Death and Taxes: Apple, Responsibility and Reputation

The perception in Washington is that Apple CEO Tim Cook handled himself pretty well in front of the Senate panel investigating the company's highly inventive and profitable tax avoidance strategy.

But the company's challenge is that the issue is more of a global marketing and reputation problem than a US political flap.

Cook trotted out the usual applause lines about Apple's  contributions to job creation and the many ways in which the US tax code makes American companies uncompetitive. All without providing a shred of hard evidence. It played well to some in the media who routinely parrot those points of view. What it did to how people feel about owning an Apple product may be another matter entirely.

The big issue is that the revelation about the tax avoidance strategy casts Apple - again - as the bad guy. Even given universal aversion to paying taxes and quiet approval for those who get away with it, the numbers reported about Apple are breath-taking. For a company that made its reputation by casting itself as the cool, creative outsider in ads featuring a young woman throwing a sledge hammer through the screen of a corporate overlord, the latter-day Apple has now cast itself firmly as one of those suits.

On top of the Foxconn employee abuse scandals and the high cost of Apple products relative to the competition, it has been a while since Apple generated any news even hinting that it shares its customers' interests. The dearth of praise-worthy new products contributes further to the notion that this is a company that has lost its edge. That it is reduced to maintaining its share by using dodgy schemes invented by slick lawyers and boring accountants rather than cool products invented by brilliant designers.

The risk is that Apple is losing that reputation for being the iconic revolutionary, smarter, more inventive and way hipper than the big Asian and American tech behemoths. Instead, the perception may be that it is just another corporate grifter, grabbing what it can before someone overtakes it. On top of that, with future growth dependent on global sales outside the US, Apple has served notice to the Chinese and others that there is a huge pot of cash out there. No one is going to be shy about demanding a piece of it in return for market access. Even the Irish, who have obligingly provided cover till now, will have to demand a bit more, if only to avoid appearing like they are humbly tugging their forelocks to Apple as they once did to the English.

Ultimately this will raise further questions in the minds of investors about whether than 'most valuable company on earth' moniker is the result of hard-won market success or whether it is based on tax and accounting trickery. Given its recent stock price disappointment, those are questions Apple would have preferred to avoid. 

Tim Cook may have talked his way through the day, but it is the years and decades Apple needs to worry about. JL

Tony Romm reports in Politico:

“Just like millions around the world, I carry an iPhone in my pocket. The company’s engineers and designers have a well-earned reputation for creativity. What may not be so well-known is that Apple also has a highly developed tax avoidance system — a system through which it has amassed more than $100 billion in offshore cash in a tax haven,”

Apple CEO Tim Cook on Tuesday vigorously defended his company on Capitol Hill against charges that the tech company stashes billions of dollars overseas to lower its U.S. tax bill.
In his first appearance before Congress, Cook told a Senate investigative committee that the company is a leading U.S. taxpayer that’s generated thousands of new jobs. And he countered that the U.S. Tax Code itself is faulty because it hamstrings “American corporations in relations to our foreign competitors.”
“We are proud to be an American company and equally proud of our contributions to the American economy,” Cook added.
Still, the Apple chief, flanked by fellow company executives, seemed unlikely to win over the panel’s most skeptical leaders: Democratic Chairman Carl Levin and ranking Republican John McCain. Even before Cook began his testimony, lawmakers released a report that found Apple had established overseas entities to help it bypass some taxes while exploiting U.S. loopholes that shielded about $44 billion from U.S. levies.

The committee leaders, however, stopped short of calling any of Apple’s conduct illegal. One committee member, Sen. Rand Paul (R-Ky.), even went as far as to defend the company Tuesday while urging the subcommittee to “apologize” for “bullying” executives.
“If anyone should be on trial here, it should be Congress,” Paul stressed in pointing out serious problems with the U.S. Tax Code.
Still, Apple has drawn Washington scrutiny because the company maintains more than $100 billion in cash overseas. That money, if ever returned to the United States, would be subject to a 35 percent U.S. corporate tax — a big bill that’s deterred the broader tech industry from repatriating its foreign earnings.

Apple isn’t the only company with a complex international tax scheme seemingly designed to lower its multibillion dollar tax dues. Two other tech leaders — Microsoft and Hewlett-Packard — were the subjects of the same committee’s 2012 tax probe. Levin suggested earlier this week that additional similar investigations are forthcoming, but he declined to specify who might be in the cross hairs.

With Apple, though, Levin said its “tax avoidance” strategies and “gimmicks” are especially unprecedented.
Apple’s long-established entities in Ireland handle the tech company’s sales and operations outside the Americas. But some of those entities, including one called Apple Operations International, aren’t legally tax residents of the European country, according to Senate investigators. In the case of AOI, it means the holding company hasn’t even filed an income tax return for the past five years, even as it reported income of roughly $30 billion over that period, lawmakers’ probe found.
Senate investigators further charged in their report that Apple had avoided paying taxes on $44 billion of income by transferring the economic rights to its intellectual property abroad and exploiting a series of U.S. tax loopholes. Top U.S. tax officials are slated to testify about Apple’s tactics later in Tuesday’s hearing.
For his part, Cook said in testimony that Apple already paid more than $6 billion to the federal treasury last year and expects to pay more this year.
Alongside Cook, Apple’s chief financial officer, Peter Oppenheimer, argued Apple follows international laws. And Oppenheimer added Apple’s international structure isn’t meant to reduce its taxes in the United States, as those earnings already are taxed in their local jurisdiction.
Oppenheimer, however, acknowledged later to Levin that Apple Operations International did not file an income tax return over the past five years. “That income is not subject to U.S. tax, both by statute and regulation,” the executive said.
Even before Apple executives testified, though, members of the subcommittee divided sharply over the nature of the probe itself.
“There is a direct relationship between this rapidly accelerating shift of corporate profits offshore, on the one hand, and on the other, a worrisome federal deficit fed in part by a decline in the contributions corporate taxes make to federal revenue,” said Levin, coupling Apple’s “tax avoidance” tactics with the country’s current budget debate.
Levin’s comments drew a stinging rebuke from tea-party darling Paul. At one point, the Kentucky senator derided the entire hearing as a “show trial.”
That didn’t sit well with the chairman. After Paul suggested the subcommittee “apologize” to Apple, Levin retorted that Paul is “free to apologize if you wish.”
“No company, no company, should be able to determine how much it’s going to pay in taxes,” Levin said.
McCain, for his part, later came to the chairman’s defense, describing Paul’s comments as offensive. “Apple’s corporate tax strategy reflects a flawed corporate tax system — and it’s a system that allows large multinational corporations to shift profits offshore to low-tax jurisdictions,” McCain added.