were 35% corporate income tax. sco, the committee's hearing is evil apple, let's go to companies like this racer taxes, their headquarters may no longer be in cupertino. they may be in dublin. they are the high-tech companies that could relocate around the world. if you want to chase them out, bring them here and vilify the wrong thing to do. we should congratulate them on hiring people and not vilify them for obeying the law. they are to maximize profit.

we've created this bizarre taxcutter chase them overseas. they're 70 of those right now the site for having a 5% repatriation tax. everybody says that's the sweetener for overall tax reform. why not pass it tomorrow? we've made ourselves beholden to things like cbo. the cbo will score that is a loss of revenue. the cbo doesn't know a lot of times up from down in the sense you could change the corporate tax. there is such a number you come away to give our revenue. at about the numbers, but that number does exist. give a couple trillion dollars overseas. there is some number where less money goes overseas unless people set up come the needs. very many ways you can do this. repatriation of bergamot home.

if we take it as a vendetta against american companies are trying to maximize profit, we've really missed the boat and once again we should look at ourselves and talk about what we do. overall tax reform. if it has to be revenue neutral. that is absurd as well. who punish some people less. why don't we reward the economy and shareholders? why not reduce taxes assisted us in the economy. and with the people who are in it. i'm very frustrated by the whole proceeding, particularly because all these accusations are simply doing what every company does. if they're not, why do with the next hearing of companies who come in and their chief goal is to mix music expert. i want to see what company tele

circle is different than apple, the goal is to maximize tax burden. taxes are simply accosted me try to minimize legally. i do to you. take a home mortgage action, k. deductions, other deductions i can legally take. this vilification is gone on before. fdr did it, the president did it. this is not good for the country. senator johnson put it well when he said who are these people? is very mr. apple out there? no, it is fast. you probably have some publishers. if you're a teacher the pension fund company you own apple shares. apple is a great american company and i don't know if you know the breakdown, but probably the vast majority, 70% cut 80% may be owned by americans. who are we about to punish mr. apple, we punish ourselves. if we want to grow america a lot more companies to succeed, make money welcome.

as much as you want to stuff the genie back in the box and say you must do this, come to me scannable go everywhere. let's not vilify her american companies. let's keep in mind is not breaking of law. thank you. >> in my testimony and i want to clear. i take no position on the legal correctness of any tax position taken. i want that construed by saying what they've done is also fine. i have no idea and that wasn't the point of the hearing. the subcommittee staff does not request financial data.

under current u.s. law and ask ourselves is this a place you want to be? i was trying to vilify apple is simply don't know. i wasn't given the facts to reach the conclusion i do not reach that conclusion. >> thank you. i think you could very come out very clearly. we are trying to shine a spotlight on the practices of the big company. we done as with other companies. there's no other way to illustrate the current system works. it's a perfectly legitimate, not a legitimate function for congress that we don't do enough analysis of how the current system works. we don't do enough oversight and to attribute that -- to characterize that in a way that has been characterized by one senator here as vilification is so was the target of what the function of the subcommittee is,

congress is responsible to do and has to find it a lot. it's a look at how the current practices of the government work, how they fall short, how they misfire, how they reach absurd results which is the case here it is two corporations. is that the goal? is zero tax? you can set up a straw man about no one wants to maximize. of course no one wants to maximize tax. >> mr. chairman, could i also make an unnecessary comment here? i've had the honor of serving with you from within a quarter of a century. i know of no member of the united states senate has ever accused you of olein or harassing them at this in the thousands of hearings to you and i've part of over many years and frankly it's offensive to hear

you accused of that behavior, which is never characterize your conduct of this committee for this defense committee. thank you, mr. chairman. >> thank you, senator mccain. i very much appreciate that. senator mccaskill. >> eye to things to say. i'm anxious to hear the testimony of the next panel. first is i love apple. i love apple. ..

