Apple publishes full testimony to be given before the U.S. Senate Permanent Subcommittee

Apple today published the company’s full testimony to be given before the U.S. Senate Permanent Subcommittee on Investigations. Here is the introduction and “Apple’s Story,” verbatim:

TESTIMONY OF APPLE INC. BEFORE THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS US SENATE

MAY 21, 2013

I. INTRODUCTION
Apple Inc. (“Apple” or the “Company”) appreciates the opportunity to testify before the Permanent Subcommittee on Investigations (“Subcommittee”) in connection with its inquiry into the tax practices of multinational companies.

Apple, a California company, employs tens of thousands of Americans, creates revolutionary products that improve the lives of tens of millions of Americans, and pays billions of dollars annually to the US Treasury in corporate income and payroll taxes. Apple’s shareholders – from individuals and institutions to pension funds and public employee retirement systems – have benefitted from the Company’s success through the appreciation of its stock price and generous dividends. Apple safeguards the capital entrusted to it by its shareholders with prudent management that reflects the Company’s extensive international operations. Apple complies fully with both the laws and spirit of the laws. And Apple pays all its required taxes, both in this country and abroad.

Apple welcomes an objective examination of the US corporate tax system, which has not kept pace with the advent of the digital age and the rapidly changing global economy. The Company supports comprehensive tax reform as a necessary step to promote growth and enable American multinational companies to remain competitive with their foreign counterparts in both domestic and international markets.

The information Apple has provided to the Subcommittee demonstrates several key points about the Company’s operations that are critical to any objective evaluation of its tax practices:

• Apple has been a powerful engine of job creation in the US. Apple estimates it has created or supported approximately 600,000 jobs in the US, including nearly 50,000 jobs for Apple employees and approximately 550,000 jobs at other companies in fields such as engineering, manufacturing, logistics and software development. Approximately 290,000 of these American jobs are related to the new “App Economy” launched by Apple’s App Store. In less than five years, Apple has paid third-party app developers worldwide over $9 billion in connection with sales of their software to Apple customers.

• Apple pays an extraordinary amount in US taxes. Apple is likely the largest corporate income tax payer in the US, having paid nearly $6 billion in taxes to the US Treasury in FY2012. These payments account for $1 in every $40 in corporate income tax the US Treasury collected last year. The Company’s FY2012 total US federal cash effective tax rate was approximately 30.5%. (This calculation is a reflection of federal taxes Apple paid against US pretax earnings, not a calculation of Apple’s final tax liability for FY2012.) The Company expects to pay over $7 billion in taxes to the US Treasury in its current fiscal year. In accordance with US law, Apple pays US corporate income taxes on the profits earned from its sales in the US and on the investment income of its Controlled Foreign Corporations (“CFCs”), including the investment earnings of its Irish subsidiary, Apple Operations International (“AOI”).

• Apple does not use tax gimmicks. Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands. Apple has substantial foreign cash because it sells the majority of its products outside the US. International operations accounted for 61% of Apple’s revenue last year and two-thirds of its revenue last quarter. These foreign earnings are taxed in the jurisdiction where they are earned (“foreign, post-tax income”).

• Apple carefully manages its foreign cash holdings to support its overseas operations in the best interests of its shareholders. Apple uses its foreign cash for business operations, geographic expansion, acquisitions and capital investments, and to fund other expenses required by its overseas operations, such as the capital-intensive construction of retail stores in Europe and Asia and the purchase of customized tooling equipment. If the Company repatriated these funds, they would be reduced by a 35% US corporate tax rate. Apple serves its shareholders by keeping these funds overseas where they can be deployed efficiently to fund international operations at a lower cost. As Apple’s recent bond issuance demonstrates, the Company can return capital to shareholders using debt at a far lower cost than through repatriation of foreign cash.

