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OFFSHORE PROFIT SHIFTING AND THE 

U.S TAX CODE—PART 2 (APPLE INC.) 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

MAY 21, 2013 

Available via the World Wide Web: http://www.fdsys.gov 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

THOMAS R. CARPER, Delaware Chairman 

CARL LEVIN, Michigan 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

TAMMY BALDWIN, Wisconsin 

HEIDI HEITKAMP, North Dakota 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

MICHAEL B. ENZI, Wyoming 

KELLY AYOTTE, New Hampshire 

RICARD J. KESSLER, Staff Director 

KEITH B. ASHDOWN, Minority Staff Director 

TRINA D. SHIFFMAN, Chief Clerk 

LAURA W. KILBRIDE, Hearing Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan Chairman 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

TAMMY BALDWIN, Wisconsin 

HEIDI HEITKAMP, North Dakota 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

KELLY AYOTTE, New Hampshire 

ELISE J. BEAN, Staff Director and Chief Counsel 

ROBERT L. ROACH, Counsel and Chief Investigator 

DAVID H. KATZ, Senior Counsel 

DANIEL J. GOSHORN, Counsel 

HENRY J. KERNER, Minority Staff Director and Chief Counsel 

STAPHANIE HALL, Counsel to the Minority 

BRAD M. PATOUT, Senior Advisor to the Minority 

SCOTT D. WITTMAN, Research Assistant to the Minority 

MARY D. ROBERTSON, Chief Clerk 
(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator McCain ................................................................................................ 8 

Senator Paul ..................................................................................................... 10 

Senator Carper ................................................................................................. 26 

Senator McCaskill ............................................................................................ 34 

Senator Portman .............................................................................................. 53 

WITNESSES 

TUESDAY, MAY 21, 2013 

J. Richard Harvey, Professor, Villanova University School of Law, Villanova, 

Pennsylvania; and ................................................................................................ 13 

Stephen E. Shay, Professor, Harvard Law Cambridge, Massachusetts .............. 17 

Timothy D. Cook, Chief Executive Officer, Apple Inc., Cupertino, California .... 35 

Peter Oppenheimer, Senior Vice President and Chief Financial Officer, Apple, 

Inc., Cupertino, California; accompanied by Phillip A. Bullock, Head of 

Tax Operations, Apple Inc., Cupertino, California ............................................ 38 

Mark J. Mazur, Assistant Secretary for Tax Policy, U.S. Department of the 

Treasury, Washington, D.C. ................................................................................ 65 

Samuel M. Maruca, Director, Transfer Pricing Operations, Large Business 

& International (LB&I) Division, Internal Revenue Service, Washington, 

DC .......................................................................................................................... 68

ALPHABETICAL LIST OF WITNESSES

Bullock, Phillip A.: 

Prepared statement .......................................................................................... 121 

Cook, Timothy D.: 

Testimony .......................................................................................................... 35 

Prepared statement .......................................................................................... 121 

Harvey, J. Richard: 

Testimony .......................................................................................................... 13 

Prepared statement .......................................................................................... 81 

Maruca, Samuel M.: 

Testimony .......................................................................................................... 68 

Prepared statement .......................................................................................... 146 

Mazur, Mark J.: 

Testimony .......................................................................................................... 65 

Prepared statement .......................................................................................... 139 

Oppenheimer, Peter: 

Testimony .......................................................................................................... 38 

Prepared statement .......................................................................................... 121 

Shay, Stephen E.: 

Testimony .......................................................................................................... 17 

Prepared statement .......................................................................................... 107 
(IV) 

EXHIBIT LIST 

1. a. Memorandum from Permanent Subcommittee on Investigations 152 

b. Apple’s Offshore Organization Structure, chart prepared by the Permanent Subcommittee on Investigations, Source: Materials received from 

Apple Inc. ..................................................................................................... 192 

c. Effect of Check the Box, chart prepared by the Permanent Subcommittee on Investigations, Source: Materials received from Apple 

Inc. ................................................................................................................ 193 

d. Apple’s Current Operating Structure. Source: Apple Inc. ........................ 194 

e. Cost Sharing Payments and Earnings of Apple Sales International 

(Ireland) and Cost Sharing Payments and Earnings of Apple Inc. 

(United States), chart prepared by the Permanent Subcommittee on 

Investigations, Source: Materials received from Apple Inc. .................... 195 

f. Apple’s Offshore Distribution Structure, chart prepared by the Permanent Subcommittee on Investigations ........................................................ 196 

g. Global Distribution of Apple’s Earnings, chart prepared by the Permanent Subcommittee on Investigations, Source: Materials received from 

Apple ............................................................................................................ 197 

h. Apple Operations International’s Profits as a Share of Worldwide Profits, chart prepared by the Permanent Subcommittee on Investigations, 

Source: Materials received from Apple ..................................................... 198 

i. Global Taxes Paid by Apples Sales International, 2009–2011, chart 

prepared by the Permanent Subcommittee on Investigations, Source: 

Materials received from Apple .................................................................... 199 

j. Taxes Avoided by Apple Using Check The Box, chart prepared by 

the Permanent Subcommittee on Investigations, Source: Materials received from Apple ......................................................................................... 200 

k. Apples’ Non-Tax Resident Entities, chart prepared by the Permanent 

Subcommittee on Investigations, Source: Materials received from 

Apple Inc. ..................................................................................................... 201 

l. Apple: Avoiding Billions in U.S. Taxes, chart prepared by the Permanent Subcommittee on Investigations, Source: Materials received from 

Apple Inc. ...................................................................................................... 202 

2. Excerpt (cover and signature page) from Amended & Restated Cost Sharing Agreement Between Apple Inc., Apple Operations Europe & Apple 

Sales International, May 2008. [APL–PSI–000020, 034] 203 

3. Excerpt (page 1 and signature page) from Amended & Restated Agreement 

To Share Costs and Risks of Intangibles Development (Grandfathered 

Cost Sharing Arrangement), June 2009. [APL–PSI–000035, 053] ............... 205 

4. Correspondence between Ernst & Young and Cork, Ireland Office of the 

Revenue Commissioners, dated September 2004, regarding Apple Computer Inc Ltd, The company is a non-resident holding company and 

is non-trading. In the circumstances there is nothing to return from the 

corporation tax standpoint. [APL–PSI–000336–337] ..................................... 207 

5. Apple Operations International—2009–2012 Shareholder Meetings [APL– 

PSI–000340] ...................................................................................................... 209 

6. Excerpt from June 22, 2012 information supplied by Apple to the Permanent Subcommittee on Investigations, . . . table identifies the Board Members and Corporate Officers of Apple’s Irish entities . . .; Since the early 

1990s, the Government of Ireland has calculated Apple’s taxable income 

in such a way as to produce an effective rate in the low single digits. 

. . . The rate has varied from year to year, but since 2003 has been 2% 

or less. [PSI-Apple–02–0002–005] ................................................................... 210 
Page

V 

7. Excerpt from July 6, 2012 information supplied by Apple to the Permanent Subcommittee on Investigations, . . . its principal offshore trading 

activities take place in Ireland and through Apple Distribution International and in Singapore through Apple South Asia Pte, Ltd.; What 

percentage amount of your company’s world-wide revenues were: booked 

or recorded in the U.S.?; Cash Reserves and Amounts Paid to Top 5 

non-U.S. Subsidiaries. [APL–PSI–000081, 098–108, 120] ............................ 214 

8. Excerpt from September 10, 2012 and January 11, 2013 information 

supplied by Apple to the Permanent Subcommittee on Investigations, 

Apple Inc., Apples Sales International (‘‘ASI’’), and Apple Operations Europe (‘‘AOE’’) participate in a long-standing R&D cost sharing arrangement. . . . [APL–PSI–000129, 233] .................................................................... 226 

9. Excerpt from September 12, 2012 information supplied by Apple to the 

Permanent Subcommittee on Investigations, Apple Operations International—2009–2011 Minutes. [APL–PSI–000323] ....................................... 228 

10. Excerpt from January 11, 2013 and 18, 2013 information supplied by 

Apple to the Permanent Subcommittee on Investigations, Since its inception, Apple determined that AOI was not a tax resident of Ireland.; Apple 

does not believe that AOI qualifies as a tax resident of any other country 

under the applicable local laws.; For the past three fiscal years, AOI 

has not filed any corporate income taxes with any national government. 

[APL–PSI–000236, 239–240] ........................................................................... 229 

11. Excerpt from March 11, 2013 information supplied by Apple to the Permanent Subcommittee on Investigations, To the best of our knowledge, 

AOI does not meet any of the Irish central management and control 

factors.; The conclusion that AOI is not managed and controlled in Ireland does not require a determination where AOI is managed and controlled. [APL–PSI–000241–248] ....................................................................... 232 

12. Excerpt from March 11, 2013 information supplied by Apple to the Permanent Subcommittee on Investigations, MINUTES OF A MEETING 

OF THE BOARD OF DIRECTORS OF APPLE OPERATIONS EUROPE; 

IT WAS NOTED that the Company was to receive on 18th November 

2010 a dividend in the amount of US $1,750,000,000 from Apple Sales 

International; . . . an interim dividend . . . be paid in the total amount 

of US $1,750,000,000 on the 18th of November 2010, to Apple Operations 

International. . . . [APL–PSI–000288–289] ...................................................... 240 

13. Excerpt from April 26, 2013 information supplied by Apple to the Permanent Subcommittee on Investigations, Apple Operations International— 

Board of Directors Meetings During Tim Cook Directorship. [APL–PSI– 

000341–343] ...................................................................................................... 242 

14. Excerpt from May 3, 2013 information supplied by Apple to the Permanent Subcommittee on Investigations, Apple Operations International— 

FY 08 and FY 12 Board of Directors Meeting Information. [APL–PSI– 

000349] .............................................................................................................. 245 

15. Excerpt from May 12, 2013 information supplied by Apple to the Permanent Subcommittee on Investigations, AOE and ASI are participants 

in a Cost Sharing Arrangement with Apple Inc whereby AOE, ASI and 

Apple Inc have agreed to pool their resources for purposes of undertaking 

intellectual property co-development activities. . . . [APL–PSI–000351–353] 246 

16. Excerpt from May 16, 2013 information supplied by Apple to the Permanent Subcommittee on Investigations, IRC section 954(d) generally does 

not apply to income received by ASI or any of Apple’s other Irish entities 

during the period 2008 to present because sales made to third parties 

are generally made through disregarded entities.[APL–PSI–000381–383, 

386] .................................................................................................................... 249 

17. Excerpt from May 17, 2013 information supplied by Apple to the Permanent Subcommittee on Investigations, The individual who signed the 

relevant agreements for Apple Sales International was a U.S.-based Apple 

Inc. employee who signed the agreement in his capacity as Director of 

Apple Sales International. [APL–PSI–000392, 396] ...................................... 253 

18. Apple Inc. 10–K Select Figures, 2009-2012, with excerpts from 10–K filings ..................................................................................................................... 255 

19. Foreign Indefinitely Reinvested Earnings: Balances Held By The Russell 

3000, A 5-Year Snapshot, May 2013, prepared by Audit Analytics .............. 284 

20. Responses to supplemental questions for the record from Apple Inc ........... 290 

(1) 

OFFSHORE PROFIT SHIFTING AND THE 

U.S. TAX CODE—PART 2 (APPLE INC.) 

TUESDAY, MAY 21, 2013 

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:33 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin, Carper, McCaskill, McCain, Johnson, 

Portman, Paul, and Ayotte. 

Staff present: Elise J. Bean, Staff Director and Chief Counsel; 

Mary D. Robertson, Chief Clerk; Robert L. Roach, Counsel and 

Chief Investigator; David H. Katz, Senior Counsel; Daniel J. 

Goshorn, Counsel; Allison F. Murphy, Counsel; Adam Henderson, 

Professional Staff Member; Angela Messenger, Detailee (GAO); 

Christopher Reed, Congressional Fellow; Michael Avi-Yonah, Intern; Aaron Fanwick, Law Clerk; Alex Zerden, Law Clerk; Ty 

Gellash (Senator Levin); Elizabeth Herman (Senator McCaskill); 

Henry J. Kerner, Staff Director/Chief Counsel to the Minority; 

Stephanie Hall, Counsel to the Minority; Brad M. Patout, Senior 

Advisor to the Minority; Scott Wittman, Research Assistant to the 

Minority; Megan Schneider, Intern to the Minority; John Lawrence 

(Senator Ayotte); Ritika Rodrigues, Rachael Weaver, (Senator 

Johnson); and Brandon Brooker (Senator Paul). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. Before we begin, I 

know that we are all heartbroken because of the tragedy in Oklahoma, and we want those communities and all the families and individuals who are affected to know that they are not alone. They 

are not going to face this alone, and American mourns with you 

and will help you rebuild. 

The Subcommittee meets today to hold a second hearing to examine how U.S.-based multinational corporations use loopholes in the 

Tax Code to move profits to offshore tax havens and to avoid paying U.S. taxes. In September, we examined two case studies: a 

study of how Microsoft Corporation shifted profits on U.S. sales to 

U.S. customers from the United States to an offshore tax haven; 

and also a study on how Hewlett-Packard devised a ‘‘staggered foreign loan program’’ to effectively repatriate offshore profits to the 
2 

United States without paying the U.S. taxes that are supposed to 

follow repatriation. 

Today the Subcommittee will focus on how Apple effectively 

shifts billions of dollars in profits offshore, profits that under one 

section of the Tax Code should nonetheless be subject to U.S. taxes, 

but through a complex process avoids those taxes. 

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. One study has estimated that offshore earnings 

stockpiled by S&P 500 companies using these techniques have increased 400 percent in the last decade. 

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. 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. That decline is in part due to the use and abuse of loopholes that so riddle our Tax Code that the average U.S. corporation 

pays an effective tax rate of 15 percent, less than the statutory rate 

of 35 percent. A recent study found that 30 of our largest U.S. multinationals, with more than $160 billion in profits, paid nothing in 

Federal income taxes over a recent 3-year period. These corporations use multiple offshore loopholes that give them significant control over how much U.S. income they will report and how much 

tax, if any, they will pay. 

Despite the immense impact of these offshore tax practices that 

deepen the Federal deficit and increase the tax burden on American families, few Americans see the problem because of its complexity. The first step toward change is to acknowledge that there 

is a problem. Today, we again spotlight corporate offshore tax 

avoidance so that our colleagues, and the American people, understand the depth of our offshore tax loophole problem and the damage that it does to our fiscal and economic health. 

Apple is an American success story. Its products are justifiably 

well known and used throughout the world. 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. 

Sending valuable intellectual property rights offshore together 

with the profits that follow those rights is at the heart of Apple’s 

tax avoidance strategy. More and more, intellectual property is the 

dominant source of value in the global economy. It is also highly 

mobile. Unlike more tangible, physical assets, its value can be 

transferred around the globe, often with just a few keystrokes. The 

secret to Apple’s business success is not 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 
3 

1See Exhibit No. 1b which appears in the Appendix on page 192. 

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. 

Apple’s tax avoidance strategy comes in two parts: first, it executes a shift of the profit-generating power of its intellectual property to an offshore tax haven, thus directing the resulting income 

to the tax haven—and, of course, to its wholly owned corporations 

in that tax haven. Next, it uses a number of tactics to ensure that, 

once this income is offshore, it remains shielded from U.S. taxes, 

despite provisions of the U.S. tax law which are designed to capture that income as taxable. 

Some of Apple’s techniques are staples of international tax avoidance, such as its use of what is known as a ‘‘cost-sharing agreement’’ between the parent company and its offshore subsidiaries, 

and its use of so-called check-the-box regulations. We will discuss 

those in a moment. But others are unique. Apple has sought the 

Holy Grail of tax avoidance, offshore corporations that it argues are 

not, for tax purposes, resident anywhere in any nation. And here 

is how it works. 

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 that 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 5 years; another 

pays tax to Ireland equivalent to a tiny fraction of 1 percent of its 

total income. 

The first of these companies is Apple Operations International 

(AOI), and this chart,1 which we will put up over here, shows Apple’s offshore corporate network. AOI is at the top of the structure. 

Apple is its sole owner. AOI in turn directly or indirectly owns 

most of Apple’s other offshore entities. 

Under Irish law, only companies that are managed and controlled in Ireland are considered Irish residents for tax purposes. 

Apple says that although AOI is incorporated in Ireland, the company is not managed and controlled in Ireland and, therefore, is 

not a tax resident in Ireland. U.S. tax law, on the other hand, generally turns on where a company is incorporated, not on where it 

is managed and controlled. Apple says that since AOI is not incorporated in the United States, it is also not present in the United 

States for tax purposes. Magically, it is neither here nor there. 

The second corporate ghost is Apple Sales International (ASI). 

ASI, as we will explore in a bit, holds the economic rights to Apple’s valuable intellectual property in Europe, the Middle East, Africa, India, and Asia. From 2009 to 2012, its sales income amounted to $74 billion. Apple has performed the same alchemy with ASI 

as with AOI. It is incorporated in Ireland, operated from the 

United States, but, Apple says, is a tax resident in neither country. 

Unlike AOI, ASI has paid a small amount of tax, to Ireland. In 

2011, for example, it paid $10 million in taxes on $22 billion in in-
4 

come. Now, that is a tax rate of five-hundreds of 1 percent. It appears that this tiny tax payment may be related to activity unrelated to ASI’s main purpose, which is to serve as a receptacle for 

profits generated by Apple’s intellectual property in much of the 

world. 

Apple has told the Subcommittee that a third subsidiary, Apple 

Operations Europe (AOE), which sits between ASI and AOI in Apple’s corporate structure, also has no tax home, again using the 

same claims about Irish and U.S. standards on tax residency. 

Now, Apple is exploiting an absurdity, one which we have not 

seen other companies use. The absurdity need not continue. Although the United States generally looks to where an entity is incorporated to determine its tax residency, it is possible to penetrate 

an entity’s corporate structure for tax purposes and to collect U.S. 

taxes on its income, if the entity is controlled by its U.S. parent to 

such a degree that the shell entity is nothing more than an ‘‘instrumentality’’ of its parent, a sham that should be treated as the parent itself rather than as a separate legal entity. AOI, AOE, and 

ASI all sure seem to fit that description. 

Take AOI. AOI has no owner but Apple. AOI has no physical 

presence at any address. In 30 years of existence, AOI has never 

had any employees. AOI’s general ledger, its major accounting 

record, is maintained at Apple’s U.S. shared service center in Austin, Texas. AOI’s finances are managed by Braeburn Capital, an 

Apple Inc. subsidiary in Nevada. Its assets are held in a bank account in New York. 

AOI’s board minutes show that its board of directors consists of 

two Apple Inc. employees who live in California and one Irish employee of Apple Distribution International (ADI), an Irish company 

that AOI itself owns. Over the last 6 years, from May 2006 through 

the end of 2012, AOI held 33 board meetings, 32 of which took 

place in Cupertino, California. AOI’s lone Irish resident director 

participated in just seven of those meetings, six by telephone, and 

in none of the 18 board meetings between September 2006 and August 2012. 

ASI’s circumstances are similar. Prior to 2012, ASI, like AOI, 

had no employees and carried out its operations through the action 

of a U.S.-based board of directors, most of whom were Apple Inc. 

employees in California. Of ASI’s 33 board meetings from May 

2006 to March 2012, all 33 took place in California. 

In short, these companies’ decisionmakers, board meetings, assets, asset managers, and key accounting records are all in the 

United States. Their activities are entirely controlled by Apple Inc. 

in the United States. Apple’s tax director acknowledged to the Subcommittee staff that it was his opinion that AOI is functionally 

managed and controlled in the United States. The circumstances 

with ASI and AOE appear to be similar. 

Now, our legal system has a preference to respect the corporate 

form. But the facts here present this issue: Are these offshore corporations so totally controlled by Apple Inc. that their identity as 

separate companies is a sham and a mere instrumentality of the 

parent, and if so, whether Apple’s claim that AOI and ASI owe no 

U.S. taxes is a sham as well? 
5 

AOI sits at the apex of Apple’s offshore tax avoidance strategy. 

Apple’s claim that AOI and these other 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? And that brings us to a second, more common 

arrangement for shifting income away from the United States to a 

low-tax jurisdiction through what is called ‘‘transfer pricing.’’ 

Many U.S. companies, including Apple, use transfer pricing to 

shift intellectual property rights to offshore affiliates and then direct 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. Now, there are multiple ways 

to transfer intellectual property rights offshore, but Apple’s primary method is through a so-called cost-sharing agreement. 

Generally in a cost-sharing agreement, a U.S. parent and one or 

more of its affiliates are assigned a designated percentage of funds 

and resources to be applied to the development of new products— 

products that in the case of Apple are developed here in the United 

States. Apple retains legal title to and all marketing rights to the 

developed property in North and South America, and its offshore 

affiliates get marketing rights for the rest of the world. And that 

is a key part of the so-called cost-sharing agreement. It is more 

than sharing the costs, but the offshore affiliates also gets the marketing rights and the profits for the rest of the world. 

Apple set up its cost-sharing agreement with its Irish subsidiaries. Now, I use the term ‘‘cost sharing’’ with some skepticism 

since it is obviously not an arm’s-length transaction, although it is 

called an agreement. All the money supposedly changing hands belongs to Apple, and all the signatories were Apple employees. The 

agreement on its face allocates the costs to be shared among the 

Apple companies; but since all of those costs ultimately come out 

of the same pocket, in reality the agreement is about shifting profits. The cost-sharing agreement enables Apple to shift profits generated by its intellectual property away from the United States 

where the intellectual property was developed and instead concentrate the lion’s share of profits from most of the world to Apple 

subsidiaries in Ireland. Again, the intellectual property that generates Apple’s profits was created in the United States, but most 

of the profits are assigned to Ireland. 