>> i wanted to publicly acknowledge those on the campaign. finally, i have questions about this, not because i think that apple is the villain, but rather apple is utilizing the tax code we have given them. if we have any hope of changing that tax code to promote free enterprise and capitalism and the success of the american entrepreneur, at the same time to make sure we are receiving enough taxes to fix our roads and bridges, to help educate our kids, to remain a country that

is seen as the bright and shining light on the hill we have to make sure that we have a tax structure that supports those goals. i think we can do both without eliminating any american companies and i appreciate you for holding this hearing. thank you for the witnesses for being here and i look forward to the next question. >> thank you, senator. senator claire mccaskill. sir, you referred to the asi, the irish company -- as will be just a couple minutes in the second round. a three-minute second round. is having dashwood evening by having an ocean? >> again, we have not seen tax returns. i have tried to be very careful in my testimony. but it would appear as though

the asi, which has substantial sales with very low tax rates in ireland, they may well be allocating what is attributable not to the irish business. since it's not resident anywhere else. if that were the case. i mentioned in my testimony that that is something that the taxpayers prefer to as income. i have seen it occur in at least one other case. but it does not come from no tax residents. including the other countries in the least at that point, there were two that they could have resolved the issue. the structure is different.

it is the most polite way that i will put it. >> thank you. this is an additional question for the panel. we are we're going to move now to the second panel. [inaudible conversations] okay. thank you. i would like to call our next panel. timothy cook, the officer of apple, and also peter oppenheimer and phillip bullock

come in ahead of tax operations. we thank you for being with us this morning. we look forward to your testimony pursuant to rule six. all witnesses who have testified before the subcommittee are wired a sworn. at this time, please then raise your right hand. do you swear that the testimony you're about to give will be the whole truth and nothing but the truth, so help me god? >> i do, so help me god. >> we will use our traditional timing system here today, about one minute before the red light comes on. you will see the lights change from green to yellow, giving you an opportunity to conclude your remarks, your testimony will be printed in the record and we ask that you limit your oral testimony to no more than 10 minutes, again, thank you to you and your colleagues for being here today, and you may proceed. >> thank you, we have changed

that to a 15 minute opportunity instead of 10 minutes. >> i appreciate that. good morning, chairman. good morning members of the subcommittee. i am proud to represent apple before you today. apple has been enjoying unprecedented success over the past 10 years. worldwide popularity has soared and our international revenues are now twice as large as our domestic revenues. as a result, i am often asked if apple still considers itself an american company. my answer has always been an emphatic yes. we are proud to be an american company and equally proud of her contributions to the u.s. economy. apple is a bit larger today than the company created by steve jobs 40 years ago. that same entrepreneurial spirit drives everything that we do.

and tell the story of apple's success in just one word. innovation. it is what we are known for. products like iphone's and ipads, which created an entirely new market. these give this gives customers something useful so that they can't imagine a life without them. you might be surprised to learn that much of that innovation takes place in a single u.s. zip code. 95014. that is california, where we have the brightest and most creative people on the planet. they come to work each day with just one mission. to make the very best products on earth. their job is to dream of things that capture the world's imagination. one of those inventions is the application store. if you have ever used an

iphone or an ichat, local applications are one of the hottest things in technology today. it makes software development one of the fastest-growing job segments in the u.s. we estimate that it has generated nearly 300 jobs in the u.s. they have developed over $9 billion from applications on the application store. half in the last year alone. none of that economic activity was there five years ago. apple took a bold step in developing the application store and the economy was born. today, it is a multi-billion-dollar marketplace and it shows no sign of slowing. we have chose the design and development of revolutionary products right here in the united states. jobs has stagnated over the country across the last decade.