• The dividends distributed among Apple’s international affiliates, including AOI, are not subject to US corporate income tax. AOI and other Apple subsidiaries in Ireland play an important role in the Company’s international business activities. Established more than thirty years ago, Apple’s base of operations in Ireland now employs nearly 4,000 people engaged in manufacturing, customer service, sales support, supply chain and risk management operations and finance support services. For cash management purposes, these subsidiaries distribute foreign, post-tax income as dividends within Apple’s corporate structure. Under US tax law, these foreign intercompany payments are not taxable.

• Apple’s cost sharing agreement with two of its subsidiaries supports high-paying, tax-revenue generating jobs in the US. Unlike companies that do a substantial share of their research and development in lower cost, foreign jurisdictions, Apple conducts virtually all its R&D in the US. Apple has an agreement with two of its Irish subsidiaries to share the costs and risks of this R&D. The agreement, first established in 1980, is authorized by US law and complies with all US tax regulations. Under the current agreement, the Irish subsidiaries have rights to distribute Apple products in territories outside the Americas in exchange for contributing to jointly-financed R&D efforts in the US. Thus, the agreement supports the funding of the Company’s high-paying R&D jobs in the US, promoting domestic job growth and generating significant tax revenue for federal and state governments.

• AOI performs important business functions that facilitate and enhance Apple’s success in international markets; it is not a shell company. AOI is a holding company that performs centralized cash and investment management of Apple’s foreign, post-tax income. AOI permits Apple to mitigate legal and financial risk by providing consolidated, efficient control of its global flow of funds. AOI was incorporated in Ireland when Apple began its longstanding business presence there, and AOI is properly treated as a CFC under US law. The existence of AOI does not reduce Apple’s US tax liability.

• Apple supports comprehensive reform of the US corporate tax system. The Company supports a dramatic simplification of the corporate tax system that is revenue neutral, eliminates all tax expenditures, lowers tax rates and implements a reasonable tax on foreign earnings that allows free movement of capital back to the US. Apple believes such comprehensive reform would stimulate economic growth. Apple supports this plan even though it would likely result in Apple paying more US corporate tax.

II APPLE’S STORY

Apple is an American success story. Founded by Steve Jobs and Steve Wozniak nearly four decades ago in a residential garage, Apple has become the world’s most valuable high tech company. Its success results from a simple priority: Apple strives to make the best products on Earth through a singular focus on its customers. Apple has introduced new products, new categories – even new markets – that have profoundly improved people’s lives around the world. True to its California roots, Apple remains headquartered in Cupertino, and it is now building a large new campus in that community to accommodate its substantial growth over the past decade.

Apple designs, manufactures and markets a range of personal computers, mobile communication and media devices, and portable digital music players. The Company also provides consumers a variety of related software and services, including access to third-party digital content and applications. Apple sells its products worldwide through retail stores, online stores, its direct sales force, third-party cellular network carriers, wholesalers, retailers and value- added resellers. The hallmarks for which Apple is best known – creativity, innovation and design – drive its development activities, almost all of which take place on Apple’s main campus in Cupertino.

Apple launched the personal computer revolution in 1976 with the Apple I, followed by the highly successful Apple II. In 1984, Apple reignited that revolution when it introduced its first category-defining product, the Macintosh. With innovations such as the graphical user interface and mouse, the Macintosh made computing accessible to consumers and set the standard for all personal computers that followed.

The mid-1990s proved to be difficult years for the Company. Apple struggled to manage declining sales and market share in an increasingly competitive personal computing market. In 1996 and 1997, Apple lost nearly $2 billion. Many observers predicted Apple would not survive.

Mr. Jobs, who had left Apple in 1985, returned in 1997 with the task of saving the Company. Under his direction, Apple was entirely restructured and focused on innovation. The results are legendary. In 1998, Apple introduced the iMac, a groundbreaking new computer for the consumer market. In 2001, the Company introduced the iPod, another category-defining product that marked Apple’s expansion beyond personal computing into the digital marketplace.

Two years later, Apple launched the iTunes on-line music store, changing forever the way consumers legally acquired digital content. The innovative design and customer-focused engineering evident in these products laid the foundation for the Company’s explosive growth over the next decade.

