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Washington Memo: Torches and Pitchforks for I.R.S. but Cheers for Apple

May 22, 2013 by Leave a Comment

Armed with a blistering report that said Apple had avoided paying billions of dollars in taxes, senators this week had choice words for the company’s chief executive, Timothy D. Cook, when he appeared before the Senate’s Permanent Committee on Investigations on Tuesday.

They called him a “pretty smart guy” and praised the “incredible legacy” his company had left. They gushed over his products, calling Apple “a great company” that had managed to “change the world.”

True, Senator John McCain, Republican of Arizona, and Senator Carl Levin, Democrat of Michigan, vigorously attacked Mr. Cook over tax gimmicks. But the overall mood of the panel was summed up by Senator Claire McCaskill, a Democrat from Missouri, who declared, “I love Apple!”

It was considerably different for the officials of the Internal Revenue Service, whose presence was also “requested” by lawmakers to face accusations that the agency had improperly targeted conservative Tea Party groups for special scrutiny.

On Wednesday, Lois Lerner, who leads the I.R.S.’s division on tax-exempt organizations, prompted angry denunciations from lawmakers by proclaiming her innocence and then quickly invoking her Fifth Amendment right to refuse to answer questions. Representative Tim Walberg, Republican of Michigan, marveled at the “amount of ineptitude” at the I.R.S. and proposed that Ms. Lerner’s refusal to answer questions from the committee suggested “there’s some concern about criminality” regarding what happened at the tax agency.

Representative John Mica, Republican of Florida, accused Ms. Lerner’s former boss, Douglas Shulman, of having “closed down or gagged” I.R.S. employees from telling the truth.

In short, Wednesday’s I.R.S. hearing felt like an inquisition — unforgiving, angry, prosecutorial.

Mr. Cook, by contrast, took his hot seat in front of senators who seemed halfhearted in their desire to beat up on the rich guy who makes their iPhones, and whose products are far more popular than they are.

“With him, they were just not going to go up against an American success story,” said Neil Eggleston, a veteran Washington lawyer who has prepared many government officials to face a grilling at the hands of lawmakers.

But Mr. Eggleston said Ms. Lerner and the other I.R.S. officials never had a chance at changing the narrative of their hearing. Before such sessions, Mr. Eggleston said, he is honest with his clients: “You are going to get beat up. You are going to get yelled at. There’s no way to turn the tide in your favor.”

The hearings of Mr. Cook were in striking contrast to those 15 years ago of Bill Gates, the chairman of Microsoft, who was skewered by lawmakers and his rivals over using monopoly power to run over his business rivals.

Mr. Gates was disdainful of Washington and politicians when he arrived from Seattle for his first Capitol Hill appearance in 1998. That did not serve him well. Microsoft’s Windows — highly crash-prone at the time — along with irritants like “Clippy,” the obsequious talking paper clip who popped up on computer screens offering to help write letters, hardly endeared Mr. Gates to consumers.

Not so Mr. Cook and Apple. Even the often-cantankerous Mr. McCain, who as recently as 2008 still used an old-fashioned flip phone, concluded his questioning with a jocular tech support query. “What I really wanted to ask you is why the hell I have to keep updating the apps on my iPhone all the time,” Mr. McCain said, prompting guffaws from the dais and the audience.

Public relations experts who help witnesses survive Capitol Hill hearings say the tenor of the sessions is often set well before the witnesses take their seats. How much the witnesses subsequently are pummeled often depends on whether they are able to tap into any reservoirs of good will on their issues among the public.

As an example, when lawmakers created a spectacle in 2005 by demanding the testimony of the nation’s top baseball stars during an investigation into steroid use, the questioning got rough. But the players were still heroes to millions — certainly more so than most of the lawmakers. (After the hearings, congressional staff members crowded around the sluggers, asking for autographed baseballs.)

In contrast, lawmakers pilloried the top executives of the auto companies in 2008 after they admitted to flying on corporate jets to Washington to beg the government for as much as $25 billion in help. Their appeals, though, came in the middle of an economic crisis and were roundly denounced by an outraged public.

This week, Mr. Cook tapped into the public’s good will to defuse the congressional anger. The I.R.S. officials had no such luck.

“This just shows the trust deficit that the I.R.S. has with the American public,” said Kevin Madden, a veteran Republican strategist who advises corporate clients on communications strategies. “The only thing that the American public hates more than the Congress right now is the I.R.S.”

There is always the possibility that a witness can change his or her fortunes by saying just the right thing at a congressional hearing.

Mr. Cook was well prepared, observers of his testimony said. During the hearing, he appeared to know as much about tax policy as the lawmakers asking him questions. (Mr. Cook might also have been helped by the “reality distortion field” that journalists often joked surrounded his predecessor, Steve Jobs, during rollouts of the latest “magical” iPhone or iPad.)

