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Congress Miffed At Apple For Taking Advantage Of Perfectly Legal Tax Loophole

Apple CEO Tim Cook and members of Congress engaged in a feisty exchange about the company's practice of keeping most of its cash parked overseas. It's legal, but we don't like it.

Posted on May 21, 2013, at 2:47 p.m. ET

Apple CEO Tim Cook on Capitol Hill in Washington, May 21, 2013.
Jason Reed / Reuters

Apple CEO Tim Cook on Capitol Hill in Washington, May 21, 2013.

There's a simple way to explain Apple CEO Tim Cook's appearance on Capitol Hill today — Congress is miffed that, despite what it views as being there to help Apple grow as a public company, Apple is not returning the favor by paying the proper amount of taxes.

Nevermind that what Apple is doing, namely parking more than $100 billion in cash overseas so it is not subject to U.S. taxation, is technically legal. Or that corporations are basically encouraged to partake in the practice by systemic issues with the U.S. tax code.

Apple is one of the biggest companies in the world, recognizable to nearly everyone, and Cook is its public face, so why not drag him up to the Hill to testify?

Here's what Sen. Carl Levin, who led the hearing, said that basically sums up the situation:

"We can't continue a system where the company, a multi-national as phenomenally successful as yours, can make a decision, sitting in 2008 and 2009, as to where the profits are going to flow. An American company where the R&D is 95% in the US. You created it, you had some real benefits in doing that. You get R&D tax credits, all the benefits of living in this country, you've got the protection of patents. With all that, you're sitting there unilaterally deciding whether to continue a system where profits are shifted to a place where they are not available to the American tax man. Everyone agrees, we gotta change this system. I know it's your intention here, and I applaud you for your constructive view, I know."

In summary, what Levin is saying is tax dodging is both the fault of Congress and Apple.

As the U.S. tax code is currently configured, Apple doesn't have to pay taxes on international sales, so long as the cash is held overseas. The tax climate in holding that cash overseas is more favorable, so there's no incentive to bring it back. At the current corporate tax rate of 35 percent, it would actually cost Apple a fortune to bring its cash back, known as "repatriation," to U.S. shores.

For his part, Cook did not play the part of Congressional whipping boy.

"We pay all the taxes we owe, every single dollar," said Cook, who emphasized his words and held a stern look on his face. "We're proud that most of our design and innovation is in the United States. All of the profits from products we sell in the US are paid taxes in the U.S. We don't depend on tax gimmicks."

Cook said that Apple is emphatically an American company, pointing out that while overall U.S. job growth has stagnated, Apple's domestic workforce is growing, with 50,000 employees in all 50 states.

"In total, Apple is responsible for creating or supporting 600,000 new jobs," said Cook defiantly.

Cook said to incentivize companies like Apple to repatriate their cash and hold it in the U.S., it would require a single-digit tax rate. Apple would likely pay more taxes in this situation, but Cook said it would be to the overall benefit of most companies.

Cook did say the company is finding alternative ways to invest in the U.S., such as ramping up production and building large data centers. But, as they say, perception is often reality.

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