Why Ireland? Another highly successful but, until now, hidden 

tax strategy is that Apple has quietly negotiated with the Irish 

Government an income tax rate of less than 2 percent, well under 

the Irish statutory rate of 12 percent as well as the tax rates of 

other European countries and the United States, well below those 

statutory rates. And as we have seen, in practice Apple is able to 

pay a rate far below even that low figure. In 2012 alone, due to the 

cost-sharing agreement essentially shifting profits from all Apple 

sales outside of the Americas to Ireland, ASI received $36 billion 

in income in a nation where it pays almost no income tax. 

Additional facts make it even more clear how the cost-sharing 

agreement functions as a conduit to shift Apple profits offshore to 

avoid U.S. taxes. 
6 

1See Exhibit No. 1e, which appears in the Appendix on page 195. 

First, Apple’s transfer of intellectual property rights through the 

cost-sharing agreement is not needed for Apple to conduct its commercial operations. Apple Inc. operates in numerous countries 

around the world without transferring intellectual property rights 

to each region or country. When interviewed, Apple officials could 

not explain why ASI needed to acquire Apple intellectual property 

economic rights in order to conduct business abroad. The interests 

of all the parties to the agreement are identical, and what is more, 

Apple Inc., which has renewed the agreement several times, most 

recently in 2009, can modify the agreement at any time, further 

evidence that this is not in any sense an arm’s-length transaction. 

Second, 95 percent of Apple’s R&D, the engine behind the success of Apple products, is conducted in the United States. Yet figures provided by Apple show that, over a 4-year period from 2009 

to 2012, ASI paid approximately $5 billion to Apple Inc. as its 

share of the R&D costs. Over that same period, ASI received profits 

of $74 billion.1 The difference between ASI’s costs and the profits, 

almost $70 billion, is how much taxable income, in the absence of 

Apple Inc.’s cost-sharing agreement with its own subsidiaries and 

its use of other tax loopholes, would otherwise have flowed to the 

United States. In comparison, over the same 4 years, Apple Inc. 

paid $4 billion under the cost-sharing agreement and declared profits of $38 billion from sales in the Americas. Its subsidiary, in other 

words, ASI, its Irish subsidiary, received almost twice the profits 

from property developed by Apple Inc. in the United States. 

Common sense says that Apple would never have offered such a 

lucrative arrangement in an arm’s-length deal with an unrelated 

party. It is hard to imagine Apple offering such a lucrative deal to 

an outside party at any price. The fact that the Irish subsidiaries 

pay a share of the R&D costs is irrelevant to the main goal, which 

is concentrating profits offshore. Even if the Irish subsidiaries paid 

100 percent of the R&D costs, this arrangement would still result 

in massive profit concentration in a tax haven and, therefore, massive tax avoidance. 

The cost-sharing agreement is where profits generated by U.S. 

activity begin their offshore journey. Other loopholes keep these 

profits shielded from U.S. taxes. Apple exploits tax loopholes to 

protect its offshore income from being taxed under a part of the 

Tax Code known as Subpart F, which was designed to combat profit shifting by U.S. multinationals and to collect taxes on some of 

their income even when held offshore. 

Subpart F was a Kennedy-era attempt to combat rampant offshore tax avoidance and evasion. It made certain types of offshore 

income subject to U.S. income tax, even when that income was not 

brought back to the United States, including, for example, funds 

transferred between offshore affiliates in the form of dividends, royalties, or interest. 

But in the 1990s, the Treasury Department unwittingly opened 

a massive loophole in Subpart F. It approved a regulation known 

as ‘‘check the box,’’ which allows companies to declare to the Internal Revenue Service (IRS) what type of entity they are for tax purposes, simply by checking a box on a form. Under check the box, 
7 

multinationals began to declare offshore subsidiaries as ‘‘disregarded’’ for tax purposes—making it appear as if complex chains 

of offshore entities were one big corporation. That made the funds 

being transferred among those offshore entities nontaxable under 

Subpart F. Circumvention of Subpart F became even easier in 2006 

when Congress passed what is known as the ‘‘look-through rule,’’ 

which similarly shields offshore income from taxation under Subpart F. 

Apple is one among many U.S. multinationals exploiting these 

tax loopholes. Its strategies are complex and are outlined more 

fully in the memo that we have issued. But the net effect is huge. 

Apple argues that it is one of the biggest corporate taxpayers in 

America, that in 2012 alone it paid $6 billion in taxes. What Apple 

does not say is that, also in 2012, it shifted $36 billion in worldwide sales income away from the United States and paid no U.S. 

tax on any of it. In fact, the data provided by Apple indicates that, 

through its cost-sharing agreement and check the box, in 2012 

alone, Apple avoided the payment of $9 billion in U.S. taxes. That 

works out to avoiding $25 million a day, more than $1 million an 

hour, in taxes. 

Now, Apple executives want the public to focus on the U.S. taxes 

the company has paid, but the real issue is the billions in taxes 

that it has not paid, thanks to offshore tax strategies whose purpose is tax avoidance, pure and simple. 

Today we will ask Apple executives, as well as tax experts and 

Treasury and IRS officials, about these tax avoidance strategies. 

And as we listen to their testimony, we should keep in mind the 

context in which we meet today. The offshore tax avoidance tactics 

spotlighted by the Subcommittee do real harm. They disadvantage 

domestic U.S. companies that are not in a position to 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. It has helped lead to round after 

round of budget slashing and the ill-advised sequestration that now 

threatens our economic recovery. 

Because of those cuts, children across the country are not going 

to get early education from Head Start. Needy seniors are going to 

go without meals. Fighter jets sit idle on tarmacs because our military lacks the funding to keep pilots trained. Apple and the other 

companies exploiting tax loopholes depend on the safety, security, 

and stability provided by the U.S. Government and by this Nation. 

Their economic existence depends on the U.S. Government’s energetic protection of their intellectual property—property which they 

develop here and keep under the protection of the U.S. legal system, while shifting the income that it generates overseas. 

Nearly 30 years ago, Ronald Reagan faced a tax system similarly 

open to exploitation and loopholes. When President Reagan’s Treasury Secretary told him that dozens of America’s most profitable 

companies paid no income tax, President Reagan was stunned. And 

armed with that information, he went before the American people 

to decry ‘‘individuals and corporations who are not paying their fair 

share or, for that matter, any share.’’ And he said, ‘‘These abuses 

cannot be tolerated.’’ And he did not tolerate them. 
8 

The question that each of us should ask today is: Shouldn’t we 

close unjustified tax loopholes and dedicate the revenue to educating our children, protecting our Nation, building its future, and 

reducing its deficit? 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, to our schools, our 

roads, the safety of our food supply, and other important priorities. 

And we should close these loopholes. They are unjustified. We 

should dedicate the revenue that generates to these other important priorities, whether or not we reform the overall Tax Code. 

Senator McCain and his staff have made an extraordinary contribution to this bipartisan effort, and I thank them for their great 

work and for your partnership, Senator McCain, on this Subcommittee. Thank you. Senator McCain. 

OPENING STATEMENT OF SENATOR McCAIN 

Senator MCCAIN. Thank you very much, Mr. Chairman. I want 

to thank our witnesses who are here today, our two expert witnesses, Professor Harvey and Professor Shay. 

I would also like to express my appreciation to both the government witnesses and Mr. Cook and his two executives who are here 

to defend their position, and we will obviously listen very carefully 

to their testimony. And I think it is important that all of us make 

it very clear the admiration that we hold for Apple. The incredible 

changes that Apple has caused in our lives and the spread of information and the capabilities to share information and knowledge 

throughout the world have been phenomenal, both by Mr. Cook and 

his predecessor, Mr. Jobs. 

However, Apple’s corporate tax strategy reflects a flawed corporate tax system, and it is a system that allows large multinational corporations to shift profits offshore to low-tax jurisdictions. For years, Apple has opted to forgo fully contributing to the 

U.S. Treasury and to American society by shifting profits and circumventing U.S. taxes. In the last 4 years alone, Apple has avoided 

paying taxes on $44 billion in income. 

With over $145 billion in cash on hand, Apple ranks as one of 

the wealthiest multinational corporations in the world. Given its 

annual intake, Apple executives enjoy reminding the public that 

the company is likely the largest corporate taxpayer in the United 

States. However, these same executives fail to mention another less 

attractive fact: Apple is also one of the biggest tax avoiders in 

America. 

Today Apple has over $100 billion, more than two-thirds of its 

total profits, stashed away in an offshore account. That is over 

$100 billion that are not currently subject to U.S. corporate income 

taxes and, therefore, cannot be used to ease the deficit or help invigorate the same American economy that fostered the creation of 

this large corporation in the first place. As the shadow of sequestration encroaches on hard-working American families, it is unacceptable that corporations like Apple are able to exploit tax loopholes to avoid paying billions in taxes. 

Apple’s corporate tax strategy is fueled by the company’s fixation 

on reducing U.S. tax payments. Apple’s scheme enables the com-
9 

pany to shift billions of dollars in global profits into overseas subsidiaries without having to pay U.S. taxes. 

Although Apple is by all accounts an American company, its 

holding company in Ireland currently retains the bulk of its profits. 

The Subcommittee’s investigation has uncovered a disturbing 

truth. Apple’s three primary Irish entities hold 60 percent of the 

company’s profits, but claim to be tax residents nowhere in the 

world. It is completely outrageous that Apple has not only dodged 

full payment of U.S. taxes, but it has managed to evade paying 

taxes around the world through its convoluted and pernicious strategies. 

Specifically, from 2009 to 2012, Apple Operations International 

received roughly $30 billion in dividends from other Apple subsidiaries around the world. That made up 30 percent of Apple’s total 

worldwide net profits over the last few years. However, Apple Operations International did not pay corporate income taxes to any 

national government. Furthermore, Apple Operations International, a company with tens of billions of dollars in cash, has 

never had any employees and appears to be completely directed by 

Apple in California. 

Perhaps sensing that it might need to maintain some semblance 

of legitimacy, Apple Sales International, another subsidiary with 

no tax residence and no employees through 2011, began employing 

250 people in 2012. However, with $22 billion of income in 2011, 

Apple Sales International, only paid one-twentieth of 1 percent in 

Irish taxes. As Apple funnels billions of dollars through its numerous Irish entities, even those entities that do pay taxes enjoy a negotiated tax rate of less than 2 percent. Apple contends that none 

of its subsidiaries in Ireland reduce its U.S. tax liability by one 

cent. This statement is demonstrably false. 

For one thing, the very method by which Apple divides the world 

serves to deprive the United States of substantial revenue. By centralizing worldwide profits outside of the Americas in Ireland, 

Apple is able to shelter its profits from the U.S. tax authorities. 

Furthermore, Apple has taken its most valuable asset, its intellectual property, and divided it between its legal and economic rights. 

The company left 100 percent of its legal rights in the United 

States, but transferred a portion of these economic rights to its 

Irish entities, thereby shifting billions of dollars in profit to Ireland. Despite the fact that 95 percent of Apple’s research and development takes place right here in the United States of America, 

the majority of its profits are elsewhere. Apple’s Irish subsidiary 

has profited in an amount far in excess of its research and development contributions. 

By engaging in these elusive corporate strategies aimed at deferring and reducing tax payments, Apple’s tax department has given 

a new meaning to the company’s old slogan, ‘‘Think different.’’ In 

my view, loopholes like these, which multinationals like Apple aggressively employ, are harmful in that they provide large corporations huge competitive advantages over smaller domestic companies. These domestic companies pay a higher tax rate because they 

cannot use overseas operations to lower their effective corporate 

tax rate. It is problematic when small and emerging American com-
10 

panies feel the full weight of corporate income taxes while larger 

corporations maneuver around full tax payment. 

Given the massive budget cuts under sequestration that have impacted our Nation’s most vital interests, U.S. corporations cannot 

continue to avoid paying their appropriate share in taxes. Our military cannot afford it, our economy cannot endure it, and the American people will not tolerate it. 

America’s tax system is broken and uncompetitive, and I have 

long supported efforts to modernize it. However, I will not allow 

that position to be used as an excuse to turn a blind eye to the 

highly questionable tax strategies used by Apple. The general 

American public should not have to make up the balance as corporations avoid paying billions in U.S. taxes. The egregious loopholes that exist in the Tax Code must be closed so that the nearly 

$1 trillion in untaxed overseas profits can come back to the United 

States. It is past time for American corporations like Apple to reorganize their tax strategies to pay what they should and invest 

again in the American economy. 

When Tim Cook, an outstanding executive, CEO of Apple, met 

with the Subcommittee, he said that though he has no immediate 

intentions of repatriating Apple’s foreign cash, the company does 

have plans to grow manufacturing in the United States and create 

more American jobs. This is a step in the right direction, and we 

must have a tax system that encourages this objective. 

Mr. Chairman, finally, as Ronald Reagan used to say, facts are 

stubborn things, and I would just like to repeat again the following 

facts: 95 percent of the research and development of Apple takes 

place in the United States, less than 1 percent in Ireland. Apple’s 

Irish subsidiaries, Apple Operations in Europe, Apple Sales Incorporated, and Apple Operations International, are tax resident—I 

repeat, are tax resident—nowhere in the world. Apple has negotiated a tax rate in Ireland of less than 2 percent. Apple used loopholes to defer paying taxes on $44 billion in taxable offshore income. ASI paid 0.05 percent in global taxes in 2011, $10 million in 

taxes on $22 billion in earnings. ASI from 2009 to 2012 contributed 

a little more than half of the cost-sharing payments to Apple Incorporated but pocketed twice the earnings of Apple Incorporated, $74 

billion compared to $39 billion. Apple Operations International received $30 billion in dividends from 2009 to 2012 and paid zero 

taxes; $102 billion of Apple’s $145 billion in cash on hand is overseas. 

I thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator McCain. 

And we have Senator Johnson and Senator Paul. Do either of 

you have an opening comment? We welcome you. 

OPENING STATEMENT OF SENATOR PAUL 

Senator PAUL. Frankly, I am offended by the tone and tenor of 

this hearing. I am offended by a $4 trillion government bullying, 

berating, and badgering one of America’s greatest success stories. 

Tell me one of these politicians up here who does not minimize 

their taxes. Tell me a chief financial officer that you would hire if 

he did not try to minimize your taxes legally. Tell me what Apple 

has done that is illegal. 
11 

I am offended by a government that uses the IRS to bully tea 

parties, but I am also offended by a government that convenes a 

hearing to bully one of America’s greatest success stories. I am offended by the spectacle of dragging in executives from an American 

company that is not doing anything illegal. If anyone should be on 

trial here, it should be Congress. 

I frankly think the Committee should apologize to Apple. I think 

that the Congress should be on trial here for creating a bizarre and 

byzantine Tax Code that runs into the tens of thousands of pages, 

for creating a Tax Code that simply does not compete with the rest 

of the world. 

This Committee will admit that Apple has not broken any laws, 

yet we are forced to sit and Apple is force to sit through a show 

trial at the whims of politicians, when, in fact, Congress should be 

on trial for chasing the profits of great American companies overseas. 

We haul before this Committee one of America’s greatest success 

stories, and you want applause? I say instead of Apple executives 

we should have brought in here today a giant mirror. OK? So we 

could look at the reflection of Congress, because this problem is 

solely and completely created by the awful Tax Code. 

If you want to assign blame, the Committee needs to look in this 

mirror and see who created the mess, see who created this Tax 

Code that is chasing American companies overseas. 

Our corporate Tax Code is double Canada’s I never thought I 

would be complimenting Canada for their Tax Code. Ours is double 

Canada, double a lot of Europe. Instead of complaining that theirs 

is too low, why don’t we set about to work that ours is too high? 

Apple has 600,000 jobs they have created, American jobs, and we 

want to drag them before this Committee to chastise them? I find 

it abominable. 

Just in my State, we have $700 million in sales from Dow Corning. They make the Gorilla Glass, and they were virtually out of 

business. In the 1990s, Apple struggled. If I had to guess—unfortunately, I did not guess enough to invest in Apple, but the thing is 

that in the 1990s people were worried they might go out of business. They had one computer that was not doing well, and then all 

of a sudden, the innovation that came about. And we want to bring 

them forward and chastise them for their success? 

A couple years ago, we did repatriation of foreign capital. We 

want the capital to come home. Do not double tax it. We tax it at 

35 percent. Let us tax it at 5 percent. I have a bill that would repatriate profits from foreign companies at 5 percent and put it into 

infrastructure. Our country is woefully short of money for infrastructure. But you are not going to get it at 35 percent. You are 

getting zero. Let us make it 5 percent and create an infrastructure 

fund. There are probably 70 votes for that bill in Congress, but nobody will bring it up. Why? They say, oh, it is the sweetener for 

overall tax reform, which is elusive and a hill too tall to climb and 

never seems to get here. Why not tomorrow pass it? 

Why do you think people are frustrated with Congress? Because 

we do not do the right thing. Everybody admits, even those who 

want to drag Apple before this Committee, they admit that our Tax 

Code is part of the problem, that if we had repatriation at 5 per-
12 

cent that they would bring money home. Why don’t we just pass 

it? Instead, it has to be revenue neutral, scored by the Congressional Budget Office (CBO). Just pass it if it is the right thing to 

do. 

I would say that what we really need to do is apologize to Apple, 

compliment them for the job creation they are doing, and get about 

doing our job. Look in the mirror and let us make the Tax Code 

better, fairer, and more competitive worldwide. Money goes where 

it is welcome. Currently our Tax Code makes money not welcome 

in this country. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Senator Paul. You are, of course, free 

to apologize if you wish. That is not what this Subcommittee is 

about. This Subcommittee is about investigating a Tax Code that 

is not working for the American people, is not working for businesses in this country, where some businesses decide how many 

taxes they are going to pay, how many they will not, what they are 

going to leave offshore in terms of profits, and cooking up all kinds 

of arrangements to avoid paying taxes. Apple is a great company, 

but no company should be able to determine how much it is going 

to pay in taxes, how many profits they are going to keep offshore, 

how they are going to bring them back home, using all kinds of 

gimmicks to avoid paying the taxes that should be paid to this 

country. They make use of this country. They use our legal system. 

They have the right to lobby here for whatever they want to do, 

and they do lobby here plenty. But they do not have a right to decide in my book how many taxes they are going to pay and to 

whom they are going to pay them. Avoiding paying taxes in this 

country to me is not right. The American people know it is not 

right. And if you want to hold up a mirror, you can hold up a mirror to anybody you want. You can apologize to anyone you want. 

This Subcommittee is not going to apologize to Apple. We did not 

drag them in front of this Subcommittee. They have come here willingly to explain their system. We intend to hear from them as to 

what this system is that they use. We are also going to hear from 

some experts, and those experts are now going to testify in front 

of us. 

I now would like to call our first panel of witnesses this morning: 

Professor Richard Harvey of Villanova University School of Law in 

Villanova, Pennsylvania; and Professor Stephen Shay of Harvard 

Law School in Cambridge, Massachusetts. We appreciate both of 

you being with us this morning. We look forward to your testimony. 

Professor Shay, I would like to welcome you back, having testified at our previous hearing on this matter in September of last 

year. 

Professor Harvey, we welcome you to the Subcommittee. We appreciate both of you sharing your legal and your tax expertise 

today. We look forward to your testimony and your perspective on 

offshore profit shifting. 

Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn. At this time I would ask you 

both to please stand, raise your right hand. Do you swear that the 

testimony you are about to give to this Subcommittee will be the 
13 

1The prepared statement of Mr. Harvey appears in the appendix on page 81. 

truth, the whole truth, and nothing but the truth, so help you, 

God? 

Mr. HARVEY. I do. 

Mr. SHAY. I do. 

Senator LEVIN. We will use a timing system today. Please be 

aware that 1 minute before the red light comes on, you are going 

to see the lights change from green to yellow, giving you an opportunity to conclude your remarks. While your written testimony will 

be printed in the record in its entirety, we ask that you limit your 

oral testimony to no more than 10 minutes. 

Professor Harvey, we are going to have you go first, and after we 

have heard your testimony, all of the testimony from both witnesses, we will then turn to questions. Professor Harvey, you may 

proceed. 

TESTIMONY OF J. RICHARD HARVEY,1PROFESSOR, VILLANOVA 

UNIVERSITY SCHOOL OF LAW, VILLANOVA, PENNSYLVANIA 

Mr. HARVEY. Thank you, Mr. Chairman. Also, thank you, Ranking Member McCain, Members of the Subcommittee. Thank you for 

the opportunity to speak this morning. The issues surrounding 

transfer pricing and the shifting of profits by multinationals offshore is a very important issue, and specifically we are going to 

discuss the techniques that Apple uses to accomplish that result. 

My professional background is described in my written testimony, but in summary, I am currently a professor at Villanova 

School of Law and Graduate Tax Program. I am a retired managing partner at a Big Four accounting firm, a former senior IRS 

official, and was also in the Treasury Department Office of Tax Policy during the 1986 Tax Reform Act. 

So, with the Chairman’s permission, I want to submit my written 

testimony for the record, and I will summarize my major observations orally. 

Senator LEVIN. It will be made part of the record, as will all the 

prepared testimony. 

Mr. HARVEY. OK. I plan to make a few general remarks about 

Apple’s tax planning, and then I want to discuss briefly how companies like Apple accomplish the shifting of income offshore. And 

then I want to close with some tax policy recommendations that 

hopefully the Committee will consider. So let us start with my general comments. 

