WASHINGTON - Recently, the Senate Permanent Subcommittee on Investigations, which I chair, held the latest in a series of hearings to examine how U.S.-based multinational corporations use loopholes in the tax code to avoid paying U.S. taxes. An earlier hearing examined tax avoidance strategies at Microsoft and Hewlett-Packard; our recent hearing looked at Apple.
Our purpose with these hearings is to shine a light on practices that have allowed U.S.-based multinational corporations to amass an estimated $1.9 trillion in profits in offshore tax havens, shielded from U.S. taxes.
Corporate income tax revenue has accounted for a smaller and smaller share of federal receipts, and today is down to about 9 percent of federal revenue. The average U.S. corporation pays an effective tax rate of 15 percent, less than half the statutory rate of 35 percent. A recent study found that 30 of the largest U.S. multinationals, with more than $160 billion in profits, paid nothing in federal income taxes over a recent three year period.
Sen. Carl Levin
These offshore tax practices deepen the federal deficit and increase the tax burden on American families. Our hearing helped our Senate colleagues, and the American people, understand the depth of our offshore tax loophole problem and the damage it does to our fiscal and economic health.
Apple's products are justifiably well known and used throughout the world. 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.
The secret to Apple's business success isn't in the aluminum and steel and glass of my iPhone and other Apple products. Its profits depend on the ideas that bring those elements together in such an elegant package. That intangible genius is intellectual property that is nurtured and developed here in the United States. The key to offshore tax avoidance is transferring the profit-generating potential of that valuable intellectual property offshore so that the profits are directed not to the United States, but to an offshore tax haven.
Some of Apple's techniques are staples of international tax avoidance. But others are unique. Apple has sought the Holy Grail of tax avoidance, offshore corporations that it argues are not, for tax purposes, resident in any nation.
Apple Inc. has created three offshore corporations, entities that receive tens of billions of dollars in income, but which have no tax residence - not in Ireland, where they are incorporated, and not in the United States, where the Apple executives who run them are located. Apple has arranged matters so it can claim that these ghost companies, for tax purposes, exist nowhere. One has paid no corporate income tax to any nation for the last five years; another pays tax to Ireland equivalent to a fraction of one percent of its total income.
Apple's claim that its Irish subsidiaries are not tax resident in any nation is a key element in its strategy to avoid taxes on its offshore income. But how did that income end up offshore to begin with? That brings us to a second, more common arrangement for shifting income away from the United States to a low tax jurisdiction.
Many U.S. companies, including Apple, shift intellectual property rights - that is, the rights to market products based on their innovative ideas - to offshore affiliates. That shift directs the income associated with that intellectual property - taxable income that would otherwise flow to the United States where the intellectual property was developed - to the affiliates' home jurisdiction, which is typically a tax haven.
Apple set up such an arrangement with its Irish subsidiaries through what's known as a cost-sharing agreement. The cost sharing agreement enables Apple to shift profits generated by its intellectual property in most of the world to Apple subsidiaries in Ireland, where Apple has an arrangement that has allowed it since 2003 to pay a 2 percent tax rate or less.
The offshore tax avoidance tactics spotlighted by the Subcommittee do real harm. They disadvantage domestic U.S. companies that can't reduce their tax bills using offshore tax gimmicks. They offload Apple's tax burden onto other taxpayers - in particular, onto working families and small businesses. The lost tax revenue feeds a budget deficit that has reached troubling proportions, and has helped lead the ill-advised sequestration now threatening our economic recovery.
Because of those cuts, children across the country won't get early education from Head Start. Needy seniors will go without meals. Fighter jets sit idle on tarmacs because our military lacks the funding to keep pilots trained.
Closing these kinds of unjustified loopholes could provide hundreds of billions of dollars to reduce the deficit and avert damaging budget cuts to our defense, our schools, our roads, the safety of our food supply and other important priorities.
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Carl Levin is the senior U.S. senator from Michigan and chairman of the Permanent Subcommittee on Investigations.