we have grown by five fold area we have 50,000 employees and 50,000 employees in all states. apple has created hundreds of thousands of jobs as small and large businesses support us, from people involved in manufacturing, to people involved in delivering the products our customers. the component for ipads and my phones are made in texas and iphone's comes from kentucky. in total, apple is responsible for creating order supporting 600,000 new jobs. we invest billions of dollars in the united states to create even more american jobs. we are investing $100 million and this will be the product

that is assembled in texas, including components from illinois and florida and rely on equipment from kentucky and michigan. we have constructed one of the largest data centers in north carolina. afflicting our commitment to the environment, the data center powered by the largest solar farm of its time in the u.s. we are building data centers in oregon and nevada and a new headquarters. give us our knowledge, iowa -- apple has become the largest income here in america. last year tax rate was 30.5%. we paid nearly $6 billion in cash to the u.s. treasury. that is more than $60 million each day. we expect to pay even more this

year. i would like to explain the subcommittee very clearly how we view our responsibility with respect to taxes. apple has real operations in real places with apple employees selling real products to real customers. we pay all the taxes that we owe, every single dollar. we not only comply with the law, but we comply with the spirit of the law. we don't depend on taxes. we don't move intellectual property office shorter to avoid taxes. we do not testimony on a caribbean island and we don't have our money from our subsidiaries to fund the u.s. business in order to serve the repatriation. our subsidiaries hold 70% of our cash because of the very rapid

growth of our international business. we use these earnings to fund foreign operations, such as spending billions of dollars to acquire equipment and on construction of apple retail stores around the world are under the current u.s. corporate tax system, it would be very expensive to bring the cash back to the united states. unfortunately, the tax codes have not kept up with the digital age. a handicapped american corporations in relation to our foreign competitors who do not have such constraints in the free movement of capital. apple is a company of strong values. we believe our extraordinary success brings increased responsibilities to the community where we live and work and sell our products.

we enthusiastically embrace the belief is visiting kennedy said, to whom much is given, much is required. in addition to creating hundreds of thousands of american jobs in developing products that deeply enrich the lives of millions. apple is a champion of human rights and education and the environment. i believe that innovation should serve humanity deepest values and highest aspirations is not going to change. apple is also a company of strong opinions. we are deeply committed to our country's welfare. we believe great public policy can be a catalyst for a better society and a stronger america.

apple has always believed in the simple and not the complex. you confuse and a products and in the way the that we conduct ourselves. it is in this spirit that we recommend a dramatic specification of the corporate tax code. this should they should be revenue neutral, illuminating all corporate tax expenditures, lower corporate income tax rate and implement a reasonable tax on earnings that allow the free flow of capital backed the united states. we make this recommendation with their eyes wide open and we fully recognize that this would likely result in an increase of apple's u.s. taxes. but we strongly believe that this reform would be fair to all taxpayers and would keep america

globally competitive and promote u.s. economic growth area my colleague, peter oppenheimer, will make opening remarks and be happy to answer questions or a thank you very much. >> good morning ranking members and members of the subcommittee. my name is peter oppenheimer and i'm apple's chief financial officer area i would like to discuss management of the global business and financial operations. in the united states, our operational structure is quite simple. this includes our retail stores, and channel partners. provide our support to apple care. we pay taxes to federal and state governments. outside the united states, we provide the same products and supports their customers have come to expect.

we now cell the iphone and ipod in 100 countries. apple must follow the laws and regulations in each area where we operate in java and requires apple to establish a physical presence, not only in the region, but also a in the country where we wish to sell her products and services. apple's presence in these countries often takes the form of the apple subsidiaries. includes products to sell through the operating subsidiaries, which include parts manufacturers. these subsidiaries, which were established in the early 1980s, now employ nearly 4000 people in ireland. he recently broke ground on our campus. we have had a cost sharing

agreement with our subsidiaries that it was her's yours purchase from apple was about five years old and wanted to set up computers overseas. at that time, the revenues were one 10th of 1% of what they are today. and the invention of the iphone is decades away. today, the agreement is largely unchanged, except for our expansion into more countries in recent updates to comply with new u.s. treasury regulations. it is audited by the irs and in full compliance with all laws and regulations. basically all this takes place in the u.s. in exchange for the funding, the irish subsidiaries have rights in europe and asia, created and

funded by the agreement. we have used this internationally for more than 30 years to distribute our product. more than half of our ongoing funds are supplied by ireland. our irish subsidiaries benefit greatly as we have in the u.s. when apple lost money in the 1990s, we lost money with our irish subsidiaries as well. i mention this money in the 1990s because it served as a reminder as to how close application running out of business. we were on the brink of bankruptcy and running out of cash. in just two years, we lost $2 billion. but until you firsthand i can tell you that a big part of the turnaround include streamlining and simplifying so that apple can simplify.