I guess starting off—this is obviously going to be a little bit of 

an Apple-bashing day, I suspect, but I would like to start off with 

some good news for Apple. And the first good news is after reviewing their structure, although I have not done a detailed audit—I 

leave that to the IRS, I suspect that what Apple has done is within 

the bounds of what is acceptable under current international tax 

law. 

Now, that in its own right raises issues, though, and I will talk 

about them in a minute. 

The second thing I want to mention is that Apple was able to allocate 64 percent of its 2011 income into Ireland, a company, as 
14 

you folks have indicated, that basically had no employees, and had 

no real activity. It was basically an entity on paper. 

Now, the scary thing is Apple allocated 64 percent of its global 

income into that shell corporation. There are other multinationals 

that probably would have allocated even more. So to some extent, 

Apple is not as aggressive as others; but, nevertheless, Apple is 

still shifting a substantial amount of income, 64 percent of its 2011 

income, into an entity with no employees and with no real activity. 

So, in my opinion, the issue today is not whether Apple’s current 

structures are legal. It is not whether they are the most aggressive 

multinational company on the planet. But, rather, the real question 

is whether it makes sense for Apple and other companies like 

Apple—and I am talking about not only U.S. multinationals. This 

is a global issue, so it is foreign multinationals as well—whether 

it makes sense to have them being able to record 64 percent of 

their profits in an entity that has no employees and no real activity. That is the real question that I think we need to focus on. And, 

again, I think there is congressional action that can be taken if 

Congress so chooses. 

Now, let us turn to how Apple was able to record so much income 

in an entity, Apple Sales International. And I focused mostly on 

2011 during my review. So in 2011, they recorded $22 billion of 

pre-tax income in Apple Sales International. And the question is: 

How did they do that and accomplish a 0.05 percent tax rate? 

But before I go into that, I would like to directly address a statement in Apple’s testimony that they made public yesterday. And, 

specifically, the testimony says, ‘‘Apple does not use tax gimmicks.’’ 

Now, I about fell off my chair when I read that because, when 

I think about tax gimmicks, certainly some of the techniques that 

Apple uses could, in general usage of the word, be considered ‘‘gimmicks.’’ But I will let the Committee decide for themselves whether 

Apple used gimmicks that resulted in $74 billion of income over 4 

years being recorded in an Irish subsidiary with no employees for 

3 of the 4 years and 250 employees in the last year and paying essentially no tax. 

So I think as you listen to today’s hearing, I would ask you to 

think about whether these are gimmicks or maybe techniques or 

tools, but I would also think about what we should be doing about 

it. 

Now, quickly, some critical factors that allowed Apple to accomplish this result, and Chairman Levin and Ranking Member 

McCain have already discussed some of them, so I will just quickly 

summarize them. 

The first critical factor is that the United States has this concept 

of arm’s-length pricing. So the idea is that two affiliated entities 

can enter into a transaction, and as long as it is at an arm’s-length 

price, it will be respected for international tax purposes. 

Now, this is true whether the transaction is a relatively simple, 

say, provision of service or whether it involves the cure of cancer 

or the development of an iPad, an iPod, or an iPhone. 

As a result, because of this arm’s-length pricing, what Apple did 

is they entered into a cost-sharing agreement where they transferred their development rights to operations outside of the Americas to the Ireland subsidiary. Cost-sharing agreements are legal 
15 

under U.S. tax law. So I think one question for Members of the 

Committee and ultimately Members of Congress to consider is 

whether it makes sense for a company like Apple to be able to 

enter into an agreement that transfers its crown jewels to a foreign 

affiliate with no employees and very little activity. So that was the 

first factor. 

The second factor is the United States has so-called Subpart F 

rules. Those Subpart F rules are designed to tax passive income, 

and Apple was able to avoid those. Apple avoided them mostly 

through check-the-box regulations and the controlled foreign corporation (CFC) look-through rule. 

Now, the check-the-box regulations allow Apple to make an election to treat entities as though they do not exist, and as a result, 

transactions disappear. 

Now, when my children were younger—I have four adult boys, 

but when they were younger, they were big into magic, and they 

might characterize the check-the-box regs as making things go, 

‘‘Poof.’’ Now, some of us in the tax trade refer to check-the-box regulations as a tool for avoiding the Subpart F rules. However, I suspect most others may view it as a gimmick in the sense that you 

are able to make an election and just make transactions disappear 

under the U.S. tax law. 

The third critical factor in Apple’s planning was they were able 

to avoid paying any material Irish tax. It is not clear to me whether they cut a specific deal with the Irish taxing authorities. That 

was what I was led to believe by some of the testimony they apparently gave to members of the staff. But at the last minute, in the 

last 48 hours, we became aware that Apple has entities in Ireland 

that are not managed and controlled—in fact, all of their major entities in Ireland are viewed as not managed and controlled and, 

therefore, not tax resident in Ireland. But be that as it may, the 

bottom line is that they had a substantial amount of income, $74 

billion over 4 years, recorded in Ireland, and they paid essentially 

no tax. 

The fourth critical factor—and this is really important for the 

rest of the world—is that Apple has roughly 60 percent of its global 

sales outside of the United States and outside of Ireland, but they 

only allocate roughly 6 percent of their profits to the rest of the 

world. And the way they accomplish that is by having a very minimal sales commission being paid to entities that operate in those 

countries. I am not suggesting that that is in any way illegal, but 

that is the end result of their planning. They pay a sales commission to sell into those particular countries in the world, and $74 billion of income can end up being retained in the Irish entity. Now, 

I suspect there will be some interesting publicity around the world 

surrounding the lack of Irish taxes being paid. 

So let me move on because I am running out of time, but the real 

question here is what to do about this. And I guess the more important question is: Should anything be done? And if so, what? And 

I would say that except for executives of multinational companies, 

almost everyone I speak to would agree that something needs to be 

done when so much income can be allocated into an entity that has 

no substance of any significant effect. So it seems kind of crazy to 

allow that result. 
16 

Although there is general agreement that something needs to be 

done, there is not general agreement as to exactly what should be 

done, and there are different scenarios. One scenario would say we 

will wait for some sort of global consensus to arise. The Organization for Economic Co-Operation and Development (OECD) is studying this particular issue and is due to issue some thoughts within 

the next month or two. But typically my experience is the OECD 

does not move very quickly. 

Second, another alternative is for the United States to act unilaterally, and unilateral action may be something that is needed in 

this particular case, if only to jump-start what is going on around 

the rest of the world. 

So my basic recommendations are: 

In the short run, Congress should consider tightening the Subpart F rules by potentially restricting check-the-box regulations for 

foreign entities, potentially limiting the CSC look-through rule, and 

potentially limiting the contract manufacturing regulations which 

I have not spoken about because Apple really did not take advantage of those. 

In addition, I think in the short term, Congress should be thinking about increased transparency. There should be additional reporting done by U.S. multinationals that shows where they record 

their income for both accounting and tax purposes, as well as 

where they record tax expense, where they pay tax, and other factors that might be useful in allowing tax administrators around the 

world to audit those companies. 

In the longer term, there still needs to be a solution because to 

the extent that there is an arm’s-length pricing model, you will always have companies having the opportunity to shift income. So I 

would strongly suggest that in the long run the United States continue to monitor what is going on in the OECD. But assuming a 

global consensus cannot be reached, I would not recommend that 

the United States adopt a worldwide tax system unless the United 

States reduces its corporate rate down to 15 percent. And since I 

do not think that is going to happen anytime soon, we can probably 

reject that alternative. But if the United States does keep the 

arm’s-length standard, I recommend imposing a minimum tax on 

foreign earnings, especially those from tax havens. But this tax 

needs to be designed so it is administrative. As a former tax adviser in the private sector as well as a government official, it needs 

to be administrable, and I make some specific recommendations in 

my written testimony. 

And then one other point that I have not mentioned is the need 

to defer deductions with respect to activity overseas. What oftentimes happens is U.S. multinationals will borrow in the United 

States effectively on-lend that overseas, and they will deduct the 

interest in the United States. but they will not recognize any interest income in the United States. I think that is an issue that also 

needs to be addressed. 

Since I am over my time here, I am going to conclude my testimony. Thank you for asking me to testify this morning, and I 

would be pleased to answer any questions. 

Senator LEVIN. Thank you, Professor Harvey. 
17 

1The prepared statement of Mr. Shay appears in the Appendix on page 107. 

TESTIMONY OF STEPHEN E. SHAY,1 PROFESSOR, HARVARD 

LAW SCHOOL, CAMBRIDGE, MASSACHUSETTS 

Mr. SHAY. Chairman Levin, Ranking Member McCain, Members 

of the Subcommittee, thank you for the opportunity to testify on 

the important topic of shifting of profits offshore by U.S. multinational corporations. I am a professor of Practice at Harvard Law 

School. The views I am expressing are my own personal views. 

I have also served in the Treasury Department and I have practiced for over two decades at a large law firm as an international 

tax partner. 

The Subcommittee and its staff should be commended for pursuing this important investigation. Protecting the existing U.S. tax 

base is an important responsibility of those in Congress and the 

Administration responsible for the fiscal health of the country. The 

revenue lost to tax base erosion and profit shifting is hard to estimate, but there is compelling evidence that the amount is substantial. This revenue loss exacerbates the deficit and undermines public confidence in the tax system. Restoring revenue lost to base erosion and profit shifting would support investing in job-creating 

growth in the short term and reducing the deficit over the long 

term. 

My written testimony provides background information on the 

taxation of foreign income of U.S. multinationals earned through a 

controlled foreign corporation and on transfer pricing. I will review 

certain of the information developed by the Subcommittee staff regarding Apple’s international tax planning and consider how current elements of U.S. tax law contribute to key elements of that 

planning and make a limited number of observations regarding the 

implications for tax law changes. 

Apple is a remarkable and a remarkably successful company. I 

will refer to the information in Apple’s fiscal year ending 2011 instead of the most recently ended year because separate subsidiary 

information only was made available to the Subcommittee staff for 

fiscal year 2011. 

The Apple companies in Ireland included two participants in the 

cost-sharing agreement that was of longstanding with Apple for the 

rights to sell products outside North and South America. Based on 

consolidating financials (without eliminations for each of these 

companies), in 2011 Apple’s Irish companies earned approximately 

$22 billion in earnings before tax (EBT), or approximately 64 percent of total global EBT. Of that $22 billion, roughly $18 billion 

was operating income. For reasons I mention in my testimony, I 

am going to stick with EBT for most of my numbers. 

Senator LEVIN. And, again, what is EBT? 

Mr. SHAY. Earnings before tax. Thank you, Mr. Chairman. 

The Apple Irish companies’ earnings before tax to sales margin 

was 46 percent compared to 23 percent for Apple in the United 

States. 

The average effective book tax rate for the Irish companies was 

well below 1 percent. Although Apple listed their ‘‘location for tax 

purposes’’ as Ireland in prior disclosures to the Subcommittee, I 

was advised on Sunday night that the principal companies in terms 
18 

of earning income directly, Apple Operations Europe and Apple 

Sales International, are not tax resident in Ireland. 

Apple Operations Europe and Apple Sales International as a result only pay Irish tax on business carried out in Ireland. Ireland 

does not make a claim to tax a non-resident Irish company on nonIrish income. 

It is not clear where the income attributable to the cost-shared 

intangibles is treated as earned by Apple from the information that 

we have been provided. It appears to be allocated away from Ireland for tax purposes. Presumably, it is what is fondly referred to 

by international tax planners as ‘‘ocean income.’’ It would be difficult to achieve a less than 2-percent Irish effective tax rate if that 

income were subject to Irish tax at either its 12.5-percent rate for 

trading income or a 20-percent rate otherwise. 

Over the 3-year period 2009–11, Apple’s Irish cost-sharing par- ticipants paid approximately $3.3 billion in cost-sharing payments 

to Apple US. While that is a very large number, over the same period Apple’s Irish affiliates has earnings before tax after those payments of $29.3 billion. So would Apple have entered into the costsharing arrangement if Apple’s Irish affiliates had been unrelated? 

To answer ‘‘yes’’ in my view strains credulity. 

The U.S. tax that was deferred on these earnings was likely over $10 billion. The ability to reinvest those tax savings is a valuable 

tax benefit. 

The objective of the arm’s-length principle in transfer pricing is 

to achieve neutral treatment of related and unrelated party transactions. The ability of multinational businesses to take advantage 

of transfer pricing between related persons in different countries— 

or possibly in this case in no country—strongly favors structuring 

transactions with affiliates to be able to shift income into low-tax 

countries or no country. It is an advantage that is largely unavailable to purely domestic businesses including almost all small business enterprises. Yet small businesses and individuals must make 

up the lost taxes. 

The benefit of this income shifting is enhanced when deductions 

are incurred in the United States to earn this low-tax income that 

is deferred from U.S. tax. As described in my testimony, it appears 

that Apple’s general and administrative and sales, marketing, and 

distribution expenses are incurred disproportionately in the United 

States. By that, it is not that they should not be incurred here, but 

they do not appear to be charged against this low-taxed income in 

Ireland. 

Allowing a current deduction for whatever portion of these expenses is attributable to income booked in the Irish companies effectively is a U.S. tax subsidy for those deferred earnings. This is 

often referred to in exemption countries as ‘‘deduction dumping’’— 

in other words, you put your deductions in the home country, and 

you try and achieve low tax exempt income outside the home country. 

Our system of deferral creates, and even more if it were an exemption system, creates an irresistible incentive to shift income to 

where it will be low taxed or not taxed. This was understood when 

the Subpart F limits on deferral were first adopted in 1962. They 

were intended to serve as a vital backstop against transfer pricing 
19 

abuse by reducing the incentives that would arise if income could 

be shifted to low-or zero-tax countries. Apple’s international structure takes full advantage of loopholes in existing anti-deferral 

rules. 

Apple avoids the reach of the foreign base company sales rules 

by contracting for manufacture of its products with third parties 

and in most cases, for U.S. tax purposes, selling to third parties. 

By using check-the-box disregarded entities, intercompany transactions within the group of companies that are classified as disregarded simply disappear. 

With respect to payments of interest and dividends, the lookthrough rule of 954(c)(6) accomplishes much the same result except 

to the extent that deductible payments offset income of the payor 

that would not be subject to current U.S. tax. 

If all of this works, our tax rules allow Apple to allocate billions 

of dollars to nowhere when our rules presume that in order to 

achieve deferral, some country has residence jurisdiction to tax the 

income. That to me is the implication of what we learned on Sunday night. No country is making a claim, and yet we are allowing 

deferral of those earnings. 

Our international tax rules are out of balance. They are too generous to foreign income and not strong enough in protecting 

against U.S. base erosion by foreign companies investing in and 

carrying on business in the United States. The losers are domestic 

businesses. 

In the context of current law, if we are not going to go to tax reform and in my view repeal deferral, changes still may be made 

that would limit the scope for profit shifting. Most promising is a 

minimum tax imposed on the U.S. shareholder of a controlled foreign corporation in respect of low-tax foreign income. This should 

not be a final tax in design. It should be a deemed distribution, as 

under current Subpart F, but the remaining U.S. tax should be collected when the earnings are distributed or the stock is sold. 

This should be accompanied by taking away the advantage of tax 

havens for foreign companies that invest and carry on business in 

the United States. The United States should protect its source tax 

base by measures that include imposing withholding tax on and/or 

restricting deductions for deductible payments of income paid to or 

treated as beneficially owned by related persons that are not ‘‘effectively taxed’’ on the income. In doing this, the United States would 

take away a substantial advantage that foreign-owned companies 

have in structuring investments in the United States. 

Third, the United States should strongly support and lead efforts 

at the OECD to combat base erosion and profit shifting. I have described elsewhere an approach that, if taken by the United States, 

would provide the incentive for other countries to adopt complementary rules. 

Should Congress wait for tax reform to address income shifting? 

The short answer is no. 

I applaud the Committee for exposing—‘‘exposing’’ is really the 

wrong word—for bringing to light international tax practices that 

are not easily discernible from public financial statements. 

Thank you, and I would be pleased to answer any questions. 

Senator LEVIN. Thank you both. 
20 

Let us have an 8-minute first round of questions for the Members of the Subcommittee. 

Professor Shay, as we have all said this morning, we have 

learned that these three Irish subsidiaries of Apple are not tax 

resident anywhere in the world, and the majority of Apple’s profits 

worldwide are not being taxed anywhere. The evidence indicates 

that ASI, AOI, and AOE, the Irish subsidiaries, are controlled out 

of the United States. 

Let me start with you, Professor Shay. From a tax law perspective, does it make sense to have Apple treat this income as deferred 

when those entities have no tax residence? I think you just testified 

to that, but if you could repeat your conclusion. 

Mr. SHAY. When deferral was established, its premise was that 

another country has asserted a tax claim or could potentially assert 

a claim even if it chooses not to with respect to that income. Ireland, by treating these companies as non-resident, has affirmatively said it is asserting no tax jurisdiction over the income that 

is not attributable to the Irish business operation. It seems to me 

that is inconsistent with the premise of deferral because the company has no tax residence anywhere else that is making a tax 

claim. So, to me that is incoherent. It is an incoherent tax system 

that permits that to occur. 

Senator LEVIN. Now, we have also seen that ASI, which is Apple 

Sales International, signed a cost-sharing agreement with Apple, 

that they have no tax residence anywhere in the world; they had 

no employees at all until 2012; they currently claim to Irish tax authorities that ASI is not managed or controlled in Ireland; their 

board of directors is composed primarily of Apple Inc. employees; 

they hold their meetings in California; ASI’s finances, including 

funds, are managed, controlled, and invested by Apple employees 

in a Nevada subsidiary; their business decisions are made by Apple 

executives in California. Now, we also know that—I will leave it at 

that. 

Now, Professors, from a policy perspective, does it make sense for 

a company which is located in a foreign jurisdiction in name only, 

while activities are controlled in the United States, to be used as 

a tool to shift profits and to direct tax liabilities away from the 

United States? Professor Shay. 

Mr. SHAY. Mr. Chairman, I do not think that makes sense. But 

I also meant to put it in a broader perspective, we talk about 

globalization. We are aware that we now have a digital economy. 

We have different ways of earning income that no longer have the 

kind of traditional physical nexus to a country that they once did. 

It simply is important to rethink our rules, and the premise that 

I would start with is that we should no longer be oblivious to what 

happens in the other countries. If another country is not taxing income, then, for example, we should not give a deduction with respect to payments to that country. That is subsidizing activity unnecessarily. 

I think we need to rethink our rules on the cross-border context 

to be more aware of how other jurisdictions are taxing the income. 

Senator LEVIN. Professor Shay, has Apple in their cost-sharing 

agreement effectively shifted profits overseas when they shifted 

their economic value of their intellectual property offshore? 
21 

Mr. SHAY. Yes, by entering into an agreement that had its origin 

long ago, although it has been renewed a couple of times—or 

amended a couple of times, I should say, and agreeing to pay a 

share of the research and development expenses, they have then 

taken the fruits of that and possibly the fruits of more than just 

those expenses—based on the numbers—and located it outside the 

United States. And that clearly has the result of shifting of profits. 

Senator LEVIN. Overseas. 

Mr. SHAY. Overseas. 

Senator LEVIN. Now, they deny that they shift profits overseas, 

and your testimony is that they are shifting profits overseas 

through this mechanism. The way to test the reality of Apple’s 

cost-sharing agreement is to ask, as you did, whether or not it 

would have entered into the same agreement with an independent, 

unrelated third party. And you, I believe, testified, Professor Shay, 

that to say yes to that question strains credulity. 

Can you tell us why it would strain credulity to say that they 

would enter into this kind of a cost-sharing and profit-shifting 

agreement with an independent party? 

Mr. SHAY. I think it is important to look at outcomes. And the 

law authorizes us to do that since 1986. One way of thinking about 

this is if you were an investor in Apple and the Apple management 

came to you and said, ‘‘Look, we want to partner with somebody 

who has few or no employees but has some money, and they are 

going to pay a share of our R&D, and as a result, we are going to 

give up the rest of the world outside of North and South America 

profit for that amount, is that a good deal?’’ 

Another way of thinking of it is how would Mr. Einhorn think 

about that deal. Would he be pleased with that arrangement? 

Thinking about it that way, it does not seem credible to me. 

Now, Apple correctly says in their testimony this cost-sharing 

agreement had its origins many years ago, and it did. And that 

raises the question of should that ever have been revisited, and at 

arm’s-length would it ever have been revisited? 

When you look at the numbers that were up on the chart, $4 billion in exchange for $74 billion of earnings before tax—or $72 billion, whatever it was, I think in that context you would really question whether at arm’s-length that deal would not have been amended sometime between 1980 and now. 

Senator LEVIN. So it was amended in the last few years. Is that 

correct? 

Mr. SHAY. It was amended. It was amended for technical reasons. I do not advise them. It appears clear that they amended it 

in order to stay within a grandfather clause under prior, much 

more relaxed, cost-sharing rules that have allowed them to perpetuate the arrangement. 

Senator LEVIN. All right. And in that arrangement, you are saying that arrangement would never be entered into in the last few 

years at an arm’s-length with an independent party. It just strains 

credulity, to use your word—— 

Mr. SHAY. Yes, there are bad deals out there. This would be a 

whopper. And I just doubt—— 

Senator LEVIN. A whopper against Apple. 
22 

Mr. SHAY. Against Apple, and would you still own the stock if 

somebody gave away that much of your income? That is a simple 

way of asking the question. 