In 2007, Apple introduced the iPhone, which quickly set the standard for smartphones. In 2010, Apple introduced the iPad, which established a new market for tablet computers. The iPhone and the iPad illustrate Apple’s emphasis on delivering an unmatched user experience and superior technical performance. These products generated unprecedented commercial success and growth for the Company, and created extraordinary value for its shareholders.

In 2008, following the introduction of the iPhone, Apple launched the App Store, which has fundamentally transformed how customers acquire and use software. Today, Apple customers can choose from among 850,000 applications in the App Store. Customers currently download approximately 800 apps per second. Just days ago the 50 billionth app was downloaded – about seven downloaded apps for every person on Earth.

Apple’s growth has created hundreds of thousands of highly-skilled, high-paying jobs for Americans during one of the most difficult economic periods in US history. While the overall size of the domestic workforce has stagnated during the last ten years, Apple has increased its US workforce more than five-fold, from fewer than 10,000 in 2002 to approximately 50,000 today. The Company has also built and opened 250 retail stores in the US. Apple’s R&D budget, almost all of which is spent in the US, has also grown dramatically.

Apple is committed to increasing its foundation and operations in the US. The Company is building a new three million square-foot campus in Cupertino that will house 12,000 Apple employees. The Company has broken ground on a new one million square-foot campus in Austin, Texas. In 2010, Apple built one of the country’s largest data centers in North Carolina, and it is in the process of constructing two additional data centers in Oregon and Nevada. Reflecting Apple’s strong commitment to the environment, these new facilities incorporate green architecture and an emphasis on renewable energy. The North Carolina data center, for example, is powered entirely by renewable energy sources and contains a solar farm and fuel cells on-site, both of which are the largest non-utility owned installations of their kind. The Company will also begin manufacturing one of its Mac lines in the US this year, creating high quality American manufacturing jobs for a product previously assembled primarily overseas.

Apple’s investments over the past decade have resulted in the creation of entirely new products, product categories and industries. The Company estimates that it has created or supported approximately 600,000 jobs for American workers. These US jobs are found in both small and large businesses, and include people who create components for Apple products, deliver those products to Apple’s customers and develop apps for sale on the App Store. Apple estimates that approximately 290,000 jobs are related to the “App Economy” created by the App Store (Apple Inc., ‘Apple – Job Creation,’ available at http://www.apple.com/about/job-creation/).

Apple’s commercial success and effective management of cash reserves have yielded significant returns to the Company’s shareholders, including individual investors, widely-held mutual funds, US pension funds and public employee retirement systems. Based on the latest available public filings, at least twelve public and private pension funds in the US held Apple stock as their top equity investment, including funds for public employees in Michigan, Ohio and Kentucky. At least twenty-nine such funds identified Apple as a top five holding. All told, these entities own approximately $14.6 billion worth of Apple stock, which entitles them to annual dividend payouts totaling approximately $396 million. At approximately 3% of the S&P 500, Apple is one of the most-widely held equities in the mutual fund industry.

Read Apple’s full testimony (.pdf) – highly recommendedhere.

MacDailyNews Take: This witch hunt has been severely hampered due to a preemptive strike of overwhelming logic.

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20 Comments

  1. Beautifully written an comprehensive.

    Clearly shows Apple is more competent than the goofballs in the current government.

    Apple is doing exactly what is required to be done by a responsible company confronted with insane and counterproductive tax codes.

    1. “Apple claims to be the largest U.S. corporate taxpayer,” says MCCAIN, “but by sheer size and scale, it is also among America’s largest tax avoiders. A company that found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue. It is important to understand Apple’s byzantine tax structure so that we can effectively close the loopholes utilized by many U.S. multinational companies, particularly in this era of sequestration. I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America. The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.”

      Your poster boy is all up in it too.

      1. Apple is not “avoiding” any payment of taxes, merely avoiding payment earlier than they have to pay them. It is perfectly legal to “delay” such payments. Profits earned totally from operating in foreign countries are not subject to US corporate taxes until they are “repatriated” to the US. You can keep foreign profits free from taxation forever…if you don’t bring them back into the US. The stupid excessive “double taxation” of foreign earnings will just cause more companies to keep all possible manufacturing, jobs and profits outside of the US.