we are making everything as simple and efficient as possible as part of that effort, we have consolidated our european income into two subsidiaries. a holding company and apple operations international and an operating company, apple sales international. it eliminated the handling of foreign bank accounts and improves our ability to manage risks. while they are both incorporated in ireland, many are under the rules of irish law. irish law contemplates that companies may be incorporated in ireland without being taxed residents residence there. i should clarify one point here. for many years, we have had thousands of employees in ireland. until 2012 from the payroll for these employees was run through another apple subsidiary. the fact that they are not tax

residence in ireland is not remove the u.s. taxes at all. they have already been taxed by foreign government, according to the government. the investment income is taxed by the u.s. government at the corporate tax rate of 35%. apple could choose to manage after cash products without moving the cache with others. i would have absolutely no effect on the taxes that we pay in the u.s. however, illuminating this function would be inefficient. managing larger pools of cash rather than other places around the world, reduces complexity, better protect our assets, and helps us earn higher returns to the economies of scale. today, apple has been in the fortunate position of having more cash with operations which

we did when her company and her pursue strategic opportunities. part of it is apple's decision to fund shareholders by issuing $17 billion in debt. apple respect would suggest that any objective analysis will conclude that this decision was in the best interest of our shareholders. apple could use earnings returned capital, it would've been diminished by the very high u.s. orbit tax rate of 35%. by contrast, the cost of issuing debt was less than 2%. mr. cook, we would be happy to answer your questions. thank you. >> thank you very much. >> good morning. >> thank you.

thank you for the cooperation that is extended to the subcommittee. we very much appreciate that. mr. cook, you made reference and he quoted president kennedy on whether you agree with the following statement that president kennedy made in his april 1961, text message. deferral is serve as a shelter for taxes keep the unjustifiable use of tax havens, such as switzerland, recently more and more enterprises have organized abroad by american firms come and they have arranged their corporate structures aided by apple's subsidiary companies, regarding the transfer of patent licensing rights and the shifting of management needs and similar practices. it maximizes the cumulation of profits. you agree that? >> the president and his brother

have been long-time heroes of mine. so i'm sure that he said at the time it was true. today from our point of view, i do not consider deferral to be a sham or an abusive tactics of any kind. >> mr. phillip bullock, is apple inc. owned directly or or indirectly by asi? >> yes, we are owned directly by a lot, aop, and asi. >> are all three companies owned by apple at the weekly nazi yes, they are all legally owned by apple inc. >> where are they functioning for managing control? >> in our view it is feng shui managed and controlled as an irish legal concept in the united states.

>> integrin 2011, it says that they have not made a distinction on the aoi management control. why did you tell us that? >> the reason we responded in a manner is that under irish law, the requirement for evaluating or concluding on the tax residency in ireland looks to whether or not until management control takes place in ireland or not. it does not formally require that you make any determination -- >> because that the location of this is in the united states.

apple have concluded that. is that correct? >> i believe that in the previous meeting with your staff. they ask the same questions, and i believe that i have provided the same response. >> you agree that this central management control is in the united states? >> sir, i do not know the practical point of view. >> okay. >> okay, relative to asi, mr. bullock, it's asi functioning in the united states? >> applying the irish legal standard of control, i believe that it is centrally managed and controlled in the united states. >> does apple agree that it is feng shui managed and controlled

in the united states? >> under irish law. >> under our law do you believe that? >> i do not believe that central management and control is a legal term under u.s. tax laws. >> you believe it is feng shui managed and controlled in the united states? >> yet. >> mr. cook, do you agree? >> we have employees in ireland. some of the most strategic wants to take place in the united states. >> you agree that the balance is functionally managed and controlled in the united states? direct from a practical matter, i don't know the legal definition. >> would you agree that it is functionally managed and controlled in the united states? >> yes, senator. >> okay. thank you.

