Inquiry of tech firms’ tax tactics nears end

Congressional investigators are wrapping up their scrutiny of the accounting practices of Apple and other technology companies that allocate revenue and intellectual property offshore to lower the taxes they pay in the United States.

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 the inquiry who declined to be identified.

Those people said the subcommittee had subpoenaed or otherwise asked the companies to explain methods they have 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 would likely play a significant role in congressional tax-code negotiations.

Apple’s domestic tax bill has drawn interest among corporate tax experts and policymakers. 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 Thursday, said the company was “one of the top corporate income tax payers 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. Beyond Apple, the subcommittee is known to be looking

at Google, Hewlett-Packard, Microsoft and firms in such fields as biotechnology.

The subcommittee, which is overseen by U.S. Sen. Carl Levin, D-Mich., has been interested in the effect on budget deficits of offshore tax strategies. Representatives from Microsoft and HewlettPackard testified at a subcommittee hearing on the subject in September. Both companies were criticized sharply by Levin for using accounting rules to allocate revenue to other nations to avoid paying taxes in the U.S.

“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,” 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 reduce its domestic taxes. Last year, for instance, Apple saved the equivalent of $2.4 billion through various techniques, according to a study by a former Treasury Department economist, Martin Sullivan. At the September hearing, Levin said the ongoing investigation indicated that Apple had deferred taxes on more than $35.4 billion in offshore income from 2009 to 2011.

Tech companies are able to easily shift “intellectual property, and the profit that goes along with it, to tax havens,” said Sullivan. “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.”

Apple paid cash taxes last year of $3.3 billion around the world on reported profits of $34.2 billion, a tax rate of 9.8 percent. (The company does not disclose what portion of those payments was in the United States, or what portion is assigned to previous or future years.) By comparison, Wal-Mart last year paid worldwide cash taxes of $5.9 billion on its booked profits of $24.4 billion, a tax rate of 24 percent, which is about average for nontech companies.

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 income 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, accountants at those companies said. More recently, Apple has moved revenue to states such as 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 past 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.)