Senator LEVIN. And if Apple can create companies with no tax 

residence and create profits in those companies, and if that is going 

to be tolerated, couldn’t all U.S. multinationals in effect do the 

same thing—eliminate the corporate tax for our multinationals and 

allow them not only to become tax freeloaders but also to offload 

their taxes on domestic competitors, small business, and working 

people? I mean, if they can do it, why couldn’t every multinational 

do the same thing? 

Mr. SHAY. I will point out, Apple points out in their testimony, 

correctly, that they only did this for their international sales. Now, 

their international sales are very large—— 

Senator LEVIN. I mean, couldn’t any multinational do it for their 

international sales? 

Mr. SHAY. Any multinational could do it for their international 

sales, but there is nothing preventing it from being done, as we 

saw with Microsoft, for domestic sales. So, again, this is not an 

Apple-bashing exercise to me. This is an exercise in saying: Where 

are we? How can we possibly be in a situation today where the law 

permits income to be allocated to a company resident nowhere and 

not be taxed anywhere and the United States just say, forget it, do 

not worry about it, that is fine? 

Senator LEVIN. Thank you. 

One last question, Mr. Harvey. You said that you almost fell off 

your chair when you read that Apple says that they do not use 

gimmicks. Why did you almost fall off your chair? 

Mr. HARVEY. I think the check-the-box regulations, certainly the 

practical effect of those regulations is a gimmick to make transactions disappear. 

Senator LEVIN. And how about creating corporations that do not 

exist anywhere? Did you ever hear of that before? 

Mr. HARVEY. Certainly that is a goal of many tax planners. The 

utopian goal that tax planners try to obtain is to create an entity 

that is taxed nowhere. So Apple, through this particular structure, 

was able to substantially accomplish that result. 

Senator LEVIN. Have you heard of that being done in other 

cases? 

Mr. HARVEY. There are other situations where that situation 

arises, yes. 

Senator LEVIN. Where it is taxed nowhere? 

Mr. HARVEY. Correct. 

Senator LEVIN. Okay. Thank you. 

I think, Senator Johnson, probably you came in next. I am not 

sure who was first. 

Senator JOHNSON. I was here first. 

Senator LEVIN. Thank you. 

Senator JOHNSON. Thank you, Mr. Chairman. 

Professor Harvey, in your testimony you stated that, according to 

your calculations, Apple’s overseas income was 64 percent of total 

income. Their sales were roughly 60 percent. It would strike me 

that seems to be a somewhat fair allocation of income to sales. 
23 

What do you think would be a more fair allocation between recognition of income? 

Mr. HARVEY. First of all, just to maybe clarify the statistics, the 

64 percent is the amount of income recorded in Ireland. There is 

another 6 percent recorded in other foreign countries. So in the aggregate, there is 70 percent of income located overseas. So the statistics that I would look at would be that there is 30 percent of the 

global income in the United States and there are roughly 39 percent of global sales in the United States. 

Senator JOHNSON. Okay. My figures are about 39 percent global 

sales and about 32 percent—I mean U.S. sales about 32 percent. 

So there is a greater allocation of income. 

How should income be allocated? 

Mr. HARVEY. I think that is a question, and the key question is 

for technology that is developed, say, in the United States, how 

should that be taxed? Now, I think most economists would tell you 

that if you develop the technology in the United States then the 

United States would expect to get the lion’s share or substantially 

all of the income with respect to that technology. But—— 

Senator JOHNSON. How is it handled between States in the U.S.? 

If you develop the technology, let us say, in New York but your 

manufacturing plant is in Texas, where is the income tax, the State 

income tax allocated on that basis? 

Mr. HARVEY. Well, it depends on which State you are talking 

about. There are some States that are separate company States, 

and there are some States that are global apportionment—— 

Senator JOHNSON. But, generally, if you are manufacturing in 

Texas, even though you might have produced a product in New 

York, you are probably going to be taxed—well, Texas may be 

wrong. Let us say Wisconsin. In Wisconsin, you would be taxed in 

Wisconsin because you are manufacturing and selling out of Wisconsin. Isn’t that correct? 

Mr. HARVEY. Not necessarily. It depends on the particular State 

rules. It depends where the technology is located. But what I wanted to say, to finish up, which I think is important for you to hear 

because it may support some of where you are heading, is I think 

it is a legitimate question for Congress to ask how should technology income be allocated. And if Congress decides that it wants 

to provide some sort of incentive to have technology income not 

taxed in the United States then I think that is perfectly within 

Congress’ right to do so, and they should affirmatively do it, as opposed to leaving a regime that is, in essence, a self-help regime 

that allows taxpayers to really decide how much they are going to 

pay. 

Senator JOHNSON. But in the end, Apple is selling a product, and 

so you are really talking about where do you tax the manufacturing 

income. I mean, we can split this baby 16 different ways, but at 

some point in time you have to figure out where does the incidence 

of tax lie? I mean, how should income be allocated between countries, between State, between tax jurisdictions? That is a difficult 

question to answer, isn’t it? 

Mr. HARVEY. Absolutely. But what I would say is when you have 

64 percent of your income in a country like Ireland with no employ-
24 

ees and no real substance, that seems to be a serious issue, and 

you have to decide where should that income be taxed. 

Senator JOHNSON. So let me ask, how long have we been trying 

to solve this problem through the U.S. Tax Code? 

Mr. HARVEY. This problem has existed on and off—well, basically 

continuously for decades. 

Senator JOHNSON. So do you really think there is a fix to it? 

Mr. HARVEY. Yes, I believe there are fixes to it that Congress 

should take, because what has happened in the last 17 years is the 

passive income—or the Subpart F rules have been so significantly 

relaxed that it is just open season for taxpayers to go and do whatever they want. 

Senator JOHNSON. If you are a business manager whose primary 

fiduciary responsibility is to your shareholders, and let us say the 

United States passed a law and said we are going to claim all of 

your income and tax it at our corporate tax rate of 35 percent, 

what would a rational business manager do with his overseas operations? 

Mr. HARVEY. As I indicated in my testimony, I do not recommend 

that we tax worldwide income, at least at the full U.S. tax rate. I 

recommend that we only tax if we are going to have a minimum 

tax on foreign earnings, that it only be with respect to tax haven 

earnings, and at something less than the full rate. 

Senator JOHNSON. What would that be? 

Mr. HARVEY. I think the number that is thrown around by a lot 

of folks is 15 percent, in that range. 

Senator JOHNSON. But what if a business manager felt that was 

too onerous and couldn’t they just divest themselves of those companies and then all of a sudden you have a smaller U.S. company 

and you have a larger overseas company? I mean, there are unintended consequences to try and do anything there? 

Mr. HARVEY. Well, you have the competitive issue, and are you 

going to let U.S. multinationals then effectively have free rein to 

move income offshore? And as Professor Shay indicated, you can, 

if you want to, move almost all of your income offshore. Now, Apple 

was not that aggressive. They were fairly aggressive, but not that 

aggressive. So I think you have to balance those issues and, admittedly, very difficult issues. But I think Congress needs to face up 

to the issue and make some tough policy calls. 

Senator JOHNSON. Now, I understand the point that you might 

have the disadvantage of a domestic competitor that does not operate overseas when a multinational corporation’s overall effective 

tax rate is lowered because of some of the overseas taxation issues. 

But, in general, who benefits from a lower tax rate on a corporate 

structure such as Apple? Who is the beneficiary? 

Mr. HARVEY. Certainly as a result of their tax planning, their 

shareholders are the beneficiaries. 

Senator JOHNSON. Who are the shareholders of Apple? 

Mr. HARVEY. Whoever owns the shares of stock. 

Senator JOHNSON. Do you have any idea what the breakdown is? 

Mr. HARVEY. I do not know what it is. 

Senator JOHNSON. I will probably ask Apple management that. 

But, in fact, the people that benefit really are those owners, and 

a lot of those are probably union pension funds and just individual 
25 

shareholders, correct? In other words, there is an assumption that 

because Apple made a really good deal with the overseas taxing authorities that that is somehow bad for America. In fact, would we 

be better off if Apple were paying 12 percent to Ireland or 25 percent to Germany? Would Americans be better off? 

Mr. HARVEY. I think to the extent that you get a more fair allocation of income, I think ultimately in the long term, yes, Americans 

would be better off. 

Senator JOHNSON. So it would be better if Apple were paying 

more of its corporate profits to taxing authorities in Ireland and 

Germany? That would be better for America? 

Mr. HARVEY. I think in the long run we need to come up with 

what is the appropriate taxation of international income. As indicated in my testimony, my written testimony, my preference would 

be to see a reduction in the corporate tax rate in total for both domestic and foreign companies down to 15 percent and probably replace that with some sort of alternative funds, whether it be a VAT 

or something else. I do not think that is going to happen anytime 

soon, so if that is not theoretically possible, then you have to address the very difficult issue about competition between domestic 

companies and U.S. multinationals and then U.S. multinationals 

versus foreign multinationals. And I am sensitive to that. 

There is an issue as far as competitiveness between the United 

States and foreign multinationals, but do not forget there is also 

an issue between competitiveness of U.S. domestics versus U.S. 

multinationals. 

Senator JOHNSON. If you are, let us say, a global manufacturer 

that wants to manufacture for the U.S. market—and, by the way, 

that is one of the things we have going for us. We are still the 

world’s largest market. If I am a manufacturer, I would not dream 

of manufacturing for my domestic customers anywhere other than 

the United States. But if you are a global manufacturer, would you 

be more likely to site a plant, let us say, in Toronto at 15 percent 

or Detroit at 35 percent? What would be the rational thing to do? 

Mr. HARVEY. The rational thing from a corporate perspective is 

to clearly locate in the lowest tax jurisdiction. 

Senator JOHNSON. So we need to make sure that we are very 

competitive globally, and when we are competing against tax jurisdictions around the world that are willing to cut a deal, should corporations take advantage of that? I mean, isn’t that the rational 

thing to do? And, quite honestly, when Apple is responsible for 

600,000 jobs in America, that is not just Apple but all the application developers, you multiply that times about a $50,000 median 

household income, that is about $30 billion worth of payroll at 

about a 20-percent tax rate. That is a lot of taxes flowing into the 

Federal Government as well, isn’t it? 

Mr. HARVEY. It certainly is. But under that theory, why don’t we 

just eliminate taxes for Apple? 

Senator JOHNSON. That was my next question. So one way 

around this—one way of actually capturing that income—I just 

want to posit this idea. My business was an LLC. It was a passthrough income. Why not tax corporate income at the shareholder 

level? We would eliminate all these problems, wouldn’t we? 
26 

Mr. HARVEY. Well, how would you propose to tax it for pension 

funds and foreign shareholders? Would you tax that? 

Senator JOHNSON. Well, it—— 

Mr. HARVEY. Would the U.S. corporate tax be a withholding tax? 

Senator JOHNSON. If it passed through to the actual taxpayer— 

if you are a tax-exempt organization, you will not pay tax on that 

income. But if you are a high-taxed individual, you will pay it at 

your high tax. You could eliminate all dividend income, and you 

could capture all worldwide income, and corporations would—you 

would eliminate the competitive disadvantage of different taxing 

jurisdictions. 

Mr. HARVEY. Again, if that is what Congress decides to do and wants to replace the $250 or $300 billion a year, it is within your 

prerogative to do so. 

Senator JOHNSON. But, again, that would eliminate the inability—and that is basically what we have had. We have had the inability for decades of trying to capture this income that shifts 

around the world and reacts to different, very byzantine tax structures. 

Mr. HARVEY. There is no question that the U.S. tax law is extraordinarily complex. I guess one thing you did say, though, is the 

issue of whether the U.S. tax law puts U.S. multinationals at a 

competitive disadvantage, and there are pros and cons on both 

sides of that. My personal view is that the U.S. tax law in many 

cases actually favors U.S. multinationals. Maybe we can talk about 

that separately at some—— 

Senator JOHNSON. Okay. Thank you. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you. Senator Carper. 

OPENING STATEMENT OF SENATOR CARPER 

Chairman CARPER. Thanks very much. I have another competing 

hearing going on over in the Finance Committee dealing with the 

IRS, and I apologize for missing your testimony. But thank you for 

joining us and welcome. 

I would like to maybe put this hearing in context. Let me just 

thank the Chairman and the Ranking Member for holding this 

hearing and for all the witnesses coming. I want to put it in some 

context, if I could. 

The Congressional Budget Office reported earlier this month that 

the budget deficit is coming down. About 3 or 4 years ago, it 

peaked out, topped out at about $1.4 trillion. The estimate as recently as a month ago was it was—this year our deficit is going to 

be about $840 billion. CBO has now said it will be probably closer 

to $650 billion—only $650 billion, and that is an improvement, but 

we all know it is way too much. 

One of our former colleagues, Kent Conrad, who for a number of 

years was the Chairman of the Budget Committee, told his colleagues last year that if you added up all the tax expenditures, tax 

deductions, tax breaks, tax loopholes, tax credits, that it added up 

for the next 10 years to something like $15 trillion. And as I recall, 

what our friends Erskine Bowles and Alan Simpson tried to do in 

leading the Deficit Commission was to propose—in order to be able 

to bring down the business corporate tax rate from 35 to about 25 
27 

to 28 percent, they proposed reducing significantly—not entirely 

but significantly—the tax expenditures and argued that if we were 

to do that, we would be more in line with the rest of the world. 

And it also called for moving to a territorial tax system. 

Let me just either of you or both of you just to share with us 

your views of the approach laid out by the Deficit Commission, 

their recommendation, which a lot of people said, well, that was 

dead on arrival. I think it still has a heartbeat, and my hope is 

that it gives us a road map that will still follow as this year carries 

on. But let me just ask you to react to their recommendations. 

Mr. SHAY. You are referring to Simpson-Bowles. 

Chairman CARPER. You got it. 

Mr. SHAY. I think that was a very important start to the discussion. There have been a variety of changes since, and I think the 

realism of eliminating all tax expenditures, as I referred to, is 

somewhat overstated. I do not think it is going to happen. 

Chairman CARPER. I do not know of anyone suggesting we are 

going to get rid of all of them—they did not suggest that either— 

but enough to get us down to a rate between—our top rate to about 

25 to 28 percent. That was what they recommended. 

Mr. SHAY. Right. But I think some of the recommendations, the 

reason I think this hearing and this issue is important is because 

part of those recommendations included moving to a fairly unspecified exemption system. 

I think that is a source of great concern for the reasons we have 

been discussing this morning. Under an exemption system, there 

would be even fewer restrictions; it would even be more beneficial 

to try and shift income abroad unless significant protections are 

put in place or there is some form of a minimum tax, something 

that is done of that nature. 

Speaking more broadly, do I think the direction of tax reform 

should be to broaden a base? My own view is we can use more revenue, so I would not necessarily put it all into lowering rates, but 

some mix, some balance. I think that is a very sensible way forward. 

I think we need to bring the discussion from the level of broad 

generalities down to specifics. One of the reasons I testified is I 

think that is going to take time. I actually served in the Treasury 

Department from 1982 to 1987 during the Reagan Administration. 

I served throughout tax reform. We started before the election in 

1984 to prepare the Treasury proposals. They came out at the end 

of the year. We spent 1985 going through the House—well, before 

they went to the House, they first were reviewed and because the 

President’s proposals. And that was a significant review, sort of a 

political screen, but pretty light, frankly. Then they went through 

the House. Then they went through the Senate. 

That process is looked back on today with great affection and 

seems to be viewed as a great process. It still came out with a product that was far from perfect, even though it took 3 years. In order 

to do a tax reform that is going to be responsible, we need the full 

involvement of the Treasury Department; we need it to be done 

with the assistance of the Office of Tax Analysis as well as the 

Joint Committee on Taxation. This is difficult, complicated stuff, 
28 

and doing it in broad brush strokes or in a series of political compromises is not going to get us where we want to be. 

So while I admire what the Simpson-Bowles folks have done at 

a high level and in the way they have contributed to the debate, 

we have a tremendous amount of work in front of us if we are 

going to have a genuinely effective tax reform. 

In the meantime, we should not allow income shifting and base 

erosion to continue. There are things we can do that would help restore revenue that should be in the budget and that could be contributed to purposes that on a bipartisan basis probably Senator 

Levin and Senator McCain would agree on. 

Chairman CARPER. All right. Thank you. 

Mr. HARVEY. I guess what I would add just very quickly, I would 

concur with pretty much all of what Professor Shay says. The key 

is if we go to a territorial system, we need to have very clear base 

erosion principles to prevent that. And I think Chairman Camp 

from the Ways and Means Committee understands that. In the proposals he has floated, there are base erosion proposals. 

Chairman CARPER. All right. The Senate Finance Committee, on 

which I serve, is going through a series of briefings, basically member-only briefings to look particularly at corporate tax reform and 

looking broadly at the exemptions that exist and trying to decide 

where it might make sense to make changes. I think sometimes 

folks in our jobs, we talk about creating jobs. Mayors, Governors, 

Presidents talk about creating jobs. We do not create jobs. What we 

do is help create a nurturing environment for job creation, and that 

includes a world-class workforce, access to capital, reasonably good 

infrastructure, some certainty on the Tax Code, and a Tax Code 

that incents, among other things, investment in the workforce and 

investment in R&D that is going to lead to products and goods and 

services that we can commercialize and sell around the world. 

We need to provide some certainty with respect to the Tax Code, 

and I think we need some more revenues. I think one of you mentioned that. The idea of taking the corporate rate down to 15 percent and being able to supplement the lost revenue with a VAT or 

a carbon tax, actually I do not think either of those are going to 

happen, probably not on my watch. 

And having said that, we do need to provide that certainty and 

that predictability. We do need the revenues. The last 4 years in 

the Clinton Administration we had balanced budgets, you will recall. Revenues were anywhere from 19.5 to 20.5 percent of GDP. 

That is when we had 4 years of balanced budgets. We need to get 

closer to something along those lines. 

Thanks, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Carper, who is 

the Chairman of our full Committee. We very much appreciate 

your being able to get here despite these other commitments that 

you have. Senator McCain. 

Senator MCCAIN. Thank you, Mr. Chairman. 

Professor Harvey and Professor Shay, thank you for being here, 

and thank you for your very important and valuable knowledge 

and expertise. 

Isn’t it just a fact that these tax advantages that Apple has either taken advantage of or in some cases, in my view, invented if 
29 

you take a tax reduction in a country that you have no employees, 

but doesn’t this put domestic companies and corporations at a distinct disadvantage? 

Mr. HARVEY. Yes. 

Senator MCCAIN. Professor Shay. 

Mr. SHAY. Yes. I think the objective of our tax rules should be 

to try and achieve a balance, and in this particular case, try to create in relation to transfer pricing and cross-border activity neutrality between what would happen if you were dealing with a 

third party and what happens when you are dealing with an affiliate. Our rules today favor using affiliates. 

Now, coming back to something Senator Johnson referred to, if 

I understand it correctly, most of Apple’s manufacturing is not 

done by Apple, and that is true of many companies today. It is 

done, I believe, by Foxconn, or other contract manufacturers, third 

parties. So companies today view themselves, I believe—and I do 

not believe there is any problem with it—as they are allocators of 

capital. They are trying to allocate the capital to the highest aftertax use. And that is fine. 

Our job and your job as designers of tax systems is to try and 

find a way that, while allowing business to do its business, we are 

taxing income in a way that least disturbs the pre-tax economic decisionmaking. And it seems to me very clear today that we are off 

balance here. We have very substantial amounts of income earned 

in a country where very little is done. It is not in the United States 

where I think most of it probably belongs, but it is also not in the 

market countries where the customers are. 

We need to come up with rules that achieve the outcome of having it taxed fairly, our fair share in the United States wherever 

else, whatever their claim is their fair share, that is fine. But right 

now it seems to me clear we are not getting our fair share. 

The R&D is done here. It is supported with our educational system. It is supported with an R&D tax credit. And that tax credit 

applies just as much to the R&D that is cost-shared out to the foreign location as it is here, so long as it was performed in the 

United States. This is not in balance. 

Senator MCCAIN. Ninety-five percent of the R&D conducted by 

Apple, and I would imagine every other high-tech corporation, is 

conducted here in the United States. Thank God. 

Professor Harvey, Apple has divided the world into two sections—North and South America, and the rest of the world. So if 

a customer in Sao Paulo, Brazil, purchases an iPhone, Apple Incorporated receives the profit and the United States the tax. However, 

if a similar customer purchases that same iPhone in Copenhagen, 

Denmark, that profit goes to Apple Ireland and no corporate tax accrues to any country. 

How is it possible that no tax goes to any country? 

Mr. HARVEY. I believe some tax does go to the country that the 

customers are located in, but it is a very small commission. 

Senator MCCAIN. Like 0.005 or something like that, Ireland? 

Mr. HARVEY. That was the ultimate tax rate in Ireland. I think 

the commission—I forget the exact commission, but it might have 

been 5 percent of sales, maybe 8 percent of sales. I am not sure. 
30 

Senator MCCAIN. So the moral of the story, at least in my view, 

is that Apple has violated the spirit of the law, if not the letter of 

the law, and I agree that a great deal of responsibility lies with 

Congress. And the last time, as you mentioned, Professor Shay, 

that we did any meaningful reform was way back in 1986, and it 

is long overdue. And perhaps this testimony today will motivate 

the Congress of the United States to enact a comprehensive reform 

and to bring him this $1 trillion or $1.5 trillion, I think it is, 

amount of money that rests overseas which is not brought back because of the 35-percent tax rate that would be imposed on it. And 

I guess my question to you, to both of you, is: Should there be a 

permanent incentive to bring that money home? Or should we have 

just a one-shot deal to say you can have—if you bring it home within the next year or two, you can have a 5-percent or a 10-percent 

tax rate imposed on it? 