>> now, mr. bullock, aoi is incorporated in ireland. is that correct? >> yes, mr. chairman, it is incorporated in ireland. >> where is aoi a tax resident? >> well, it does not have a tax residency. that does not mean that it does not pay taxes. the interest than it earns is paid -- u.s. taxes are paid in full on interest by apple inc. two the interest you're talking about is on the tens of billions of dollars that it has in cash. spirit that is correct. cash from the operating subsidiaries underneath. >> okay, so those tens of billions of dollars in cash, they earn interest. that interest is paid by apple inc. is that correct? >> guesstimate u.s. tax paid by

apple inc. at the u.s. statutory rate of 35%. >> but there is no -- there is no tax paid on the money itself that has been sent to aoi by the distributors. is that correct? >> there is no tax. >> sent from aoi to the severest blow that? >> the income of the subsidiaries have been subject to tax the countries in which they operate. >> there has been no tax paid in ireland on those distributions and those profits? >> is that correct? >> there is no united states tax on the transfer of those balances. the income earned by aoi and oei has been subject to irish tax in

full in agreement with ireland. >> is a maximum of 2%? >> mr. chairman. i am not precisely sure what the mechanics of the competition. >> not mechanicsburg is that 2%? >> proximally come yet be back having filed a corporate income tax return the last five years? >> no, prior to that, he made filings in france for a branch operation there. enough already. >> they paid no corporate income tax the last five years, is that correct? >> again, they did not pay any corporate income tax. but apple has paid corporate tax. >> i didn't ask about apple. i asked you about aoi. that is where more of the process and profits go. is that correct? >> they received dividends from the operating subsidiaries underneath. >> what is the amount of cash that went to oei from from the

dividends? >> over what period of time? >> the last five years. >> in the last five years from the company has received dividends from operating subsidiaries approximating $30 billion. >> is that asi or oei? >> that is a holding company, one of its roles is to own a number of international subsidiaries or they have received about $70 billion in cash. and about 30 billion of that 70 went to aoi. is that right? >> i do not have the precise details. there were distributions from others as well. other subsidiaries. spirit does that sound about right? >> approximately. >> okay.

>> just to summarize, a we receive about $30 billion over the last five years, but we have not filed a corporate income tax return. is that correct? in a that is correct. that income is not subject to the u.s. tax. under both statute and by regulations. while it has not filed a tax return, apple has paid tax on the interest by aoi. >> i understand that. 30 billion it has been in banks or whatever it invested in, i'm talking about the $30 billion in dividends. it has not filed a corporate income tax return on that money. is that correct? that is correct, but also severest underneath of earn that money in their countries and pay taxes by law. >> whatever taxes were there? >> just.

>> okay. does aoi own economic rights to apple's intellectual property offshore other than in the america's? >> yes, it does in part. it is a combination, which is the subsidiary that handles some of the manufacturing that the company continues to do in ireland. >> do either one of those companies file income tax with united states? >> either of those companies file a tax return with the united states, although apple inc. will work -- >> we just went through the interest in old interest, and there is a small amount of what is known as foreign-based company sales income that is subject current u.s. taxes from asi's business activities. >> my time is up, senator.

senator mccain and i think you, i think the witnesses. mr. cook, i congratulate you on all of your successes and that of apple. as was said earlier, he managed to change the world, which is an incredible legacy for apple and all the men and women who serve with apple. also, i think you have to be pretty smart guy to do what you do in a pretty tough guy as well. you have that reputation, and i say that in a componentry fashion. i enjoyed our conversation. do you feel that you have been bullied or harassed by this committee or its members? >> i feel very good to be participating in this. i hope to help the process. i really like the comprehensive tax reform to be passed this

year in any way that apple can help do that, we are ready to help. >> okay, so was my understanding that he sought to testify before this committee for that purpose and other purposes. is that correct? >> i think it is important that we tell her story. i would like people to hear directly from here and. >> so you're not drag before this committee? >> i do not drag your. >> you don't drag very easily, i understand. [laughter] i thank you. this is an issue for congress. my first question to you is that we have always we legally taken advantage of a number of tax codes, both foreign and domestic, and that has been used the tax burden. i think we would agree that if you were paying 35% corporate tax rate, that domestic companies pay, my question is