But Mr. Madden and others said the I.R.S. officials could hardly have said anything to defuse the anger, especially among Republicans eager to keep the issue alive.

Perhaps that was part of Ms. Lerner’s calculation when she decided to make an opening statement — and then shut up.

“I know that some people will assume that I’ve done something wrong,” she said. “I have not. One of the basic functions of the Fifth Amendment is to protect innocent individuals, and that is the protection I’m invoking today.”

Kitty Bennett contributed reporting.

Article source: http://www.nytimes.com/2013/05/23/business/torches-and-pitchforks-for-irs-but-cheers-for-apple.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Web of Tax Shelters Saved Apple Billions, Inquiry Finds

May 20, 2013 by Leave a Comment

Some of these subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif., according to Congressional investigators. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless – exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.

In 2011, for example, one subsidiary paid Ireland just one-twentieth of 1 percent in taxes on $22 billion on pretax earnings from various operations; another did not file a corporate tax return anywhere and has paid almost nothing on $30 billion in profits since 2009.

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” said Senator Carl Levin, a Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations. “Apple sought the holy grail of tax avoidance. It has created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.”

John McCain, the Arizona Republican who is the panel’s ranking member, added: “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.”

Over all, Apple’s tax avoidance efforts shifted at least $74 billion from the reach of the Internal Revenue Service between 2009 and 2012, the investigators said. That cash remains offshore, but Apple could still have to pay taxes on it to American authorities if the company were to return the money to its coffers in the United States.

Investigators have not accused Apple of breaking any laws, and the company is hardly the only American multinational to face scrutiny for using complex corporate structures and tax havens to sidestep taxes. In recent months, revelations from European authorities about the tax avoidance strategies used by Google, Starbucks and Amazon have all stirred public anger and spurred several European governments, as well as the Organization for Economic Cooperation and Development, a Paris-based research organization for the world’s richest countries, to discuss measures to close the loopholes.

Still, the findings about Apple were remarkable both for the enormous amount of money involved – tens of billions of dollars – and the audaciousness of the company’s assertion that its subsidiaries are beyond the reach of any taxing authority because they are stateless.

“There is a technical term economists like to use for behavior like this,” said Edward Kleinbard, a law professor at the University of Southern California in Los Angeles and a former staff director at the Congressional Joint Committee on Taxation. “Unbelievable chutzpah.”

And while Apple’s strategy was unusual in its scope and effectiveness, it underscores how riddled with loopholes the American corporate tax code has become, critics say. At the same time, it shows how difficult it will be for Washington to overhaul the tax system and shut these loopholes down.

“It’s like playing Whac-A-Mole,” said one Congressional staff member. “We’re still puzzling our way through this.”

Although the Senate examination of Apple was started by the Senate subcommittee more than 18 months ago, investigators discovered one major subsidiary in Ireland only Sunday night. A Senate hearing on the issue is scheduled for Tuesday, and will include testimony by Apple’s chief executive, Timothy D. Cook.

Apple declined to comment, except to make available a text of the testimony Mr. Cook is expected to provide at the hearing.

Charles Duhigg provided additional reporting from New York.

Article source: http://www.nytimes.com/2013/05/21/business/apple-avoided-billions-in-taxes-congressional-panel-says.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

An Inquiry Into Tech Giants’ Tax Strategies Nears an End

January 3, 2013 by Leave a Comment

The Senate Permanent Subcommittee on Investigations inquiry now drawing to a close began more than a year ago and involves at least a half dozen technology companies, according to people with firsthand knowledge of it, who declined to be identified.

Those people said the subcommittee had subpoenaed or otherwise asked the companies to explain methods they used to avoid domestic taxes. They said Apple had become a focus of the inquiry and was cooperating with the subcommittee, which is expected to issue wide-ranging recommendations that are likely to play a significant role in Congressional tax code negotiations.

Apple’s domestic tax bill has drawn the interest of corporate tax experts and policy makers because although the majority of Apple’s executives, product designers, marketers, employees, research and development operations and retail stores are in the United States, in the past Apple’s accountants have found legal ways to allocate about 70 percent of the company’s profits overseas, where tax rates are often much lower, according to corporate filings.

Apple, in a statement on Thursday, said the company was “one of the top corporate income taxpayers in the country, if not the largest.” The statement said the company “conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules.”

It is unclear how broadly Senate investigators are looking into the technology industry, if any laws are thought to have been broken and how many companies are involved. The subcommittee is also known to be looking at Google, Hewlett-Packard, Microsoft and firms in such fields as biotechnology.

The subcommittee, which is overseen by Senator Carl Levin, a Michigan Democrat, has been interested in the impact on the budget deficit of offshore tax strategies. Representatives from Microsoft and Hewlett-Packard testified at a subcommittee hearing on the subject in September. Both companies were criticized sharply by Senator Levin for using intellectual property accounting rules to allocate revenue to other nations to avoid paying taxes in the United States.