Mr. HARVEY. I guess I will respond first. I do not think another 

temporary deal makes sense. There was a temporary deal back in 

2004–05. Studies done suggested that the vast majority of those 

funds were used to pay off debt or make dividend distributions. 

So I think this really calls for a comprehensive tax reform to address this issue, but also there are some issues that can be addressed in the short term. If Congress decides it wants to tighten 

up Subpart F, it can do so. If Congress decides it wants to increase 

transparency, it can do so. So I think a one-time tax holiday of the 

type that existed before would not be the right policy answer. 

Mr. SHAY. Senator, I am not a fan of tax holidays. The fact is 

quite a substantial portion of the income that is held offshore 

should have been in the United States in the first place if we were 

fully enforcing—or if we had transfer pricing rules that made 

sense. What we are talking about today is there is a portion of the 

offshore profits that should not have been offshore. In a well-designed tax system, they would not have been offshore. 

When the decision was made to allocate income to the lower tax 

environment, it was done under a law which was crystal clear. It 

is deferral. It is not exemption. There are proposals to use a holiday or a low rate as an inducement to bring back money, which essentially is a windfall for the companies who earned it overseas 

under a law that said it was deferral. 

Now, I understand that Mr. Cook has indicated to the Subcommittee that there would be no intention to bring back money 

at the current rates. So it is true that one contributes to pushing 

more income over there and keeping it there as long as you hold 

out the prospect of exemption, lower tax rates, and so on. That 

from a policy point of view does not make a lot of sense to me. 

There is a sound economic argument that I am not really arguing 

for today but that says it is already there, if you tax it, they will 

bring it home. I mean, their decision to bring it home analytically 

should be independent of whether you tax it. If you tax it, they will 

bring it home. If you do not tax it, if you tax at a lower rate, maybe 

they will bring it home. Even under an exemption system, there is 

no incentive to bring money home if you are going to earn a higher 

after-tax return on those funds abroad. The notion that exemption 

is the key to having money come home, it reduces the transactional 

effect of having a cost at the time of repatriation. If you had taxed 
31 

it at the time it was earned, that would have gone away. That is 

equally an answer to repatriation, as is giving exemption. So—— 

Senator MCCAIN. So permanent drastic reduction of the corporate tax rate, it seems to me, following your argument, would be 

the answer. 

Mr. SHAY. That would certainly be a windfall for the earnings 

that are offshore. I think we generally agree a lower corporate tax 

rate would be beneficial. 

Senator MCCAIN. Thank you, Mr. Chairman. I thank the witnesses. 

Senator LEVIN. Thank you very much, Senator McCain. Senator 

Paul. 

Senator PAUL. I think we need to restate for the record and be 

very clear here that neither this panel nor anyone on the Committee has said that Apple broke any laws. So they are brought before this Committee and harangued and bullied because they tried 

to minimize their tax burden legally. 

I would argue that it would probably be malpractice for them not 

to do so. If you have a publicly held company and you have shareholders and your mandate to your chief financial officer is, ‘‘Please 

maximize our taxes,’’ I am guessing that that would probably be 

something that shareholders would not accept. I do not know of 

any taxpayers who really do that. I do not know of anybody on this 

panel who tries to maximize their tax burden. 

My question for Mr. Harvey: Do you take any deductions on your 

taxes? 

Mr. HARVEY. Obviously I do. 

Senator PAUL. Do you choose to maximize your tax burden or 

minimize your tax burden? 

Mr. HARVEY. Minimize it. 

Senator PAUL. Do you think you are a bad person for doing that? 

Mr. HARVEY. Absolutely not. 

Senator PAUL. If you were advising as an accountant and an expert in the tax law, if you were advising a corporation and your 

mandate was to do what is best for their shareholders, would you 

advise them to count all their profit here at home at 35 percent or 

to try to do as much as they can legally to pay their taxes at a 

lower rate elsewhere? 

Mr. HARVEY. Well, as I said in both my written and my oral testimony, certainly what Apple did does not appear in any way to be 

illegal. I think the question is a policy question as to whether they 

should be allowed to do it in the future. 

Senator PAUL. Yes, and as a policy question, talking about taxes 

I think is an appropriate thing for Congress. Bringing in an individual company and vilifying them for doing something that is in 

every business’ mandate is objectionable, and that is why I object 

to these entire hearings, because talking about policy is one thing. 

For example, $1 trillion overseas, you want to bring it home? We 

have examples. We did it for 1 year at 5 percent. We brought in 

about $30 billion. We actually limited how much could come in. I 

say make it permanent. But make it permanent and make it low 

enough that people would do it. If you permanently do this at 5 

percent, the money will come home. But money goes where it is 
32 

welcome. If we want to have high taxes, we are going to continue 

along this. 

Everybody talks about tax reform. Just do it. Other countries 

just do it. We have a 35-percent corporate income tax. We are chasing people away from us. 

If the outcome of this Committee’s hearing is, ‘‘Evil Apple, let us 

go get them, let us go get companies like this, and let us raise their 

taxes,’’ guess what? Their headquarters may no longer be in 

Cupertino. They may be in Dublin with all their employees. They 

are the type of company, high-tech companies that can relocate 

around the world. They are not dependent on large manufacturing 

forces. So if you want to chase them out, bring them here and vilify 

them. It is exactly the wrong thing to do. We should be giving them 

an award today. We should be congratulating them on being a 

great American company and hiring people and not vilifying them 

for obeying the law. I mean, they are obeying the law. No one is 

accusing them of breaking the law. They are doing what their 

shareholders ask, which is to maximize profit. 

We have created this byzantine and bizarre Tax Code and chased 

them overseas. But it has been going on a long time. But just fix 

it. There are 70 votes right now in the Senate for having a 5-percent repatriation tax. Those votes exist, but everybody says, oh, 

that is the sweetener for overall tax reform, because so many people agreed to it. Why not just pass it tomorrow? The same with the 

corporate income tax. We have made ourselves beholden to things 

like the CBO that are, like, well, the CBO will score that as a loss 

of revenue. Well, one, the CBO does not know a lot of times, I 

think, up from down in the sense that you could change the corporate tax—there is such a number that you can lower it to where 

you will get more revenue. I do not know what that number is, but 

that number does exist. We are at 35 percent. You have a couple 

trillion dollars overseas. There is some number you lower it to 

where less money goes overseas unless people set up their companies to have their taxes overseas. 

So there are many ways you can do this. Repatriation would 

bring a lot home. But if we take it that this is a vendetta against 

American companies for trying to maximize profit, I think we really have missed the boat here. And really, I say one again, there 

should be a giant mirror sitting there. We should be looking at ourselves. We should be talking about what we do. Overall tax reform, 

everybody wants to do it, but they say, oh, it has to be revenue 

neutral. That to me is absurd as well. That means we are just 

going to punish some more people and punish some people less. 

Why don’t we try to reward the economy? Why don’t we try to reward shareholders? Why don’t we try to reduce taxes as a stimulus 

to the economy? Leave it with the people who earn it. 

So I am very frustrated by the whole proceeding, particularly because of all these accusations. They are simply doing what every 

company does. In fact, if they are not, why don’t we have the next 

hearing of companies who come in and their chief goal, their stated 

goal, is to maximize their tax burden? I want to see one company 

come before here and tell us that their goal is different than Apple’s, that their goal is to maximize their tax burden. Taxes are 

simply a cost, and they try to minimize them legally. I do, too. I 
33 

take a home mortgage deduction. I take my kid deductions. I take 

all the deductions I can legally take. 

This kind of vilification has gone on before. FDR did it. The 

President did it in his campaign. This is something that is not good 

for the country. It pits one of us against another, and I think Senator Johnson really put it well when he said, ‘‘Who are these people? Is there a Mr. Apple out there?’’ No. It is us. If you have a 

mutual fund, you probably own some Apple shares. If you are a 

teacher with a pension fund, you own Apple shares. If you are a 

fireman with a pension fund, you probably own Apple. Apple is a 

great American company, and I do not even know if they will know 

the breakdown, but I think it is interesting. Probably the vast majority—I would guess 70, 80 percent of their stock may be owned 

by Americans. And so who are we doing when we want to punish 

Mr. Apple? Who are we punishing? We are punishing ourselves. 

And if we want to grow America, we want more companies to succeed in our country, make money welcome. Money goes where it is 

welcome, and as much as you want to stuff the genie back in the 

box and say you must do this in America, companies can and will 

go everywhere. So let us make it a good place to work. Let us not 

vilify our American companies. 

And so what I would say, let us keep in mind what we are talking about today is not breaking of law. What we are talking about 

is a company doing what every company in America does, and that 

is, trying to minimize their tax burden. 

Thank you. 

Mr. SHAY. Could I make one comment just to be sure the record 

is correct? In my testimony—and I want to be crystal clear—I said 

I take no position on the legal correctness or strength of any tax 

position taken by Apple. I do not want that construed as saying 

what they have done is also fine. I have no idea. And that was not 

the point of the hearing. The Subcommittee staff did not request 

tax returns. They have only requested financial data, so far as I 

have seen. 

What we are trying to do in the hearing, as I understand it, is 

understand what happens under current U.S. law and ask ourselves: Is this the place we want to be? We can come with different 

answers, but nobody is trying to vilify Apple, nobody is trying to 

say what they did is either wrong, but, frankly, I am also not saying that there is no adjustment to be made to their income. I simply do not know. I was not given the facts to reach that conclusion, 

and I do not reach that conclusion. 

Senator LEVIN. Thank you. I think you have put it very clearly. 

There is no effort to vilify anybody. We are trying to shine a spotlight on the practices of a big company. We have done this with 

other companies. There is no other way to illustrate the way our 

current system works. It is a perfectly legitimate—not only legitimate function for Congress. We do not do enough analysis of how 

the current system works. We do not do enough oversight. And to 

attribute that to—or to characterize that in the way that it has 

been characterized by one Senator here as ‘‘vilification’’ misses totally the target of what the function of the Subcommittee is and 

what Congress is responsible to do and does too far little of, which 

is to look at how the current practices of the government work, how 
34 

they fall short, how they misfire, how they reach absurd results, 

which is the case here in the case of Apple paying a zero tax. Their 

goal is a zero tax for three corporations? Is that the goal, a zero 

tax? Now, it is not a matter of maximizing tax. You can set up a 

straw man about no one wants to maximize the tax. Of course, no 

one wants to maximize tax. 

Senator MCCAIN. Mr. Chairman, could I also make an unnecessary comment here? I have had the honor of serving with you for 

more than a quarter of a century. I know of no Member of the U.S. 

Senate that has ever accused you of bullying or harassing a witness in the thousands of hearings that you and I have been part 

of over many years. And, frankly, it is offensive to hear you accused of that behavior, which has never characterized your conduct 

of this Committee or the Defense Committee. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator McCain. I very 

much appreciate that. Senator McCaskill. 

OPENING STATEMENT OF SENATOR McCASKILL 

Senator MCCASKILL. I have two things to say. I really do not 

have questions for this panel, and I am anxious to hear the testimony of the next panel. 

First is I love Apple. I love Apple. I am Apple. My family—I 

made all my family—I harassed my husband until he converted to 

a MacBook. And I use it. It is a huge part of my life, from the way 

I consume media to the way I do my job. And I am very proud of 

Apple as an American company. So I will say that first. 

Second, I will say that I had the opportunity coming in when I 

did to witness the fact—and I let the word go out—that we are capable of classy bipartisanship in the U.S. Senate, and I do not 

think that Senator McCain sometimes gets enough credit for being 

willing to go places and say things that re-establish that we are capable of classy moments of bipartisanship. And everyone just got 

to witness one of those, and I wanted to publicly acknowledge Senator John McCain for that moment. 

And, finally, I have questions about this, not because I think 

Apple is the villain but, rather, Apple is utilizing the Tax Code that 

we have given them. And if we have any hope of changing that Tax 

Code to promote free enterprise and capitalism and the success of 

the American entrepreneur, but at the same time make sure that 

we are receiving enough taxes to fix our roads and bridges, to help 

educate our kids, to remain a country that is seen as the bright 

and shining light on the hill because of our infrastructure and our 

educated workforce, we have to make sure that we have a tax 

structure that supports those goals. And I think we can do both 

without villainizing any American companies, and I appreciate you 

for holding this hearing, and thank you to both witnesses for being 

here, and I would look forward to the next panel. 

Senator LEVIN. Thank you very much, Senator McCaskill. 

Professor Shay, you referred to ASI, the Irish company—I will 

just be a couple minutes in a second round. Why don’t we have a 

3-minute second round—as having ‘‘ocean income.’’ What do you 

mean by that? 
35 

1The prepared statement of Mr. Cook appears in the Appendix on page 121. 

Mr. SHAY. Again, we have not seen tax returns, and I tried to 

be very careful in my testimony, but it would appear that ASI, 

which has quite substantial sales but a very low tax rate in Ireland, may well be allocating income attributable to the cost-shared 

intangible not to its Irish business. Since ASI is not resident anywhere else, that is something that tax planners fondly refer to as 

‘‘ocean income.’’ I have seen it occur in at least one other case, but 

it did not come from having no tax residence. It came from having 

one country view the income as earned in the other country, and 

that other country viewed as earned in the first country so it was 

not taxed anywhere. But at least at that point, there were two 

countries, they were parties to a treaty, they could have resolved 

the issue, and the income would have been located somewhere. 

This structure is ‘‘different,’’ is the most polite way I will put it. 

Senator LEVIN. Thank you. Unless there is an additional question for this panel, we are going to excuse you with our thanks, and 

we will move now to the second panel. 

Thank you. Let me now call our next panel: Timothy Cook, the 

Chief Executive Officer of Apple; Peter Oppenheimer, the Senior 

Vice President and Chief Financial Officer of Apple; and Phillip 

Bullock, Apple’s head of tax operations. We thank you for being 

with us this morning. We look forward to your testimony. 

Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn, and at this time I would ask 

you to please stand and raise your right hand. Do you swear that 

the testimony you are about to give will be the truth, the whole 

truth, and nothing but the truth, so help you, God? 

Mr. COOK. I do. 

Mr. OPPENHEIMER. I do. 

Mr. BULLOCK. I do. 

Senator LEVIN. We will use our traditional timing system here 

today. About 1 minute before the red light comes on, you are going 

to see lights change from green to yellow, giving you an opportunity to conclude your remarks. Your written testimony will be 

printed in the record in its entirety. We ask that you limit your 

oral testimony to no more than 10 minutes. 

Again, our thanks to you, Mr. Cook, and your colleagues for 

being here today, and you may proceed. 

I am sorry. We have changed that. It is a 15-minute opportunity 

instead of 10 minutes. 

TESTIMONY OF TIMOTHY D. COOK,1 CHIEF EXECUTIVE OFFICER, APPLE INC., CUPERTINO, CALIFORNIA; ACCOMPANIED 

BY PETER OPPENHEIMER, SENIOR VICE PRESIDENT AND 

CHIEF FINANCIAL OFFICER, APPLE INC. AND PHILLIP A. 

BULLOCK, HEAD OF TAX OPERATIONS, APPLE INC., 

CUPERTINO, CALIFORNIA 

Mr. COOK. Thank you. I appreciate that. 

Good morning, Chairman Levin, Ranking Member McCain, and 

Members of the Subcommittee. I am proud to represent Apple before you today. 
36 

Apple has enjoyed unprecedented success over the past 10 years. 

The worldwide popularity of our products has soared, and our 

international revenues are now twice as large as our domestic revenues. As a result, I am often asked if Apple still considers itself an 

American company. 

My answer has always been an emphatic, ‘‘Yes.’’ We are proud 

to be an American company and equally proud of our contributions 

to the U.S. economy. 

Apple is a bit larger today than the company created by Steve 

Jobs in his parents’ garage 40 years ago. But that same entrepreneurial spirit drives everything that we do. 

You can tell the story of Apple’s success in just one word: ‘‘innovation.’’ It is what we are known for. Products like iPhone and 

iPad, which created entirely new markets, these give customers 

something so incredibly useful, they cannot imagine their lives 

without them. 

You might be surprised to learn that much of that innovation 

takes place in a single U.S. Zip code—95014. That is Cupertino, 

California, where we have built an amazing team, the brightest, 

most creative people on the planet. They come to work each day 

with just one mission: to make the very best products on Earth. 

Their job is to dream up things that capture the world’s imagination. 

One of those inventions is the App Store. If you have ever used 

an iPhone or an iPad, that mobile apps are one of the hottest 

things in technology today. Apps have made software development 

one of the fastest growing job segments in the U.S. today. 

We estimate that the App Store has generated nearly 300,000 new jobs in the U.S. App developers have earned over $9 billion 

from apps sold on the App Store, half in the last year alone. 

None of that economic activity was there 5 years ago, but Apple 

took a bold step in developing the App Store, and the app economy 

was born. Today it is a multibillion-dollar marketplace, and it 

shows no sign of slowing. 

We have chosen to keep the design and development of those revolutionary products right here in the United States. While job 

growth stagnated across the country over the last decade, Apple’s 

U.S. workforce grew by five-fold. Today we have 50,000 employees, 

and we have employees in all 50 States. 

Apple has created hundreds of thousands of jobs at small and 

large businesses that support us, from people involved in manufacturing to people involved in delivering the products to our customers. 

Components for iPhone and iPad, for example, are made in 

Texas, and iPhone glass comes from Kentucky. In total, Apple is 

responsible for creating or supporting 600,000 new jobs. 

We have used our earnings growth to invest billions of dollars in 

the United States to create even more American jobs. We are investing $100 million to build a line of Macs in the United States 

later this year. This product will be assembled in Texas, include 

components from Illinois and Florida, and rely on equipment produced in Kentucky and Michigan. 

We have constructed one of the world’s largest data centers in 

North Carolina. Reflecting our commitment to the environment, the 
37 

data center is powered by the largest solar farm and fuel cell of its 

kind in the United States. We are building data centers in Oregon 

and Nevada, a new campus in Texas, and a new headquarters in 

Cupertino. 

With all this growth and investment, to the best of our knowledge, Apple has become the largest corporate income taxpayer in 

America. Last year, our U.S. Federal cash effective tax rate was 

30.5 percent, and we paid nearly $6 billion in cash to the U.S. 

Treasury. That is more than $16 million each day, and we expect 

to pay even more this year. 

I would like to explain to the Subcommittee very clearly how we 

view our responsibility with respect to taxes. Apple has real operations in real places with Apple employees selling real products to 

real customers. We pay all the taxes we owe, every single dollar. 

We not only comply with the laws, but we comply with the spirit 

of the laws. We do not depend on tax gimmicks. We do not move 

intellectual property offshore and use it to sell our products back 

to the United States to avoid taxes. We do not stash money on 

some Caribbean island. We do not move our money from our foreign subsidiaries to fund our U.S. business in order to skirt the repatriation tax. 

Our foreign subsidiaries hold 70 percent of our cash because of 

the very rapid growth of our international business. We use these 

earnings to fund our foreign operations, such as spending billions 

of dollars to acquire equipment to make Apple products and to finance construction of Apple retail stores around the world. 

Under the current U.S. corporate tax system, it would be very expensive to bring that cash back to the United States. Unfortunately, the Tax Code has not kept up with the digital age. The tax 

system handicaps American corporations in relation to our foreign 

competitors who do not have such constraints on the free movement of capital. 

Apple is a company of strong values. We believe our extraordinary success brings increased responsibilities to the communities 

where we live, work, and sell our products. We enthusiastically embrace the belief, as President Kennedy said, ‘‘To whom much is 

given, much is required.’’ 

In addition to creating hundreds of thousands of American jobs 

and developing products that deeply enrich the lives of millions, 

Apple is a champion of human rights, education, and the environment. Our belief that innovation should serve humanity’s deepest 

values and highest aspirations is not going to change. 

Apple is also a company of strong opinions. While we have never 

had a large presence in this town, we are deeply committed to our 

country’s welfare. We believe great public policy can be a catalyst 

for a better society and a stronger America. 

Apple has always believed in the simple, not the complex. You 

can see this in our products and in the way we conduct ourselves. 

It is in this spirit that we recommend a dramatic simplification of 

the corporate Tax Code. This reform should be revenue neutral, 

eliminate all corporate tax expenditures, lower corporate income 

tax rates, and implement a reasonable tax on foreign earnings that 

allows the free flow of capital back to the United States. 
38 

1The prepared statement of Mr. Oppenheimer appears in the Appendix on page 121. 

We make this recommendation with our eyes wide open, fully 

recognizing that this would likely result in an increase in Apple’s 

U.S. taxes. But we strongly believe that such comprehensive reform 

would be fair to all taxpayers, would keep America globally competitive, and would promote U.S. economic growth. 

My colleague Peter Oppenheimer will now make a few opening 

remarks, and then we will be happy to answer your questions. 

Thank you very much. 

Senator LEVIN. Thank you very much. Mr. Oppenheimer. 

TESTIMONY OF PETER OPPENHEIMER,1 SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, APPLE INC., 

CUPERTINO, CALIFORNIA 

Mr. OPPENHEIMER. Good morning, Chairman Levin, Ranking 

Member McCain, Members of this Subcommittee. My name is Peter 

Oppenheimer, and I am Apple’s chief financial officer. I would like 

to discuss the structure and management of Apple’s global business 

and financial operations. 