can one draw the conclusion you and apple have an unfair advantage over domestic taste corporations, in other words, smaller companies in this country that don't have the same ability that you do to locate in ireland or other countries overseas? >> no, sir, it's not the way that i see it. i would like to describe that. apple pays 35% of this profit in taxes in the united states. i don't know where this stacks up, but i would guess that it is extremely high on the list. i know with the 6 billion, i believe we are the top here in the united states. we do have a low tax rate outside the united states. but this tax rate is for

products that we tell outside the united states. not within. when i look at this is there is no shifting going on. no shifting that icl. in addition, if you look at apple versus other companies, i would say that the applicable comparison would be the 30.5% effective rate, not the foreign tax rate. >> okay, let's be simpler. why do you exist? >> how is his income generated? hausa tax? why was aoi inc. in ireland? 4000 employees is impressive but not impressively with your overworked was. maybe you can clear that up for us. >> thank you for your question. it was created in 1980. it was created in 1980. at this time, as a matter of

fact, includes 1984. and apple was looking for a place to distribute its products in europe. >> i understand not. that's the operative today? >> the relationship between apple and the irish government is still there today. we built up a sizable population. >> with the tax rate your pain, i can't ensure that you have a very close relationship. >> but it's more than now. sir, it is that we have -- we have a significant go base of people that really understand deeply the european market that serve our customers well and provide a number of options for that. also, i think it is important to understand that it is nothing more than holding company. a holding company, as you know,

is the concept that many companies use. it is not an operating company. so the dividends that go into this operating are withholding companies and have partied and taxed appropriately in their local jurisdictions. >> that is a great advantage to apple. would you agree? >> is nothing more than a company that has been set up to provide an efficient way to manage apple's cash. from income that is already tax and investment income that comes out of this, it is in the united states at the full 35% rate. we do not reduce the u.s. taxes at all. >> can you state for the record where it is a tax resident. >> yes, my understanding is

there's not a tax listing for any of the three subsidiaries that you just listed. >> does that sound logical? >> as i look at it does aoi and oei, and si, they are paying taxes. i personally don't understand the difference between a tax resident. i know that they fill out this nk does. it is just a holding company, the interest only makes things up and all of that is taxed in the united states at 35% level of. >> when you look at the relief of 35% tax burden, now the highest in the world, i understand you the purpose of

aoi is to ease administrative burdens. there are certain tax burdens. isn't it obvious that you are not bearing the same burdens as you were bearing the united states? and give you some advantage over corporations and companies which are smaller and strictly located in the united states of america? i'm not saying that that's wrongdoing. but i think you would agree that gives a significant advantage. >> detriment of respect for you. i see this differently than you, i believe. what i see is that apple is earning these profits outside the united states by law and regulation. they are not taxable in the united states. we have set up a holding company to collect after-tax profits from our different subsidiaries and the interest profits off of

that are in the u.s. is required with the u.s. treasury regulation. >> can you understand adventure? >> i am glad that we are having the discussion. but honestly speaking, i don't see it as being unfair, i am not an unfair person so i would not preside over that. i don't see it in that way. >> i think you. i'm out of time. what i really want to ask is why the heck i have to keep updating applications all the time i don't think that. [laughter] >> sir, we are trying to make them better all the time. >> thank you. we have only five minutes left on the local area. >> we should recess for about 10 minutes. i thank you.