  2. Having over 20 years corporate tax experience I whole-heartedly support everything in Apple’s testimony. It should be repeated that Apple itself states that the changes to the US Tax Code they recommend will result in Apple paying more US income tax than they pay now. This is based on the explicit statement that Apple never intends to repatriate any of its foreign cash!

    If this is not responsible corporate policy I don’t know what is. The irresponsible parties are the very ones in the US Congress that are investigating Apple!

    1. Notice the difference between Steven Jobs’ straightforward approach towards finances and compare it to petty approach of the likes of Google with lots of shady tax evasion schemes.

      By the way, whole life of experience of Steven Jobs always made me doubting the claims that he would cheat with Wozniak’s on the money he has got in the 1970s for an occasional work (why would he? it was not in his character to be so petty about money) or that he was greedy with one of his friends Kottke, refusing to give him Apple stock (Jobs obviously thought that those stocks were not deserved by this Kottke guy; this had nothing to do with supposed greediness). Also remember that being in India Jobs gave to Kottke his last $50 when Kottke was in dire need.

      Anyway, I am amused by all those people who by default suppose that everything Jobs tells is a lie, and what other biased parties say about those stories is all of the sudden true. Speaking objectively, those questions are not that obvious as media and “common knowledge” suppose.

  3. This is bullshit. Apple will say anything to advance its own interest. This will not result in Apple paying more taxes as they say here. They will find every loophole and avenue to reduce their taxes based on the new tax policies they advance.

    1. BTW, I think you have Apple confused with some other companies that 1099 all their employees and outsource nearly everything possible. It would appear by Apple’s actions, they in fact are retrenching and reinvesting in America.

    2. Prove what you say with facts! GE as I understand pays no US corporate income tax and Google apparently plays footloose and fancy free in how they pay corporate taxes. I am willing to bet that neither one of them would come out with as comprehensive a statement on this matter as has Apple.

  4. Love their preemptive strike and the MDN take but unfortunately politics has very little to do with logic. This is just another excuse for congress to grandstand and stroke their egos in front of the cameras. This is probably just to jerk Apples chain since they aren’t paying the greasing the wheels of the lobby machine in Washington enough!

  5. Oh, by the way, Congress is attempting to spear Apple with the “bring back the money” to the USSA. How is that even possible when it was earned outside the USSA and invested outside the USSA? It cannot be “brought back” if it never left here.

    Congress has swallowed too much Applejack and is drunk with power to destroy. Tim Cook is going into the den of thieves.

  6. Tomorrow will be a watershed for the “Kremlin-ologists” turned “Cupertinologists” — There will be subtext that Tim and his advisers have prepared that will hint at Apple’s real intentions and threats. Most of the testimony can be read with clear awareness of what Apple has done for this country… that will go away should Apple find this country to be business-hostile and against the interests of their shareholders. All mentions of reinvestment in Texas, Oregon and Nevada, retirement funds at the state-level in Michigan and elsewhere… it all should be understood as choices Apple has made, but could be reevaluated on the macro scale of an international corporation at any time. “True to it’s California roots Apple remains…” and yet by very mention of that fact the senators are on notice that this attribute of Apple is not seen as essential to the future stockholder value.

    Those of us who are represented by the folks on the Permanent Committee on Investigations owe it to our country to tune in and watch the proceedings, if for no other reason than to be better informed at reelection time.

  7. I’m confused.
    Apple is following all the tax laws that congress wrote. Congress can write all the new tax laws they want and only have to be accountable to the voters. (and their campaign donating supporters)

    Is congress complaining to Apple that congress is not doing a good enough job?

  8. If I were Tim, I’d ask the panel to answer one simple question. “Since we’re all here today to discuss income taxes, could someone on the panel please direct me to the specific section and paragraph in Title 26 that defines the word, “income” as used in the tax code. When the panel is able to provide that answer, Apple will be able to answer any questions the panel may have. Thank you.”

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