Text size

Apple (AAPL) CEO Tim Cook's just offered his testimony on Capitol Hill, before the U.S. Senate Permanent Subcommittee on Investigations, regarding tax policy and overseas earnings, followed by an initial round of questions from the Senators.

Apple shares are down $1.11 at $441.82 following the first round of questions put to Cook.

You can follow the testimony live on the Subcommitee Web page.

Following an hour and a half of discussion between Senators and tax policy experts from academia, Cook was sworn in and began his testimony stating the Apple is "emphatically proud to be an American company," and proud of its contribution to the U.S. economy. He said Apple's growth, being "a bit bigger" than when the company was founded by the late Steve Jobs, could be summed up in one word, "innovation."

Cook pointed out the company has employees in all 50 U.S. states, and that the company sources parts for its iPhone and iPad in Texas, and gets the glass for its mobile devices from Kentucky.

He also mentioned the company is building new data centers in Oregon and Nevada, and a new campus in Texas.

Cook said that last year's $6 billion-plus tax payment by the company made it the largest taxpayer in America.

"Apple has real operations in real places with Apple employees selling real products to real customers," said Cook, and the company doesn't "Stash money on some foreign island."

Cook was followed by CFO Peter Oppenheimer, who began with a bit of history, pointing out the company "was nearly bankrupt" in 1997, and had to undergo efforts to simplify its business. The company then established two foreign subsidiaries, Apple Operations International (AOI), and Apple Sales International (ASI), both of which, Oppenheimer insisted, "do not reduce the taxes we pay in the U.S. one bit."

Cook and Oppenheimer were joined by Phillip Bullock, head of its tax operations.

Senator Carl Levin leads off the question by bringing up President Jack Kennedy's statements about firms arranging corporate structures created effective tax havens, and asked Cook if he agreed with that.

Cook, saying Jack and Bobby Kennedy were heroes of his, said he wouldn't disagree, but that deferrals are not a way of avoiding taxes.

Levin asks Bullock to explain the ownership status and tax residency of AOI and ASI. Is the location of AOI's central management control in the U.S.? he asks. Bullock says Yes, as does Cook. But Bullock points out that "central management control" is not actually a term in the U.S. tax code.

The same question is put to them about ASI, and both agree that "on balance," ASI and AOI are "functionally managed and controlled in the U.S.," as Levin puts it, even though they are incorporated in Ireland. Bullock answers that the subsidiaries "do not have a tax residency," but points out that they do pay taxes.

Levin presses Bullock on whether there is any money on the "tens of billions of dollars" in "distributions" to AOI and ASI. Levin presses Bullock whether the payments to Ireland are a "maximum of 2%." Bullock says Yes.

"AOI has received $30 billion in distributions and has not filed a corporate income tax return on that money, is that correct?" asks Levin. "That is correct, says Bullock, "But all of the subsidiaries underneath have earned that money in their countries and paid taxes," Bullock responds.

Senator John McCain then starts off by congratulating Cook & Co. on "all your successes," and Apple's "incredible legacy," and notes Cook's reputation for being "a pretty smart guy, and a pretty tough guy," and asking if Cook feels he's been "bullied" by the committee.

"I feel really good" to be participating, says Cook. Cook presses, did Cook seek to testify. "You were not dragged here?" "I wasn't dragged here," says Cook. "You don't get dragged easily, I hear," says McCain, to laughter from Cook.

McCain asks if Apple has an unfair advantage over smaller companies in the U.S. who don't have the opportunity to locate overseas.

"It's not the way I see it," says Cook. "Apple pays 30.5% of its taxes in the U.S. I would guess it's extremely high on the list. I know with the $6 billion, we are the top payer in the U.S. We do have a low tax rate outside the U.S., but this low tax rate is for products we sell outside the U.S., not within. There is no shifting going on. I would say the applicable comparison would be the 30.5% effective rate, not our foreign tax rate."

McCain presses Cook on "Why does AOI exist?"

Cook explains Apple in the '90s was looking for a way to market its products in Ireland. "It's important to understand AOI is nothing more than a holding company. It's not an operating company. So the dividends that go into this holding company have already been taxed in their operating jurisdictions."

"To the advantage of Apple…" McCain insists.

"AOI has been set up as an effective way to manage Apple's cash," Cook replies. "It only makes investment income, and all of that investment income is taxed in the U.S. at the 30.5% rate."

McCain presses Cook on whether Apple simply has an unfair advantage. Cook responds that he has "tremendous respect for you," but that "I'm not an unfair person. We are not an unfair company. That's not how we think of ourselves."

McCain's time is over, but he ends with a quip: "What I really wanted to ask is why the hell I have to keep updating the apps on my iPhone, and why don't you fix that."

Cook, laughing with evident relief, responds, "We're trying to make them better all the time."

Part two of the session continues in the next post.