>> okay. [inaudible conversations] [inaudible conversations] >> i certainly understand what you all have in agent, his tax planning. if you don't tax plan, then you are incompetent as american business. i do hope that i can understand better why the structure you have used has been embraced so that will inform our decisions and how to make it simpler.

and how we can support international growth for all of our companies that are american companies. about $17 billion and issued bonds and paid dividends to shareholders fairly decently. it was and in the economic means because of your large cash reserves are clearly coming made a decision that it was going to be cheaper for you to service that debt. and then use the cash to pay dividends and you have the analysis that would help us understand how much cheaper it was for you to borrow that money? >> i can describe it at the broad level. the cost of capital today -- our average cost for the borrowing that we just did was less than

2%. we were faced with a decision to go that route were paid 35% to repatriate. so as we look at this analysis, it was in the best interest of our shareholders for us to secure the debt. >> okay. let's assume that we sympathize. i gave you a 2% rate, which was negotiated for your company. is that correct? >> we went to ireland in 1990. they were very much recruiting, i believe, technology companies at that time. apple was a hundred million dollar business that had an operation in europe. as a part of recruiting, it will give us a tax incentive agreement to enter. since then, we have built up a sizable operation or, nearly 4000 people. we are continuing to grow.

the skills of our people there are very fundamental for understanding the european markets and servicing our countries there for those and we have quite a very strong presence there. >> i guess that my question is, if ireland recruited you, back when you order a 100 million-dollar company and give you a very good deal, how do we, with tax policy, how do we do it in a way that there is not going to be -- i mean, correct me if i'm wrong. i believe that probably three fourths of this activity growth is going to be in emerging markets. would you disagree with that percentage? >> the new growth in terms of mobile activity are going to be there. as opposed to europe and north america. >> i think a significant amount

-- i'm not sure the exact number, but a significant amount of growth will be part of it either lets assume we simplify the tax code and we clear out all the underbrush in some sectors of our economy. we understand the moving of capital and international trade. keeping this country from undercutting this once again. >> the u.s. has such an enormous advantage. the barrier right now in terms of these things is that it is repatriated after 35% and at the 35% level. our proposal, it may be a bit different than my peers, my proposal is that we eliminate

all corporate tax expenditures. it's a very simple system. and it has a reasonable tax on bringing money back. if we do that, i think many companies would bring back capital to invest in the united states it would be great for the economy. >> will it cost you to move out of california? to go entirely back to ireland or two country is going to be, for example, china. if you get that deal with china, which i know you are working on. >> that is a big one and we've been working on for a while. what keeps you in terms of the relative cost analysis and benefit analysis. what keeps you from moving out of california? >> we are an american company or if we are proud to be an american company. we do the vast majority of this

in california. we are there because we love it there. this is where we can create and make things that people have not even imagined yet not raising its intangible? is not something that you can reduce? >> i'm saying that it's who we are. i have never thought -- it has never entered my mind -- losing our california headquarters to another country. it is beyond my imagination. i have a pretty wild imagination. but it is beyond. >> the corporate bonds you issued. do you think -- and i'm not being judgmental about you doing

that. i understand the business rationale behind it in terms of low cost of capital. you think you should be able to deduct the interest on this? or would that be one of the corporate expenditures that we could do away with? >> it could be one of the corporate expenditures to do away with. you know, i think the way the tax code is written currently, my understanding is that would be deductible and a very small percentage of the overall that we pay. >> okay. this is kind of complicated. but somewhere along the way, you are deciding where the proceeds go.. and if some of this occurs on

where the sale occurs. it includes what you get for your intellectual property. where is that decision being made, and what you base it on in terms of how much money comes back and the american companies that are paying taxes versus how much is attributable to the international company. >> that is a good question. today, everything that we sell in the united states is tax in the u.s. generally speaking when we saw something in a foreign country, is taxed in the local market. it is one of the countries that are being served from ireland, those units are generally sold by an irish subsidiary. that income, if you will, in his text to the degree that it needs

to be in the local tourist action. in the proceeds move to an irish subsidy in many cases. which is an act of holding company and then we pay taxes on those earnings in the united states. >> to any of the proceeds of the many thousands of dollars they've gotten over the years -- to any of the proceeds of that actually get parked and ireland or any of the international companies under the intellectual property? >> you know, i think the gentleman can answer this better than i can. >> thank you, tom. the answer is no. 100% of the profits on any sale to the customer in the united states, whether it is through the channels or through our online store is, all that is fully tax in the united states.