In the United States our operational structure is quite simple: 

We sell to our customers through our retail stores, online stores, 

and channel partners. We provide our award-winning support to 

our customers through the Genius Bar and AppleCare. We pay 

taxes to Federal, State, and local governments on the full profits 

from these sales. 

Outside the United States we seek to provide the same industryleading products, services, and support that our U.S. customers 

have come to expect. We now sell the iPhone and iPad in over 100 

countries. 

Like all multinational companies, Apple must follow the local 

laws and regulations in each region where we operate. This often 

requires Apple to establish a physical presence not only in the region but also in the particular country where we wish to sell our 

products and services. 

Apple’s presence in these countries often takes the form of Appleowned subsidiaries. These in-country subsidiaries acquire products 

to sell in their markets through Apple-owned regional operating 

subsidiaries, which in turn acquire products from our contract 

manufacturers. 

In the European region, our primary operating subsidiaries are 

incorporated in Ireland. These subsidiaries, which were established 

in the early 1980s, now employ nearly 4,000 people in Ireland, and 

we recently broke ground on an expansion to our campus in Cork. 

Since 1980, Apple has had an R&D cost-sharing agreement with 

our Irish subsidiaries. The agreement was first put in place when 

Apple was about 5 years old and wanted to sell its computers overseas. At that time, Apple’s revenues were one-tenth of 1 percent of 

what they are today, and the invention of the iPhone was decades 

away. 

Today the substance of the agreement is largely unchanged except for our expansion into more countries and recent updates to 

comply with new U.S. Treasury regulations. Our cost-sharing 
39 

agreement, which is common in the industry, is audited by the IRS, 

and we are in full compliance with all laws and regulations. 

The agreement enables Apple to share the costs and risks of developing new products with our Irish subsidiaries. Virtually all of 

this R&D, and the jobs that go with it, take place in the United 

States. In exchange for this funding, the Irish subsidiaries have 

rights to distribute in Europe and Asia products created by the 

R&D funded by the agreement. 

We have used this method to distribute our products internationally for more than 30 years. More than half of our ongoing R&D 

costs are funded by Apple Ireland. When times are good, as they 

have been in recent years, our Irish subsidiaries benefit greatly, as 

we do in the United States. When Apple lost money in the mid1990s, our Irish subsidiaries lost money as well. I mention losing 

money in the 1990s because it serves as a reminder of how close 

Apple came to going out of business. 

In 1997, we were on the brink of bankruptcy and about out of cash. In just 2 years, we lost $2 billion. I can tell you firsthand we 

were facing the very real possibility of a world without Apple. 

A big part of the turnaround was a company-wide effort to 

streamline and simplify so Apple could survive. We restructured 

our operations and finances to make everything as simple and efficient as possible. 

As part of that effort, we consolidated our European post-tax income into two existing subsidiaries: a holding company, Apple Operations International, or AOI; and an operating company, Apple 

Sales International, or ASI. 

The consolidation eliminated enormous complexity in handling 

foreign bank accounts and improved our ability to manage currency 

risk. While AOI and ASI are both incorporated in Ireland, neither 

is tax resident there under the rules of Irish law. Indeed, Irish law 

contemplates that companies may be incorporated in Ireland without being tax resident there. 

I should clarify one point here. For many years ASI has had 

thousands of employees in Ireland. Until 2012, the payroll for these 

ASI employees was run through another Apple subsidiary, AOE. 

The fact that AOI and ASI are not tax resident in Ireland does not 

reduce our U.S. taxes at all. 

The profits held by AOI and ASI have already been taxed by foreign governments according to the local laws where the money is 

earned. The investment income on their cash holdings is taxed by 

the U.S. Government at the corporate tax rate of 35 percent. Apple 

could certainly choose to manage foreign after-tax profits in numerous foreign subsidiaries without moving the cash to AOI or ASI, 

but that would have absolutely no effect on the taxes we pay in the 

United States. 

However, eliminating the central cash management function 

would be inefficient. Managing larger pools of cash centrally rather 

than many places around the world reduces complexity, better protects the asset, and helps us earn higher returns through the 

economies of scale. 

Today Apple is in the fortunate position of having more cash 

from international operations than we need to run our company 

and pursue strategic opportunities. Some observers have ques-
40 

tioned Apple’s decision to fund part of its capital return to shareholders by issuing $17 billion in debt rather than repatriating foreign earnings. Apple respectfully suggests that any objective analysis will conclude that this decision was in the best interest of our 

shareholders. If Apple had used foreign earnings to return capital, 

the funds would have been diminished by the very high U.S. corporate tax rate of 35 percent. By contrast, given today’s historically 

low interest rates, the cost of issuing debt was less than 2 percent. 

Mr. Cook, Mr. Bullock, and I would be happy to answer your 

questions. Thank you. 

Senator LEVIN. Thank you very much, Mr. Oppenheimer. Mr. 

Bullock. 

Mr. BULLOCK. Good morning. 

Senator LEVIN. Good morning. Do you have any—— 

Mr. COOK. Our statement is concluded, Senator. 

Senator LEVIN. Thank you. First let me thank Apple for the cooperation that it has extended to the Subcommittee. We very much 

appreciate that. 

I think, Mr. Cook, you made reference to—you quoted President 

Kennedy. I am wondering whether you would agree with the following statement of President Kennedy that he made in his April 

1961 tax message, that ‘‘deferral has served as a shelter for tax escape through the unjustifiable use of tax havens, such as Switzerland. Recently more and more enterprises organized abroad by 

American firms have arranged their corporate structures aided by 

artificial arrangements between parent and subsidiary regarding 

intercompany pricing, the transfer of patent licensing rights, the 

shifting of management fees, and similar practices which maximize 

the accumulation of profits in the tax haven.’’ 

Do you agree with that? 

Mr. COOK. The President and his brother have been long-term 

heroes of mine, so I am sure if he said it, at the time it was true. 

Today, from at least our point of view, I do not consider deferral 

to be a sham or abuse in any kind of way. 

Senator LEVIN. Mr. Bullock, does Apple Inc. own directly or indirectly AOI, AOE, and ASI? 

Mr. BULLOCK. Yes, Apple Inc. owns directly or indirectly AOI, 

AOE, and ASI. 

Senator LEVIN. All right. So all those companies in Ireland are 

owned by Apple effectively. Is that correct? 

Mr. BULLOCK. They are all legally owned by Apple Inc., yes. 

Senator LEVIN. And where is AOI, Mr. Bullock, functionally managed and controlled? 

Mr. BULLOCK. In our view, it is functionally managed and controlled, which is an Irish legal concept, in the United States. 

Senator LEVIN. In a February 11 letter to the Subcommittee, 

Apple wrote us that it has ‘‘not made a determination regarding 

the location of AOI central management and control.’’ Why did you 

tell us that? 

Mr. BULLOCK. Mr. Chairman, the reason we responded in that 

manner is that under Irish law, the requirement for evaluating or 

concluding on the tax residency of Ireland looks to whether or not 

central management and control takes place in Ireland or not. It 
41 

does not formally require that you make a determination that it 

takes place somewhere else. 

Senator LEVIN. But you have told us here this morning that you 

believe that the location of AOI’s central management and control 

is in the United States, so Apple has concluded that. Is that correct? 

Mr. BULLOCK. Yes, and I believe that in a previous meeting with 

your staff, they asked the same question, and I believe that I provided the same response. 

Senator LEVIN. Okay. Mr. Cook, do you agree that the location 

of AOI’s central management and control is in the United States? 

Mr. COOK. Sir, I do not know what the legal definition of that 

is, but from a practical point of view, yes. 

Senator LEVIN. All right. Now, relative to ASI, Mr. Bullock, is 

ASI functionally managed and controlled in the United States? 

Mr. BULLOCK. As a practical matter, applying the Irish legal 

standard of central management and control, I believe that it is 

centrally managed and controlled from the United States. 

Senator LEVIN. And does Apple agree that it is functionally managed and controlled in the United States? 

Mr. BULLOCK. Under Irish law—— 

Senator LEVIN. No. Under our law, do you believe that? 

Mr. BULLOCK. I do not believe that central management and control is a legal term under U.S. tax law. 

Senator LEVIN. All right. Do you believe it is functionally managed and controlled in the United States? 

Mr. BULLOCK. Yes. 

Senator LEVIN. Mr. Cook, do you agree? 

Mr. COOK. We have significant employees in Ireland. We have 

about 4,000. And so there is a significant amount of decisions and 

leadership and negotiations that go on in Ireland. But some of the 

most strategic ones do take place in the United States. 

Senator LEVIN. Would you agree on balance that ASI is functionally managed and controlled in the United States? 

Mr. COOK. From a practical matter. I do not know the legal definition of the word. 

Senator LEVIN. As a practical matter, you would agree that it is 

functionally managed and controlled in the United States? 

Mr. COOK. Yes, Senator. 

Senator LEVIN. Thank you. 

Now, Mr. Bullock, AOI is incorporated in Ireland. Is that correct? 

Mr. BULLOCK. Yes, Mr. Chairman, it is incorporated in Ireland. 

Senator LEVIN. And where is AOI a tax resident? 

Mr. BULLOCK. It does not have a tax residency. That does not 

mean that it does not pay taxes. The interest that it earns is 

paid—U.S. taxes are paid in full on its interest by Apple Inc. 

Senator LEVIN. And the interest you are talking about is on the 

tens of billions of dollars that it has in cash. Is that correct? 

Mr. BULLOCK. Correct. The cash that was distributed from the 

operating subsidiaries underneath. 

Senator LEVIN. All right. So those tens of billions of dollars of 

cash earn interest, and that interest is paid by Apple Inc. is that 

correct? 
42 

Mr. BULLOCK. The U.S. tax on that interest is paid by Apple Inc. 

at the U.S. statutory rate of 35 percent, yes. 

Senator LEVIN. But there is no income—there is no tax paid on 

the money itself that has been sent to Apple—excuse me, to AOI 

by the distributors. Is that correct? There has been no tax paid on 

that either in Ireland or in the United States on those tens of billions of dollars which has been sent to AOI from the subsidiaries 

below that? 

Mr. BULLOCK. The income of the subsidiaries has been subject to 

tax in the countries in which they operate. 

Senator LEVIN. Right, but there has been no tax paid in Ireland 

on those distributions nor in the United States on those profits. Is 

that correct? 

Mr. BULLOCK. There has been no—there is no U.S. tax on the 

transfer of those balances to AOI. The income earned by ASI and 

AOE has been subject to Irish tax in full in accordance with the 

agreement that we have with Ireland. 

Senator LEVIN. And is that a maximum of 2 percent? 

Mr. BULLOCK. Mr. Chairman, I am not precisely sure of the mechanics of the computation. 

Senator LEVIN. Not the mechanics, but is that a maximum of 2 

percent? 

Mr. BULLOCK. Approximately, yes. 

Senator LEVIN. Thank you. Has AOI filed a corporate income tax 

return in the last 5 years? 

Mr. BULLOCK. No. Prior to that, it made filings in France for a 

branch operation there. 

Senator LEVIN. All right. But they have paid no corporate income 

tax for the last 5 years, at least. Is that correct? 

Mr. BULLOCK. Again, they did not pay any corporate income tax, 

but Apple Inc. has paid corporate income tax—— 

Senator LEVIN. I did not ask you about Apple Inc. I asked you 

about AOI. 

Mr. BULLOCK. That is correct. AOI—— 

Senator LEVIN. That is where most of the profits go, doesn’t it? 

Mr. BULLOCK. They receive dividends from the operating subsidiaries underneath. 

Senator LEVIN. And what is the amount of cash that went to ASI 

from those dividends? 

Mr. BULLOCK. Over what period of time? 

Senator LEVIN. The last 5 years. 

Mr. BULLOCK. In the last 5 years, the company has received dividends from its operating subsidiaries approximating $30 billion. 

Senator LEVIN. That is ASI or AOI? 

Mr. BULLOCK. And a number of other operating subsidiaries. AOI 

is a holding company. One of its roles is to own a number of Apple’s international subsidiaries. 

Senator LEVIN. But ASI has received about $70 billion in cash, 

has it not, from those subsidiaries and about $30 billion of that $70 

billion went to AOI? Is that about right? 

Mr. BULLOCK. I do not have the precise details. There were distributions from a number of other subsidiaries as well. 

Senator LEVIN. Does that sound about right? 

Mr. BULLOCK. Approximately. 
43 

Senator LEVIN. Okay. Just to summarize here, AOI has received about $30 billion over the last 5 years, but has not filed a corporate 

income tax return. Is that correct? 

Mr. BULLOCK. That is correct. That income is not subject to U.S. 

tax under both statute and by regulation, and while it has not filed 

a tax return, Apple Inc. has paid tax on the interest earned by 

AOI. 

Senator LEVIN. I understand that, but I am not talking about the interest earned on the $30 billion that it has put in banks or whatever and invested and received interest. I am talking about the $30 

billion that it received in dividends, approximately. It has not filed 

a corporate income tax return on that money. Is that correct? 

Mr. BULLOCK. That is correct. But all of the subsidiaries underneath have earned that money in their countries and paid taxes required by law. 

Senator LEVIN. Whatever taxes were owed there. 

Mr. BULLOCK. Right. 

Senator LEVIN. Okay. Does ASI own the economic rights to Apple’s intellectual property offshore other than in the Americas? 

Mr. BULLOCK. Yes, it does in part. It owns that in combination 

with AOE, which is the subsidiary that handles some of the manufacturing that the company continues to do in Ireland. 

Senator LEVIN. All right. And neither one of those companies 

files an income tax with the United States. Is that correct? 

Mr. BULLOCK. Neither of those companies file a tax return with 

the United States, although Apple Inc. reports—— 

Senator LEVIN. We just went through that, the interest. 

Mr. BULLOCK. Actually, both interest and there is a small 

amount of what is known as foreign-based company sales income 

that is subject to current U.S. tax from ASI’s business activity. 

Senator LEVIN. My time is up. Senator McCain. 

Senator MCCAIN. Thank you, Mr. Chairman. And I thank the 

witnesses. 

Mr. Cook, we congratulate you on all of your successes and that 

of Apple, and as we said earlier, you have managed to change the 

world, which is an incredible legacy for Apple and all of the men 

and women who serve it. 

Also, I think you have to be a pretty smart guy to do what you 

do, and a pretty tough guy, too. You have that reputation, and I 

say that in a complimentary fashion. And I enjoyed our conversation. And so I wonder, do you feel that you have been bullied or 

harassed by this Committee or its Members? 

Mr. COOK. I feel very good to be participating in this, and I hope 

to help the process. I would really like for comprehensive tax reform to be passed this year, and any way that Apple can help do 

that, we are ready to help. 

Senator MCCAIN. So it was my understanding that you sought to 

testify before this Committee for that purpose, and other purposes. 

Is that correct? 

Mr. COOK. I think it is important that we tell our story, and I 

would like people to hear it directly from me. 

Senator MCCAIN. So you were not dragged before this Committee? 

Mr. COOK. I did not get dragged here, sir. 
44 

Senator MCCAIN. You do not drag very easily, I understand. 

[Laughter.] 

And I thank you. This is an issue of concern for Congress, and 

I guess my first question to you, Mr. Cook, is: You have obviously 

legally taken advantage of a number of aspects of the Tax Code, 

both foreign and domestic, and that has reduced the tax burden, 

I think we would agree, than if you were paying the 35-percent corporate tax rate that domestic companies pay. So my question is: 

Couldn’t one draw the conclusion that you and Apple have an unfair advantage over domestic-based corporations and companies, in 

other words smaller companies in this country that do not have the 

same ability that you do to locate in Ireland or other countries 

overseas? 

Mr. COOK. No, sir, it is not the way that I see it, and I would 

like to describe that. The way that I look at this is Apple pays 30.5 

percent of its profits in taxes in the United States, and I do not 

know exactly where this stacks up relative to other companies. But 

I would guess it is extremely high on the list. I know with the $6 

billion that we are the top payer in the United States. 

We do have a low tax rate outside the United States, but this tax 

rate is for products that we sell outside the United States, not 

within. And so the way that I look at this is there is no shifting 

going on that I see at all, and in addition, if you look at Apple 

versus other companies that do not sell in the United States I 

would say that the applicable comparison would be the 30.5 percent effective rate, not our foreign tax rate. 

Senator MCCAIN. Well, let us get a little simpler here. Why does 

AOI exist? How is its income generated? How is its income taxed? 

Why was AOI incorporated in Ireland? Four thousand employees is 

impressive, but not impressive when you look at your overall workforce. So maybe you can clear that up for us. 

Mr. COOK. Yes, thanks very much for the question. AOI was created in 1980, and at this period of time, Apple was—this is before 

the days that the iPhone, iPad, iPod, and the things that we are 

known for today were even invented. As a matter of fact, the Mac 

was not even announced until 1984. And so Apple was looking for 

a place to distribute its products in Europe—— 

Senator MCCAIN. I understand that was 1980. Is that still operative today? 

Mr. COOK. The relationship between Apple and the Irish Government is still there today, and we built up a sizable population—— 

Senator MCCAIN. I say with respect, given the tax rate that you 

are paying in Ireland, I am sure you have a very close relationship. 

Mr. COOK. But it is more than that, sir. It is that we have built 

up a significant skill base there of people that really understand 

deeply the European market, that serve our customers well, that 

provide a number of functions for that. Also I think it is important 

to understand that AOI is nothing more than a holding company. 

A holding company, as you know, is a concept that many companies use. It is not an operating company. And so the dividends that 

go into this holding company have already been taxed as appropriately in their local jurisdiction. And so AOI is nothing more—— 

Senator MCCAIN. To a great advantage to Apple, wouldn’t you 

agree? 
45 

Mr. COOK. AOI to me, sir, is nothing more than a company that 

has been set up to provide an efficient way to manage Apple’s cash 

from income that has already been taxed, and the investment income that comes out of AOI is taxed in the United States at the 

full 35-percent rate. And so, sir, from my point of view, AOI does 

not reduce our U.S. taxes at all. 

Senator MCCAIN. Can you please state for the record where AOI, 

ASI, and AOE is a tax residence? 

Mr. COOK. Yes, sir. My understanding is there is not a tax residence for either—for any of the three subsidiaries that you just 

named. 

Senator MCCAIN. Does that sound logical? 

Mr. COOK. Well, again, as I look at it, ASI and AOE are paying 

Irish taxes, and so I am not—I personally do not understand the 

difference between a tax presence and a tax residence, but I know 

that they fill out Irish taxes and pay those. AOI, because it is just 

a holding company, the interest—it only makes investment income, 

and all of that investment income is taxed in the United States at 

the full 35-percent level. 

Senator MCCAIN. When you look at that avoidance or relief of a 

35-percent tax burden, which I am sure that we are in agreement 

is way too high and now the highest in the world, I understand, 

but you said the purpose of AOI is to ease administrative burdens. 

But are there certain U.S. tax burdens—isn’t it obvious that you 

are not bearing the same tax burden as if you were bearing in the 

United States, which then gives you some advantage over corporations and companies which are smaller, which are strictly located 

in the United States of America? 

I am not saying that is wrongdoing. But I think you would agree 

that it gives you a significant advantage. 

Mr. COOK. Again, sir, I have tremendous respect for you. I see 

this differently than you do, I believe. What I see is Apple is earning these profits outside the United States. By law and regulation, 

they are not taxable in the United States. We have set up a holding company to collect these after-tax profits from our different foreign subsidiaries into AOI. It then invests, as any treasury kind of 

arm would, and the interest investment—or the interest profits off 

of that are paid in the United States as they are required to under 

existing U.S. Treasury regulations. 

Senator MCCAIN. Can you understand there is a perception of 

unfair advantage here, Mr. Cook? 

Mr. COOK. Sir, I see this as a very complex topic that—I am glad 

that we are having the discussion, but, honestly speaking, I do not 

see it as being unfair. I am not an unfair person. That is not who 

we are as a company or who I am as an individual. And so I would 

not preside over that, honestly. I do not see it in that way. 

Senator MCCAIN. I thank you. I am out of time. What I really 

wanted to ask is why the hell I have to keep updating the apps on 

my iPhone all the time. [Laughter.] 

And why you do not fix that. 

I thank you, Mr. Chairman. 

Mr. COOK. Sir, we are trying to make them better all the time. 

Senator LEVIN. Thank you. We have only 5 minutes left, I believe 

on a roll call. Have you voted already? 
46 

Senator MCCAIN. No. 

Senator LEVIN. I think we better recess for about 10 minutes. 

Thank you. 

Mr. COOK. Yes, sir. Thank you. [Recess.] 

Senator LEVIN. Okay. We will come back into session. Senator 

McCaskill. 

Senator MCCASKILL. I certainly understand that what you all 

have engaged in is what every good American business does, and 

that is, tax planning. If you do not tax-plan, then you are incompetent as an American business. But I do hope that I can understand better why the structure you have used has been embraced 

so that it will better inform our decisions and how to make it simpler and how we can support international growth for all of our 

companies that are American companies. 

You borrowed $17 billion and issued bonds to pay dividends to 

your shareholders fairly recently. It was in the economic news because of your large cash reserves, so clearly you made a decision 

that it was going to be cheaper for you to service that debt and 

then use the cash to pay dividends, then to bring any of this cash 

back. 

Do you have the analysis that would help us understand how 

much cheaper it was for you to borrow that money? 

Mr. COOK. I can describe it at a broad level, Senator. The cost 

of capital today is at an all-time low, as you know, and so our 

weighted average cost for the borrowing that we just did was less 

than 2 percent. And we were faced with a decision to go that route 

or pay 35 percent to repatriate. 