“This subcommittee has demonstrated in hearings and comprehensive reports how various schemes have helped shift income to offshore tax havens and avoid U.S. taxes,” Senator Levin said at that hearing. “The resulting loss of revenue is one significant cause of the budget deficit, and adds to the tax burden that ordinary Americans bear.”Apple has long been a pioneer in developing innovative tax strategies that lessen its domestic taxes. At the September hearing, Senator Levin said the investigation indicated that Apple had deferred taxes on over $35.4 billion in offshore income between 2009 and 2011.

Tech companies are able to easily shift “intellectual property, and the profit that goes along with it, to tax havens,” said a former Treasury Department economist, Martin A. Sullivan, who has studied the company. “Apple went out of its way to try and ensure that its tax savings didn’t attract too much public attention, because tax avoidance of that magnitude — even though it’s legal and permissible — isn’t in keeping with the image of a socially progressive company.”

In its statement, Apple said it paid “an enormous amount of taxes” to local, state and federal governments. “In fiscal 2012 we paid $6 billion in federal corporate incomes taxes, which is 1 out of every 40 dollars in corporate income taxes collected by the U.S. government,” it said.In the 1980s, Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies. More recently, Apple has moved revenue to states like Nevada and overseas nations where the company pays less, or in some cases no, taxes.

Almost every major corporation tries to minimize its taxes. However, technology companies are particularly well positioned to take advantage of tax codes written for an industrial age and ill-suited to today’s digital economy.

Some profits at companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft emerge from royalties on intellectual property, like the patents on software. At other times, products are digital, such as downloaded songs or movies. It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers.

Although technology is now one of the nation’s largest and most highly valued industries, many tech companies are among the least taxed, according to government and corporate data. Over the last two years, the 71 technology companies in the Standard Poor’s 500-stock index — including Apple, Google, Yahoo and Dell — reported paying worldwide cash taxes at a rate that, on average, was a third less than other S. P. companies’, according to a New York Times analysis. (Cash taxes may include payments for multiple years.)

Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments.

This article has been revised to reflect the following correction:

Correction: January 3, 2013

An earlier version of this article included outdated information on Apple’s tax payments. The company paid $6 billion in federal corporate income taxes in fiscal year 2012, according to a company statement on Thursday; it did not pay $3.3 billion “last year.” (That was the amount of cash taxes the company paid in fiscal year 2011.)

 

Article source: http://www.nytimes.com/2013/01/04/business/an-inquiry-into-tech-giants-tax-strategies-nears-an-end.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: Regulator Troubled by MF Global Dealings

November 4, 2011 by Leave a Comment

The top regulator tasked with overseeing the bankrupt brokerage firm MF Global said Thursday that the search continued for more than $630 million in missing customer money, warning that the protection of client assets is essential to doing business on Wall Street.

Gary Gensler, chairman of the Commodity Futures Trading Commission, said his agency was investigating the firm, a powerhouse commodities brokerage run by a former New Jersey governor, Jon S. Corzine.

“The most troubling aspect about the MF Global situation is the shortfall of customer money at the firm. Segregation of customer funds is the core foundation of customer protection in the commodity futures and swaps markets,” he said in prepared testimony. “Segregation must be maintained at all times. Simply put, that’s every moment of every day, down to the nanosecond.”

Mr. Gensler added that taxpayers aren’t on the hook for MF Global’s bankruptcy.

Gary Gensler of the Commodity Futures Trading CommissionJoshua Roberts/Bloomberg NewsThe Commodity Futures Trading Commission, led by Gary Gensler, is said to have become concerned in late October.

“This was an example of a financial institution having the freedom to fail,” he said in response to questioning from Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations. “I don’t think there’s any taxpayer money behind this.”

A basic tenet of the brokerage business requires that money handed to the firm by one customer is not mixed with the firm’s own money. MF Global filed for bankruptcy on Monday after weeks of anxiety weighed on the firms stock and liquidity. Investors were spooked by the revelation of an outsize bet Mr. Corzine had placed on European sovereign debt, a risky trade given the uncertainty clouding the Continent.

The exposure prompted regulators to force MF Global to set aside more cash as a cushion in the event of losses, and helped persuade Moody’s rating agency to downgrade the firm. That set in motion a week of panic, where it drew down its credit line and lenders demanded extra cash to protect themselves. MF Global had hoped to orchestrate an 11th-hour deal to sell a piece of itself, but those hopes were dashed when the money came up missing. It is unclear where the money went.

Mr. Gensler first spotted a potential shortfall late last week, calling MF Global’s lawyer to alert the firm. But it was not until around 2 a.m. Monday that the firm fully recognized the magnitude of the missing money. The disclosure sent bidders fleeing and the firm had no choice but to file for bankruptcy.

Article source: http://feeds.nytimes.com/click.phdo?i=df226e720e3079b481e05bf48cefc365

Filed Under: Business News Tagged With: , ,