there is no outcome payment going offshore. >> okay, thank you. >> thank you. thank you very much, senator mccaskill. senator johnson. >> thank you, mr. chairman. let me pick up where senator mccaskill. this is complex. how do you allocate income, what kind of transfer ices include an appropriate price. i did notice that this is 39% of your total sales, the u.s. sales are about 39% and you have income of about 39% in the united states. about 65% of income. please explain that great it is to close. you're getting pretty close to proper allocations between sales and income. can you explain the disparity? >> yes, i will make some comments and may be able to add something.

generally the macintosh business -- it is a larger percentage that is at sale in the u.s. and internationally read as we launch the iphone, the iphone became a larger percentage of our international business and the dead is part of the u.s. business. because we have this nice base. the iphone generally speaking has higher margins and so it is logical that the international business generally would carry higher margins than we may be able to add something to this. >> you have a profitable mix? >> yes, it does. it explains the difference. >> i was talking about who is the beneficiary of your very good tax rates overseas. that would point out that this is true, that it we ever do tax reform, if we incentivize companies to bring the money back home, the way the current

tax law is written as you get a deduction for the taxes paid. is that correct? >> that is correct and it is actually a dollar for dollar credit. >> as a result, apple has a lot more money, but when you repatriated, it will be taxed more. is that correct? >> correct. >> so if we ever get our taxes in order -- >> in one form or another, yes, that would yield more and. >> but imagine you probably know this better than anyone. because you are a large corporation. my guess is that you have full-time irs stations in your operations. basically doing a full-time on it nonstop. is that correct? >> yes, that is correct. we have a number of jurisdictions around the world. >> they are looking at all of this and the corporate structure and the transfer prices and basically giving you the thing you are following?

>> they look at it in detail. >> okay. talking about the beneficiaries. your low tax rates and corporate profit, can you describe your shareholders in general? >> peter can add more to this. it generally apple is very widely owned because it is a part of the underlying indexes of the stock market and a number of mutual funds in addition to pension funds. >> our top 50 shareholders own about half of the company. these include public employee retirement systems and those where people are saving for their retirement. and we also have individual retail shareholders as well.

>> those are large firm that also had very diverse shareholder bases. >> that is right. absolutely. >> those folks benefit that apple is able to retains profit. >> yes that is correct. in addition to that, what other taxes in the u.s. has apple generated? look at you take credit for? >> after we paid more than $325 million in federal employment taxes, in addition to our employees. we have paid them over the last couple of years, nearly $100 million of state and local government, property taxes and i think that last year we collected and permitted and paid

approximately $1.5 billion of sales tax. >> $2 billion in total? >> just barely. just clarify that a little bit. a little over 1.3 billion. >> okay. we were talking about allocation of income, he faced the face the same dilemma between states. do you? >> in terms of state claims how much income. >> well, the income that the company generates the united states. approximately 40% the we alluded to earlier is the total profits, which is relatively commensurate with her u.s. customer base. that does get a portion around and giving up amongst the states under a slightly different system. >> what is the basis of that allocation. how does that differ from

allocating income between different countries? >> well, that varies by state. based on relatives sales to customers in that state in total sales domestically. some state used as test and able to sales and property and payroll. >> did you have to negotiate between state and what percentage of your income? did you not pay more than a did you pay more income tax? >> it is approximately 100%. >> okay. >> it is not double tax, which would be the case. but it does approximately include 100%. >> is a similar type of problem that you have, isn't it? >> if you had this in different ways. yes. >> can you tell me a little bit

about the taxes you paid and those sales taxes, property taxes, a comedy show all those? can you give me the relative amount? >> well, there is a combination. last year the company paid 900 million and international income taxes around the world. you're projecting number to be larger this year read that number is significantly larger than it was a few years ago. in addition to that, i don't have the statistics available. i would imagine similar to the united states there is employer contributions for payroll tax and employees outside the united states. there is a considerable amount of that, that gets collected and permitted around the world. >> of the total worldwide employment, how much is based in

the u.s., how much is based overseas enact. >> about 50,000. .. one of the issues i heard raised when you were being asked questions by senator mccaul skill the issue of the