So as we looked at that analysis, we felt strongly that it was in 

the best interest of our shareholder for us to secure the debt. 

Senator MCCASKILL. Okay. Let us assume that we simplify this. 

Ireland gave you a 2-percent rate, which was negotiated for your 

company. Correct? 

Mr. COOK. We went to Ireland in 1980, and they were very much 

recruiting, I believe, technology companies at that time, and Apple 

was a small, $100 million business that had no operations in Europe. And so as a part of recruiting us, the Irish Government did 

give us a tax incentive agreement to enter there, and since then 

we have built up a sizable operation there, nearly 4,000 people. We 

are building a new site. We are continuing to grow. And the skills 

of our people there are very fundamental for understanding the European market and servicing our customers there from tech support 

to sales to reseller support, et cetera. And so we have quite a very 

strong presence there. 

Senator MCCASKILL. I guess my question, Mr. Cook, is: If Ireland 

recruited you back when you were a $100 million company and 

gave you a really good deal, how do we, if we are setting tax policy, 

how do we do it in a way that there is not going to be—I mean, 

correct me if I am wrong, but I believe that probably three-fourths 

of net new mobile activity growth is going to be in emerging markets in—would you disagree with that percentage, that net new 

growth in markets in terms of mobile activity are going to be out 

there in emerging markets as opposed to Europe and North America? 
47 

Mr. COOK. I think a significant amount—I am not sure of the 

exact number, but I think a significant amount of growth will be 

in emerging markets. 

Senator MCCASKILL. So I guess the point I am trying to get to 

here is let us assume we simplify our Tax Code and let us assume 

that we get it down, we clear out all the underbrush, we take away 

some of the goodies and some sectors of our economy. We understand the reality of international moving of capital because of 

international economies and international trade. What keeps another country in one of the emerging markets from undercutting us 

once again, like Ireland did back in 1980? 

Mr. COOK. I think the United States has such enormous advantages, and the barrier right now in terms of repatriating cash is 

that it is repatriated at the 35-percent level. And so our proposal— 

and I may be a bit different than my peers here—is I am not proposing zero. My proposal is that we eliminate all corporate tax expenditures, get to a very simple system, and have a reasonable tax 

on bringing money back from overseas. And I think if we did that, 

I think many companies would bring back capital to invest in the 

United States, and it would be great for the economy. 

Senator MCCASKILL. What about the other way? What would it 

cost you to move out of California and go entirely to Ireland or to 

a country that is going to be—for example, China, if you get that 

deal with China Mobile soon? Which I know you are working on, 

right? That is a big one, hopefully, that you get done. You have 

been working on it awhile. What keeps you from—in terms of the 

relative cost analysis and the benefit analysis, what keeps you from 

moving out of California? 

Mr. COOK. Well, we are an American company, and we are proud 

to be an American company. We do the vast majority of our R&D 

in California, and so we are there because we love it there, and this 

is where we can create and make things that people have not even 

imagined yet. And—— 

Senator MCCASKILL. So it is an intangible? You are saying it is 

an intangible? It is not something that you can reduce to—— 

Mr. COOK. I am saying it is who we are as people, and we are 

an American company. We are an American company whether we 

are selling in China, Egypt, or selling in Saudi Arabia. Wherever 

we are, we are always an American company. And so I have never 

thought, it has never entered my mind honestly, Senator, of moving our California headquarters to another country. It is beyond my 

imagination. And I have a pretty wild imagination, but it is beyond 

it. 

Senator MCCASKILL. On the money that—the corporate bonds 

you issued, do you think—and I am not being judgmental about 

you doing that. I understand the business rationale behind it in 

terms of the low cost of capital. But do you think you should be 

able to deduct the interest on those? Would that be one of the corporate expenditures we could do away with? 

Mr. COOK. It could be one of the corporate expenditures to do 

away with. I think, the way the Tax Code is written currently, my 

understanding is it would be deductible. It would be a very small 

percentage of the overall that we pay. We paid $6 billion at an effective rate of 30.5 percent. But, yes, it is certainly one of the 
48 

things that I think this group should talk about in terms of doing 

comprehensive tax reform. 

Senator MCCASKILL. Okay. And this is kind of complicated, but 

somewhere along the way you are deciding how to divide up sale 

proceeds as to where the money goes. And I know some of it depends on where the sale occurred. But some of it depends on a decision you are making internally about where you are going to allocate what you are getting for your intellectual property. 

Where is that decision being made? And what do you base it on 

in terms of how much money comes back to the American companies that are paying taxes versus how much is attributable to the 

international companies? 

Mr. COOK. It is a good question. Today everything that we sell 

in the United States is taxed in the United States. For a foreign 

country, generally speaking, when we sell something in a foreign 

country, it is taxed in the local market, and then if it is one of the 

countries that are being served from Ireland, those units are generally sold by an Irish subsidiary. And so that income, if you will, 

is taxed, to the degree it needs to be, in the local jurisdiction. And 

then the proceeds move to an Irish sub in most cases—or in many 

cases called AOI, which acts as a holding company and invests Apple’s earnings. And then we pay taxes on those earnings in the 

United States. 

Senator MCCASKILL. So does any of the proceeds of the many 

thousands of dollars you have taken from me over the years, do 

any of the proceeds of that actually get parked in Ireland or in any 

of the international companies under the aegis of intellectual property? 

Mr. COOK. I think maybe Mr. Bullock can probably answer this 

better than I. 

Mr. BULLOCK. Thank you, Tim. The answer to that is no. One 

hundred percent of the profits on any sale to a customer in the 

United States, whether it is through the channels or through our 

online stores, all of that is fully taxed in the United States. 

Senator MCCASKILL. Okay. 

Mr. BULLOCK. There are no outbound payments going offshore. 

Senator MCCASKILL. Okay. Thank you. 

Mr. COOK. Thank you. 

Senator LEVIN. Thank you very much, Senator McCaskill. Senator Johnson. 

Senator JOHNSON. Thank you, Mr. Chairman. 

Let me kind of pick up where Senator McCaskill left off there. 

This is complex, and it has to do with how do you allocate income, 

what kind of transfer price is an appropriate price. 

I did notice that your U.S. sales were about 39 percent of your 

total sales, international was about 61. So U.S. sales about 39, and 

you had income of about 35 percent in the United States; international sales, 61, and about 65 percent of income. 

Can you just explain that? I mean, it is pretty close. If I were 

taking a look at that, you are getting pretty darn close, I would 

think, to proper allocation between sales and income. Can you just 

explain that disparity? 

Mr. COOK. Sure, Senator, and I will make some comments, then 

pass it to Peter. He may be able to add something. 
49 

Generally, Apple’s Macintosh business is a larger percentage of 

its sales in the United States than internationally. As we launched 

the iPhone, iPhone became a larger percentage of our international 

business than it did a part of our U.S. business, because we had 

this nice base of Macintosh sales in the United States. 

The iPhone, generally speaking, has higher gross margins than 

our Macintosh business, so it is logical that the international business generally would carry higher margins than our domestic business. And Peter may be able to add something to this. 

Senator JOHNSON. But basically to summarize, you have a more 

profitable product mix internationally than you have in the United 

States. 

Mr. COOK. That is correct. 

Senator JOHNSON. That pretty well explains that difference? 

Mr. OPPENHEIMER. It does. 

Senator JOHNSON. I was talking earlier about who are the beneficiaries of your very good tax rates overseas. I would point out— 

I think this is true—that if we ever do tax reform, if we ever do 

incentivize companies to start bringing some of that money back 

home, the way current tax law is written is you get a deduction for 

foreign taxes paid, correct? Mr. Bullock. 

Mr. BULLOCK. That is correct. It is actually a credit, a dollar-fordollar credit, to the extent you pay foreign taxes. 

Senator JOHNSON. Okay. So as a result, now Apple has a lot 

more money that when you repatriate it we will be able to tax 

more of it. Correct? So the U.S. Government, you could argue, will 

be a net beneficiary if we ever get our tax house in order. 

Mr. BULLOCK. To the extent of repatriation in one form or another, if it is taxable, yes, that would yield more U.S. tax. 

Senator JOHNSON. Mr. Bullock, I would imagine you probably 

know this better than anybody. Because you are a large corporation, my guess is you have full-time IRS agents stationed in your 

operation basically doing a full-time audit non-stop. Is that pretty 

accurate? 

Mr. BULLOCK. That is correct. We are under audit in a number 

of jurisdictions around the world, including the United States not 

unlike many of our multinational peers. 

Senator JOHNSON. And they are looking at all this corporate 

structure, they are looking at all the transfer prices, and they are 

basically giving you the nod, saying that you are following tax law. 

Mr. BULLOCK. They look at it in detail, yes. 

Senator JOHNSON. Okay. Mr. Cook, again, talking about who are 

the beneficiaries of not only your excellent products but also just 

your lower tax rates and corporate profit, that would be shareholders. Can you describe your shareholders, in general? 

Mr. COOK. I think Peter can probably add more to this, but generally, Apple is very widely owned because it is a part of the underlying indexes in the stock market, and a number of mutual funds 

own us in addition to pension funds. Peter. 

Mr. OPPENHEIMER. Yes, Senator, roughly our top 50 shareholders 

own about half the company and these include public employee retirement systems, mutual funds such as Fidelity, Pimco, or 

BlackRock where people are saving for their retirements, and we 

also have individual retail shareholders as well. 
50 

Senator JOHNSON. So even the top 50 percent is widely dispersed, 

and those are large funds that also have a very diverse shareholder 

base in those funds. 

Mr. OPPENHEIMER. Absolutely. 

Senator JOHNSON. So, again, those folks benefit from the fact 

that Apple is able to retain more of its profit by not paying out 

taxes to foreign governments? 

Mr. OPPENHEIMER. Yes, and they also receive our dividends. 

Senator JOHNSON. In addition to U.S. and State income taxes, 

what other taxes in the United States does Apple basically generate? What could you almost take credit for? 

Mr. OPPENHEIMER. Last year, we paid more than $325 million in 

Federal employment taxes that Apple paid in addition to our employees, and we have paid over the last couple of years I think 

nearly $100 million to State and local governments in property 

taxes and various other fees. And I believe last year we collected 

and remitted and paid approximately $1.5 billion in sales taxes. 

Senator JOHNSON. So that is getting close to about $2 billion in 

total. Mr. Bullock. 

Mr. BULLOCK. Just to clarify that a little bit, it was a little over 

$1.3 billion in sales and use tax. 

Senator JOHNSON. When we are talking about transfer pricing 

and allocation of income, you face the same dilemma between 

States, don’t you, in terms of which State claims how much income 

when you are paying those State income taxes? 

Mr. BULLOCK. Well, the income that the company generates in 

the United States the approximate 40 percent that you alluded to 

earlier of our total global profits, which is relatively commensurate 

with our U.S. customer base, that income does get apportioned 

around and divvied up amongst the States, under a slightly different system but it does get allocated out to the States. 

Senator JOHNSON. So can you just tell me, what is the basis of 

that allocation? And how would that differ really from trying to allocate income between different countries? 

Mr. BULLOCK. Well, that, too, varies by State. Some States apportion based on relative sales, sales to customers in that State 

over total sales domestically. Some States use a multifactor test. 

They may look to sales, property, and payroll. 

Senator JOHNSON. Do you end up having to negotiate between 

the States in terms of who gets to claim what percentage of your 

income? Do you end up paying more—do you have more of your income allocated to pay State income tax than you actually—in other 

words, more than 100 percent? 

Mr. BULLOCK. It is not over 100 percent, but it is approximately 

100 percent. So in our fact pattern it is not double taxed, which 

would be the case if more than 100 percent of the income was apportioned. But it does approximate 100 percent. 

Senator JOHNSON. But, again, that is a similar type of problem 

you have trying to allocate income between different countries, isn’t 

it? 

Mr. BULLOCK. If you had different States apportion in different 

ways, yes. 

Senator JOHNSON. Can you tell me a little bit about the taxes 

you pay to foreign countries? Is that income taxes? Are those sales 
51 

taxes? Is it property taxes? Is it a combination of all those? And 

can you give me some sort of relative amount? 

Mr. BULLOCK. Well, there is a combination. Last year, in fiscal year 2012, the company paid a little over $900 million in international income taxes around the world. We are projecting that 

number to be larger this year. And that number is significantly 

larger than it was a few years ago. 

In addition to that, I do not have the statistics available, but I 

would imagine similar to in the United States there are employer 

contributions for payroll tax for employees outside of the United 

States, and there is a considerable amount of VAT and GST that 

gets collected and remitted by the company to various countries 

around the world. 

Senator JOHNSON. Of your total worldwide employment, how 

much is based in the United States, how much is based overseas? 

Mr. OPPENHEIMER. About 50,000 of our 75,000 employees are 

here in the United States. 

Senator JOHNSON. So even though 60 percent of your sales are 

overseas, what percentage is that? Almost two-thirds—— 

Mr. OPPENHEIMER. Yes. 

Senator JOHNSON [continuing]. Of your employment is here in 

the States? 

Mr. OPPENHEIMER. And that is also influenced by our retail 

stores. Of our approximately a little over 400 retail stores, about 

260 of them are here, and that influences it. 

Senator JOHNSON. Okay. Thank you for your testimony, and 

thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Johnson. Senator 

Ayotte. 

Senator AYOTTE. Thank you, Mr. Chairman. I want to thank the 

witnesses for being here today. 

Mr. Cook, is there any dispute at this hearing that Apple has 

complied with our tax laws? 

Mr. COOK. I have heard no dispute of that. 

Senator AYOTTE. One of the issues that I heard raised when you 

were being asked questions by Senator McCaskill about the issue 

of the $102 billion that is present overseas that you have now is 

this idea of repatriation. You had said that you would be willing 

to pay some rate on repatriation. As we look at tax reform, what 

do you think is the rate, thinking not only of Apple but of multinational corporations around the world, if we do tax reform and let 

us say we simplify the Code so deductions are eliminated and then 

we take that and pour that into reducing the rate? What rate do 

you think we have to be at if we want to be competitive in terms 

of making sure that we have investment here? 

Mr. COOK. I think the rate on the U.S. sales in my judgment, 

from most of the studies I have seen, would indicate it would need 

to be in the mid-20s as all of the expenditures are dropped out. I 

think in terms of a rate on bringing back foreign earnings, I think 

to incent a huge number of companies to do that, it would need to 

be a single-digit number. And I think by doing that, you wind up 

in a revenue-neutral kind of situation, which means some companies may pay a bit more, and I think we would be one of those. 

Other companies would pay less. But I think more important than 
52 

all of the tax, it would be great for growth in this country. And so 

that is the reason I feel so adamant about doing this. 

Senator AYOTTE. So as I understand it, let us say you are building a data center here, you are building a new facility here. Right 

now that money you have parked overseas, you cannot use that to 

invest in plant facilities here. Is that right? 

Mr. COOK. That is correct. We cannot use our overseas cash to 

make any investments in the United States. 

Senator AYOTTE. If you were in our position and thinking about 

tax policy and making sure that our country remains competitive, 

how important do you think it is that we change the Tax Code to 

ensure that this remains a good place for investment? I understand 

there are many other advantages to being here, including intellectual property advantages, et cetera, but you are not the only corporation that has significant monies overseas right now that we 

would like to see come back here. What do you think that would 

do in terms of our economy? I think you have touched on it. 

Mr. COOK. I think it is vital to do. I think it is great for America 

to do. I think we would have a much stronger economy if we did 

that. I think it would create jobs and increase investment. And so 

I put my whole weight and force behind it. 

Senator AYOTTE. And if we create more jobs and increase investment, isn’t that more taxes that can be collected here as well in 

terms of thinking about, the fiscal State of the country? 

Mr. COOK. It is, and I think that is a very excellent point, is that 

all ships rise with the tide. 

Senator AYOTTE. Right, especially with where our unemployment 

rate is right now. 

I wanted to ask you about the issue of thinking about—as we do 

tax reform, the issue of a territorial rate. How important is it that, 

as we go forward—hopefully we will on a bipartisan basis—to reform the Code to really create a better dynamic, simpler, lower 

rates for investment here that a component of that be a territorial 

rate? Because there has been some discussion around here about 

not having a territorial rate. 

Mr. COOK. I think the United States is advantaged if more capital moves into the country, because I think it would really 

strengthen our economy significantly. And so I think there has to 

be—I do not propose zero. I think it has to be a reasonable tax on 

doing so. And some people refer to that as ‘‘territorial,’’ some people 

refer to that as ‘‘hybrid.’’ I have heard different terminology for it, 

but that is how I believe it should work. 

Apple does not support a temporary tax holiday. We think that 

the Tax Code needs to be comprehensively reformed for a long period of time. 

Senator AYOTTE. If we create a temporary tax holiday, which we 

have done in the past, don’t we just perpetuate the situation, 

meaning it may have a short-term but it does not encourage longterm investment? 

Mr. COOK. I think it is very important for business to be predictable, and a permanent change to me is materially better than a 

short-term tax holiday. 

Senator AYOTTE. I actually have a question on an unrelated topic 

to the tax issue today. But can you tell us, when you think about— 
53 

when you were talking to Senator McCaskill, you talked about the 

advantages, for example, of being in this country. One of them I 

view very significantly is, of course, the intellectual property protections of this country, which I know are very significant to you 

as a technology company. 

You have faced significant challenges in China, so what would 

be—can you tell me what those challenges are? And thinking about 

intellectual property protection certainly is an advantage that the 

United States has. How do we address this with our international 

partners? 

Mr. COOK. We have actually faced more significant areas in other 

countries other than China. 

Senator AYOTTE. The reason I raise China is I have heard the 

stories about the knock-off Apple stores, but please speak to other 

countries as well. 

Mr. COOK. Yes, that has been an issue. That has clearly been an 

issue. I think that the U.S. court system is currently structured in 

such a way that it is very difficult to get the protection a technology company needs because our cycles are very fast. And when 

the cycles are very fast and the court system is very long, foreign 

competitors or even competitors in the United States can quickly 

take certain IP and use it and ship products with it, and they are 

on to the next product before the court system rules. 

And so I actually think that we require much more work on IP 

in this country as well, and I would love to see conversations between countries to try to strengthen IP protection globally. I do not 

know how likely that is to occur in the current environment, but 

for us, our intellectual property is so important to our company, 

and I would love the system to be strengthened in order to protect 

it. 

Senator AYOTTE. I thank all of you for being here. I appreciate 

it. 

Mr. COOK. Thank you very much. 

Senator LEVIN. Thank you, Senator Ayotte. Senator Portman. 

OPENING STATEMENT OF SENATOR PORTMAN 

Senator PORTMAN. Thank you, Mr. Chairman. I appreciate the 

opportunity, having just left the Finance Committee on the IRS, to 

talk about tax reform and not just tax administration. 

Look, this hearing is important because it is talking about a specific provision of our international tax rules that allows U.S. companies to effectively take IP rights created here in the United 

States to foreign jurisdictions. Some of it is by means of cost sharing. Some of it is through other agreements. 

I agree with you, Mr. Chairman, and the Ranking Member that 

we need to address this issue. I totally disagree that we ought to 

do it through picking out specific tax loopholes or tax preferences. 

We have to reform this Code, and if we do not do that, our companies will continue to be uncompetitive. 

If you think about it, we have an uncompetitive tax system now. 

We are competing with one hand tied behind our back. And if we 

are going in and taking away certain preferences, it may make us 

feel better about getting more of this IP income back here, but, in 
54 

effect, it makes our companies even less competitive and hurts U.S. 

employment. 

So that is why we have to do tax reform. We have to do it now. 

We are now living with an international Tax Code that is a relic 

of the 1960s. It was not even reformed in 1986 when the rate was 

lowered to 34 percent, now 35 percent. So we are looking at several 

decades now of tax policy that really is antiquated and does not 

keep up with the times. 

So I have a proposal to do that. It has been scored by the Joint 

Committee on Taxation. It is revenue neutral. It is a 25-percent 

rate with a territorial system. There are other ideas out there. The 

President has talked about it. He has said in his February 2012 

white paper he believes the rate ought to be lowered, it ought to 

be reinvested when you get rid of these tax preferences in lowering 

that rate. 

So there is a lot of commonality now between where Senator 

Baucus is, Senator Hatch is, and where Congressman Camp is. 

And the Ways and Means Committee and the Finance Committee 

are working together on this. 

So that is the way to approach it. Eighty percent of our world’s 

purchasing power now lies beyond our borders, and so a key strategy to grow jobs here at home is by tapping into that. And that is 

what Apple does. That is what a lot of companies in the United 

States do. We want them to do that. It is also where our international Tax Code puts our workers at a disadvantage and puts 

our companies at a disadvantage, because when you are operating 

overseas you pay the tax rate of the company you are operating in 

plus you pay the residual U.S. tax when that income is brought 

home. 

The other is a tax credit. In some jurisdictions, like Ireland, the 

tax is so low that you do not get much of a credit. But it is also 

incredibly complicated to go through that process. And so, in effect, 

it puts us, again, in a noncompetitive position. 

Almost all of our industrial competitors, by the way, have shifted 

to a territorial type system. That includes the U.K. It includes 

France. It includes Germany. It includes Japan. In fact, when you 

look at the OECD, now 26 of our 35 fellow OECD countries have 

moved to this dividend exemption system, which is a specific territorial system. Congressman Camp has talked about that. I think 

that is the right way to go. Essentially they do not tax active business income earned beyond their borders, and their businesses are 

a lot more competitive internationally as a result. 

