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2013-05-23 09:25:07
May 21st 2013, 11:30 by M.G. | SAN FRANCISCO
COMPANIES such as Apple and Google are renowned for their ground-breaking technological innovations. They have also put a great deal of effort into reducing the amount of tax they pay on the mountains of cash those innovations produce. Their tactics are now attracting the attention of governments, who have been putting tech firms tax strategies under a microscope. Last week, Google came under fire from British politicians, one of whom publicly accused the internet giant of using unethical methods to avoid paying its fair share of tax. The company says it has done nothing wrong.
This week it is Apple s turn to feel the heat, but on the other side of the Atlantic. On May 20th, a day before Tim Cook, the company s boss, was scheduled to appear in front of the Senate s Permanent Subcommittee on Investigations, the committee s investigators unveiled a report that claimed Apple had used a complex web of offshore entities to pay little or no tax on tens of billions of dollars it had earned outside America.
According to the report, between 2009 and 2012 Apple avoided paying tax in America on at least $74 billion of profits by setting up subsidiaries in Ireland that had no purpose other than to ensure these profits were shielded from tax. The investigators did not find Apple had broken any laws, but they questioned its use of multiple subsidiaries in Ireland to report profits when those subsidiaries had no offices or other physical presence in the country. Carl Levin, the subcommittee s chairman, said Apple had sought the Holy Grail of tax avoidance by creating offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere .
One Irish subsidiary that the investigators singled out is Apple Operations International (AOI), which had not filed a tax return in Ireland, America or any other country for the past five years. Although it was incorporated in Ireland, AOI kept its bank accounts and other financial matters in America. Given the differing ways in which both countries assess whether a firm is liable for tax, this allowed Apple to avoid paying tax on AOI s income of $30 billion between 2009 and 2012.
Apple was clearly anticipating a hostile reception on Capitol Hill. Ahead of Mr Cook s appearance, the company released a copy of the testimony he plans to deliver to the subcommittee. Among other things, this notes that Apple paid nearly $6 billion in taxes in America in its 2012 fiscal year and claims that this probably makes the firm the country s biggest corporate taxpayer. It also says that its subsidiaries in Ireland, where it employs almost 4,000 people, play an important role in its international business activities. And it strongly objects to the implication that AOI is nothing more than a shell company. Also responding to the report Ireland s deputy prime minister, Eamon Gilmore, on May 21st vigorously rejected the charge that his country encouraged companies to set up operations there to avoid tax, and instead blamed the tax systems in other jurisdictions.
Whatever the outcome of the Senate's committee hearing, the issue of corporate taxation is likely to remain a controversial one. Sir Roger Carr, the head of the Confederation of British Industry, has warned David Cameron, the British prime minster, to stop moralising about companies tax arrangements and to keep criticisms grounded in fact . For its part Apple, which holds more than $100 billion of cash abroad, is likely to get further scrutiny. In his testimony, Mr Cook will call for an overhaul of the tax regime in America to encourage companies to repatriate more money. Eric Schmidt, Google s executive chairman, has urged policymakers to consider reforming international tax law, too. The OECD is due to deliver its thoughts on how to change the present system to the G20 in July. Its conclusions will be required reading in Silicon Valley.