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Apple's Cook says company doesn't use "tax gimmicks"

(MoneyWatch) For Apple (AAPL) CEO Tim Cook, the Senate's bark was far worse than its bite.

Cook, testifying on Capitol Hill a day after a congressional panel released a scathing report accusing Apple of avoiding taxes, got a mostly cordial questioning from Senators, who focused on the fairness of corporate tax practices after conceding the company had done nothing illegal. 

The Senate Permanent Subcommittee on Investigations on Monday said the company has used a "complex web of offshore entities" to dodge billions of dollars in U.S. income taxes. The report outlined how the Cupertino, Calif., company has used a range of offshore structures, transactions and other arrangements to shield its earnings from taxes. These included establishing an offshore subsidiary, Apple Operations International, that filed no U.S. corporate income tax return from 2009 to 2012 despite reporting net profits of $30 billion.

Apple also has a cost-sharing agreement with its Irish subsidiaries under which they are assigned a disproportionate share of the profit from research and development that occurs in the U.S.. From 2009 to 2012, Apple allocated $4 billion in R&D costs to its U.S. unit, which had $38.7 billion in profits, while its Irish subsidiary had $4.9 billion in R&D costs and $74 billion in profits.

Also testifying at Tuesday's hearing were Apple CFO Peter Oppenheimer and Phillip Bullock, the company's head of tax operations. The executives did not deny the Senate panel's findings, but Cook defended Apple's tax practices and highlighted the technology giant's importance as a job-creator.

"We don't use tax gimmicks," he said. "Apple has real operations in real places, with Apple employees selling real products to real customers. We pay all the taxes we owe, every single dollar. We don't just comply with the law, we comply with the spirit of the law."

For their part, lawmakers took pains to affirm the legality of Apple's tax payments.

The most pointed questioning came from committee chair Carl Levin, D-Mich., who pointed out that Apple made a decision to shift its "crown jewels" in terms of economic value and rights to Ireland, despite the economic implications that has on American revenue.

"But those [patents] were not transferred there," he said. "The continuation of that system means most of your profits worldwide are sitting in Irish companies that don't pay taxes. You can defend it, but that's the result. There is a huge drain as a result -- 95 percent of the creativity is in California, but two-thirds of the profits is in Ireland."

Sen. John McCain, R-Ariz., the panel's ranking minority member, also pushed this point. "For years, Apple has opted to forgo fully contributing to the U.S. Treasury and to American society by shifting profits and circumventing U.S. taxes," he said.

After praising the company and acknowledging there was nothing illegal about what it had done, McCain shifted to whether the company's actions were fair to smaller U.S. companies that can't take advantage of foreign tax laws.

"Isn't it obvious that you aren't bearing the same tax burden that you are bearing in the U.S.? I'm not saying that's wrongdoing, but it gives Apple a significant advantage," he said.

Cook responded that he saw the issue differently.

Earlier in the hearing, Cook and Bullock seemed to skirt the truth when describing the company's Irish subsidiary, Apple Operations International. "AOI is nothing more than a company that has been set up to manage Apple's cash on income that has already been taxed," Cook said.

Bullock agreed, saying "The income of the subsidiaries have been subject to tax in the countries where they operate."

However a report from the advocacy group Citizens for Tax Justice points out that Apple has paid almost no income tax to any country on the company's $102 billion in offshore cash holdings. "That means that this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens," the group said.

Also questionable is Cook's claim that Apple doesn't rely on "tax gimmicks." While it is true that the phrase has no concrete legal meaning, Apple did use two Irish entities that it claimed were stateless for tax purposes and that executives admitted were functionally run from the U.S. According to the subcommittee report, this action helped the company avoid $10 billion in taxes.

Cook also said, "We don't move its intellectual property into offshore tax havens. ...We don't stash money on some Caribbean island."

It is worth noting that Apple is able to avoid paying Irish taxes by putting a small fraction of its ownership in a shell company called Baldwin Holdings Ltd., which is based in the British Virgin Islands.