So the U.S. penalty for repatriating earnings has resulted in 

somewhere, Mr. Chairman, between $1.5 and $2 trillion being 

locked up overseas. That means that money is starting to be deployed for R&D overseas, for putting factories overseas that otherwise could be here. So I think we have to move, and we have to 

move very quickly. No other nation in the world imposes such a 

high barrier to bringing foreign earnings home as the United 

States. No other one. 

And, by the way, every one of our little competitors have reformed their tax code since we have back in 1986. Every one of 

them, their corporate tax code and their international tax codes 

have all been reformed. They have not just lowered their rates. 
55 

Canada just lowered theirs from 16.5 to 15 percent, and our rate, 

as you know, is the highest in the world. But they have reformed 

the code to make it more competitive for their companies. 

So we have to do this. If we do not, we are going to continue to 

lose opportunities, and I think our guiding principle should be how 

do we create competitiveness so we can win customers overseas. 

Tightening rules related to sourcing of IP income, as again Chairman Camp has proposed and as my plan would do, is important 

to do. Let us just do it in the context of a comprehensive proposal. 

I note, Mr. Oppenheimer and Mr. Cook, whoever wants to answer, that you all do a lot of sales overseas. I think I just heard 

from Senator Johnson that 65 percent of your revenue is overseas, 

about 60 percent of your business is overseas now. Is that accurate? 

Mr. COOK. Yes, sir, that is accurate. About two-thirds last quarter were overseas. 

Senator PORTMAN. And how many U.S. jobs does that represent? 

In other words, how many jobs in the United States of America are 

in the U.S. because they support your foreign sales? 

Mr. COOK. In total, we have created or support 600,000 U.S. jobs. 

It is difficult to allocate a certain percentage of those for international business, but I would say it is significant. We are able to 

invest a lot more because we sell our products around the world. 

Senator PORTMAN. It would be tens of thousands of jobs in the 

United States that are here because of your sales overseas, right? 

Mr. COOK. Our earnings overseas have powered our company, 

yes. 

Senator PORTMAN. I would suggest you come up with that number. I know it is not easy, but it is probably 40 percent of your 

workforce, something like that, in the United States, and it is a 

huge boon to us. Again, we want you to sell stuff overseas because 

it creates jobs in America. 

Would it be fair to say that your biggest competitor globally is 

Samsung? 

Mr. COOK. They are certainly one of them, yes. 

Senator PORTMAN. So Samsung would be a major competitor? 

Mr. COOK. Yes, sir. 

Senator PORTMAN. And is Samsung an American company? 

Mr. COOK. Korean company. 

Senator PORTMAN. They are headquartered in South Korea that 

has as top corporate tax rate of 24 percent, which is 15 points 

lower than the U.S. corporate tax rate of 39.5 percent, which is our 

combined State and Federal. So they have a lower tax rate there. 

Based on public financial statements for both the companies, my 

staff tells me it appears that Apple and Samsung actually pay 

about the same global effective tax rates. At least they did last 

year. And this is just looking at public documents. Apple’s global 

tax payments were about $7.7 billion out of $56 billion in global 

pre-tax earnings. Samsung’s global tax payments were about $4 

billion out of $28 billion in global pre-tax earnings. So it comes out 

to a global rate of about 14 percent, the same for both companies. 

Mr. Bullock, is that consistent with your estimate of Apple’s rate 

and what you know about Samsung’s rate? 
56 

Mr. BULLOCK. Senator, yes, that was Apple’s global cash tax rate 

last year. We believe it will be actually a few points higher this 

year. 

Senator PORTMAN. Okay. Well, let us be conservative and say 

that it is going to be the same. So it sounds like all the tax planning discussed at the hearing today ultimately resulted last year 

in nothing more than the same global tax rate as your main foreign 

competitor. Is that accurate? 

Mr. BULLOCK. Yes, that sounds like—— 

Mr. OPPENHEIMER. Senator, yes, with one difference. Samsung is 

able to freely move its capital back—— 

Senator PORTMAN. I am getting to that. You are ahead of me, Mr. 

Oppenheimer. 

So I would say the answer is it is worse for Apple because they 

cannot bring their money home. 

Mr. OPPENHEIMER. Yes. 

Senator PORTMAN. And think about that. It is partly the rate, but 

it is partly the fact that they cannot bring it home at 35 percent, 

so their investment options are a lot more limited, aren’t they? 

Your investment options are a lot more limited. 

Mr. BULLOCK. Yes. 

Senator PORTMAN. How much money does Apple spend on tax 

compliance efforts to go through all this rigmarole we talked about 

earlier? 

Mr. BULLOCK. I do not have the exact figure, but it is a lot. 

Senator PORTMAN. Again, I would suggest you get that number. 

I think the American people would like to know how broken our 

tax system is. I mean, I am a recovering lawyer myself, but you 

do not need more tax lawyers. You need more engineers, you need 

more innovators. You need people to keep America on the cutting 

edge, and, your products are great already, but they could be even 

greater if you had fewer lawyers and more engineers, probably. 

How big is your tax department? 

Mr. BULLOCK. It is approximately three dozen people around the 

world, and we have a couple dozen additional resources through 

our shared service centers in Cork and Austin, Singapore, and we 

do have some personnel in Shanghai and Brazil. 

Senator PORTMAN. And I imagine it is a lot more than three 

dozen plus those folks, because you hire a lot of law firms, too. 

Mr. BULLOCK. Well, yes, there is a lot of outside help as well. If 

you could encourage Peter to help me out with more people, that 

would be appreciated. 

Mr. OPPENHEIMER. Senator, I would add—— 

Senator PORTMAN. You want to have fewer people. We want to 

reform this Tax Code so you do not have to mess with all this stuff. 

Go ahead. I am sorry. 

Mr. OPPENHEIMER. I would add, if I could, that the tax return 

that I sign each year in the United States is 2 feet tall or greater, 

and we are under continuous examination, and much of the effort 

that Phil spoke about, both internally and particularly with our 

outside advisers, deals with continuous examination. So we would 

very much support a simplified Code that would lead to a smaller 

tax return. 
57 

Senator PORTMAN. So you have high tax compliance costs. You 

cannot bring your money home so you cannot invest it where you 

want to. Let me ask you this: What would it do to Apple’s ability 

to compete successfully with Samsung if Congress effectively hiked 

the tax rate on your international earnings without doing anything 

to modernize the Tax Code so that you could move to a dividend 

exemption system or some other modernized system? 

Mr. COOK. It would be very bad, sir. 

Mr. OPPENHEIMER. It would not be helpful. 

Senator PORTMAN. And that is essentially what some are advocating here today. Would you like to be able to cut your tax compliance costs and invest more of that in some productive uses? 

Mr. COOK. Yes, definitely. 

Senator PORTMAN. With no offense to Mr. Bullock. 

Well, let me just summarize by saying, look, I appreciate the 

hearing today. None of us would design a Tax Code that has a company like Apple engaging in these costly, complex tax planning efforts. Not to achieve some windfall, as the Subcommittee report 

suggested to me, but, rather, to achieve parity and a roughly level 

playing field with its foreign competitors, not including, again, the 

costs of compliance and not including the disadvantage of not being 

able to bring the money home. It is an antiquated, complex-—needlessly complex, in my view—tax system. 

So I do not think the solution is to tinker at the margins or go 

backward toward a worldwide system that makes it even harder to 

compete. I think we should take the President up on his offer to 

do corporate tax reform. He says he wants to do it. The Chairman 

of the Ways and Means Committee and the Chairman of the Finance Committee say they want to do it. It is bipartisan. And I 

hope this hearing will help us to move toward that goal. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Portman. 

Let me just, first of all, say of course you can bring the profits 

home. You bring the profits home from South America, don’t you? 

Mr. COOK. Do we bring the profits home from South America? I 

do not know the answer—— 

Senator LEVIN. Well, you have not transferred your intellectual 

property for that geography, have you? It is just for the rest of the 

world, other than the Americas. Isn’t that correct? 

Mr. COOK. The economic transfer for Europe is in Ireland, yes. 

Senator LEVIN. I am saying that you bring the profits home from 

your sales in South America, don’t you? 

Mr. COOK. I would guess there is some cash in South America. 

I do not know, sir. I would—— 

Senator LEVIN. Well, your transfer agreement relative to the intellectual property is the rest of the world outside of the Americas. 

Is that correct, Mr. Bullock? 

Mr. BULLOCK. Yes, that is correct. 

Senator LEVIN. All right. So the other parts of the world that are 

not covered by that transfer of intellectual property, which is the 

creator of profits, that is your Golden Goose, and you have shifted 

that Golden Goose, except for the Americas, to Ireland. You shifted 

it to three companies that do not pay taxes in Ireland, Okay? They 

do not even exist for taxpaying purposes in terms of income tax. 
58 

You shifted your intellectual property there. That is your choice. 

You did that in a transfer price agreement. You did not shift the 

intellectual property, however, as I understand it, as far as sales 

in the Americas is concerned. Is that right, Mr. Bullock? 

Mr. BULLOCK. The economic rights—— 

Senator LEVIN. Economic rights. That is the right—but shorthand, the economic rights to that intellectual property were not 

transferred as far as the Americas is concerned. Is that right? 

Mr. BULLOCK. Mr. Chairman, the economic rights to the intellectual property for distribution in the Americas is owned by Apple 

Inc. The intellectual rights for distribution in Europe and Asia Pacific are owned by ASI and AOE as a result of the cost-sharing arrangement. 

Senator LEVIN. All right. So to answer my question directly, they 

were not transferred as far as the Americas are concerned. Is that 

correct? They belong to the home company, Apple Inc. Is that correct? 

Mr. BULLOCK. That is correct. Apple Inc.—— 

Senator LEVIN. All right. So the profits that result in the Americas outside of the United States, you pay income taxes on here. Is 

that correct? You are bringing them back here to the United 

States, is that correct? As far as the Americas are concerned. 

Mr. BULLOCK. There is a selling profit in both Canada and in 

Brazil and in Mexico. And, yes, any residual profit is subject to 

U.S. tax in full. 

Senator LEVIN. All right. So you are bringing those profits home. 

Mr. BULLOCK. I would characterize it as Apple Inc. is generating 

those profits. 

Senator LEVIN. Well, they are generating the profits through its 

intellectual property in Europe and Asia, too. I am just talking 

about the profits in those countries are brought home. Is that correct? In Canada, Mexico, the ones you just mentioned, they are 

brought home? 

Mr. BULLOCK. I would characterize it as those profits are generated by the U.S. company. So I would not say that they are 

brought home. I would say that they are earned by Apple Inc. 

Senator LEVIN. Apple Inc. keeps those intellectual—those economic rights, right? 

Mr. BULLOCK. It has, yes. 

Senator LEVIN. And it has chosen not to keep the economic rights 

for the rest of the world. Is that right? 

Mr. BULLOCK. Via a co-funding arrangement since 1980. 

Senator LEVIN. Right, which it controls. Is that right? I mean, 

that agreement is an Apple agreement. People who signed it all 

work for Apple, right? 

Mr. BULLOCK. It is between two related parties. 

Senator LEVIN. I understand. But they all work for Apple, don’t 

they? Is there any doubt in your mind that Apple controls that 

agreement and could write that agreement the way it wants to 

write it, Apple Inc.? 

Mr. BULLOCK. Well, I do not think that is the standard. The 

standard is: Would parties at arm’s-length enter into that type of 

arrangement? 
59 

Senator LEVIN. Is that an arm’s-length agreement? Are you suggesting that agreement is an arm’s-length agreement when all of 

the signatories are Apple Inc employees? 

Mr. BULLOCK. I would, yes. It is evidenced by parties at arm’slength enter into joint development arrangements all the time. 

Senator LEVIN. Who signed that agreement? Three parties, right? 

Mr. BULLOCK. Parties at arm’s-length enter into joint development arrangements all the time. The U.S. Treasury Department on 

three separate occasions and even the U.S. Congress have approved 

cost sharing, as evidenced by arm’s-length behavior. 

Senator LEVIN. I am just asking you, was Apple in control— 

Apple Inc.’s employees in control of that agreement. It is a very 

simple question. 

Mr. BULLOCK. Chairman, I—— 

Senator LEVIN. Did they all work for Apple Inc.? 

Mr. BULLOCK. They all work for Apple Inc. 

Senator LEVIN. Okay. 

Mr. OPPENHEIMER. Senator, may I add some context to this? 

Senator LEVIN. No, I think we ought to be able to try to get a 

straight answer on this. In terms of this so-called cost-share agreement, which shifted the economic rights to intellectual property— 

shifted the economic rights. These are the crown jewels of Apple 

Inc. They were shifted to these Irish companies in an agreement 

signed by three people, all of whom work for Apple. That is factually the case. If that is not, say I am wrong. 

Now, you signed—— 

Mr. COOK. I would disagree with your characterization. 

Mr. OPPENHEIMER. I disagree with your characterization. 

Senator LEVIN. Well, you signed the agreement in 2008, didn’t 

you? 

Mr. OPPENHEIMER. Yes, but I think there is some very—— 

Senator LEVIN. Don’t you work for Apple? 

Mr. OPPENHEIMER. I do, but I think there is some very important 

context—— 

Senator LEVIN. Okay. Well, you can give the context in a minute, 

but I want to get the facts out, and then we will call on you for 

the context. 

Mr. Cook, you signed that agreement, did you not, in 2008? 

Mr. COOK. I signed the 2008 agreement, yes. 

Senator LEVIN. And you were working for Apple at that time? 

Mr. COOK. I have been working for Apple for 15 years, sir. 

Senator LEVIN. And the other person who signed it I believe was 

Mr. Wipfler, is that correct, in 2008 who was the treasurer for 

Apple? 

Mr. COOK. I am not sure. I do not have the agreement in front 

of me. 

Senator LEVIN. Okay. Do you know, Mr. Oppenheimer? 

Mr. OPPENHEIMER. Yes, he is our treasurer. 

Senator LEVIN. And he was then? 

Mr. OPPENHEIMER. Yes. 

Senator LEVIN. Three people working for Apple signed this agreement. This agreement shifted the economic rights in your crown 

jewels to three Irish companies that you own and control. 
60 

Mr. OPPENHEIMER. Senator, I would respectfully disagree with 

that characterization. 

Senator LEVIN. Well, you already said you own and control them 

earlier this morning. Let me just finish my question, and if you do 

not agree that you own and control them, you can stop me. But you 

agreed earlier this morning you do own and control those corporations. So I am relying on your testimony that you own and control 

those corporations. So now you transfer, you shift—and, by the 

way, when you said you shifted nothing, Mr. Cook, I could not disagree with you more. Of course you shifted something, the most 

valuable thing you have. The economic rights in your intellectual 

property you shifted to those three companies in an agreement. I 

am not saying it was legal or illegal. I am simply saying you shifted the economic rights to the most valuable thing you own—intellectual property. The thing that produces the profits you shifted to 

those three Irish corporations which you own. 

Now the profits, about 70 percent of the profits worldwide now 

end up with those three Irish corporations. That is the fact. And 

now those profits are abroad. And when one of my colleagues says 

you cannot bring them home, of course you can bring it home—if 

you will pay the tax on it that would be owing on them if you 

brought them home. Of course you can bring them home. You bring 

home the profits from Mexico and Canada and South America. The 

only reason you are not bringing them home is because they were 

transferred to the companies in—these three Irish companies. That 

is the reason why they are there. It is your judgment, your decision. I am not saying you are making the wrong decision. It is your 

decision not to bring those profits home. And so $100 billion plus 

is now stashed away in these three Irish companies that you control but nonetheless it is in their legal name. 

And the question is: Will you bring them home? You have told 

us in one place, I believe, Mr. Cook, that you do not intend to bring 

those monies home unless our tax rates are reduced. I believe that 

is what you told our staff. Is that correct? You are not going to 

bring that money home unless we reduce our tax rates. Is that accurate as to what you told our staff? 

Mr. COOK. Senator, there is a lot there. I would appreciate being 

able—— 

Senator LEVIN. You can, but I just want to ask you that one 

question. Is it true you told our staff you are not bringing the $100 

billion home unless we reduce our tax rates? Is that accurate? 

Mr. COOK. I do not remember saying that. 

Senator LEVIN. Is it true? 

Mr. COOK. I said I do not remember saying it. 

Senator LEVIN. No. I am saying is it true that you are not going 

to bring them home unless we reduce our tax rates. 

Mr. COOK. I have no current plan to bring them back at the current tax rate. 

Senator LEVIN. All right. Is that the same way as saying unless 

we reduce our tax rates you are not bringing them home? Is that 

the same way—— 

Mr. COOK. No, I do not think it is the same, sir. 

Senator LEVIN. How is it different? 
61 

Mr. COOK. Your comment sounds like it is forever, and I am not 

projecting what I am going to do forever because I have no idea 

how the world may change. 

Senator LEVIN. All right. It is not your intent to bring them 

home unless we reduce our tax rates. Is that correct? 

Mr. COOK. I have no current plan to do so at the current tax 

rates. 

Senator LEVIN. Okay. Here is where we are at, here is the situation. You have an agreement which shifts the economic rights, the 

most valuable thing you have, to three Irish companies that pay no 

taxes. That is the shift. That is the Golden Goose right there. That 

is your crown jewels. That is your intellectual property. You have 

a right to do that just the way you had a right not to shift that 

intellectual property for Mexico, Canada, and South America. You 

decided not to do it there. You are going to pay—Apple Inc. is going 

to pay the taxes on the income for all the parts of the world except 

for where two-thirds of the profits are created, roughly, and that 

is the rest of the world that you have transferred the economic 

rights to. 

So, Okay, here is where we are at. You have profits going now— you have $100 billion in profits that are sitting there and you say 

it is your current intent to not pay your taxes on them because you 

do not think you need to pay taxes on those because the profits 

were shifted, as we have indicated, the economic value has been 

shifted, and, therefore—— 

Mr. OPPENHEIMER. But, Senator, I must say we do not agree 

with the characterization. 

Senator LEVIN. That the economic rights to that—to your intellectual property was shifted to those three companies? You do not 

agree with that? 

Mr. OPPENHEIMER. We do not. 

Senator LEVIN. Oh, Okay. What was shifted to them? 

Mr. COOK. Senator—— 

Senator LEVIN. Well, what was shifted to them in that agreement 

that the three people signed, all of whom worked for Apple Inc.? 

What was shifted? 

Mr. OPPENHEIMER. Well, Senator, it began in 1980. 

Senator LEVIN. I know that. I am talking about 2009, the 

most—— 

Mr. OPPENHEIMER. Yes, but, Senator, it began in 1980—— 

Senator LEVIN. We have been through that history—— 

Mr. OPPENHEIMER. It fundamentally—— 

Senator LEVIN. We have been through the history. 

Mr. OPPENHEIMER. It fundamentally did not change since 1980, 

and I think there is some very important context that gets to the 

essence of the agreement that began over 30 years ago. 

Senator LEVIN. I understand, but I want to talk about the agreement signed in 2008 and 2009. There was an agreement signed in 

2008 and 2009. You signed that agreement in 2008. Three Apple 

employees signed that agreement in 2008. That agreement did two 

things: it shifted the economic rights, the way they had been shifted before, 30 years ago, it continued to shift the economic rights 

to three Irish companies under your control that do not pay taxes 

in the United States. 
62 

Mr. OPPENHEIMER. Senator, I respectfully disagree with that. 

Senator LEVIN. Okay. It did not shift the economic rights? 

Mr. OPPENHEIMER. No, I do not—that is not the way I would 

characterize it. 

Senator LEVIN. What did it shift? 

Mr. OPPENHEIMER. What it did, beginning in 1980—— 

Senator LEVIN. Did it shift—— 

Mr. OPPENHEIMER. What it did, beginning in 1980—— 

Senator LEVIN. Let us start in 2008—— 

Mr. OPPENHEIMER [continuing]. And it continued—— 

Senator LEVIN. I am sorry, Mr. Oppenheimer. You have gone 

through the 1980. I want to talk about the 2008 and 2009 agreements. Did it shift anything? Did it give rights to those three Irish 

companies? Did they get any rights in those three—— 

Mr. OPPENHEIMER. It was a continuation of the same rights they 

have had for 30 years—— 

Senator LEVIN. Fine. 

Mr. OPPENHEIMER [continuing]. That they have co-funded. 

Senator LEVIN. Real good. Now, in 2008, you continued under 

Apple’s control, totally under Apple’s control—I do not think we 

ought to kid ourselves about that. Under Apple’s control, in 2008 

and 2009, there is an agreement that is reached, so-called, with a 

controlled corporation, which you folks have agreed this morning 

you control, and under that agreement, which continues an earlier 

arrangement—that could have been changed. You did not have to 

shift the profits in 2008. You did not have to shift your intellectual 

property, the economic benefits in 2008 and 2009. You are in control. It is your company. You are signatories. You made a decision 

to do it. You had a right to make a decision. But do not kid ourselves as to the implications of what this means in terms of America’s revenue. 

Apple makes this shift—again, I am not saying it is illegal. I am 

not saying it is legal. I am saying you made a decision to shift most 

of your crown jewels in terms of economic value and rights that 

creates the profits which are so massive, you made that decision 

to continue that arrangement in 2008 and 2009. Okay. Now, 

we—— 

Mr. OPPENHEIMER. So we did that. 

Senator LEVIN. Yes. 

Mr. OPPENHEIMER. Beginning in 1980, and that is the way we set 

up Apple. We went to Ireland when we first wanted to begin to sell 

computers overseas—— 

Senator LEVIN. I understand. But we heard that this morning. I 

understand that. 

Mr. OPPENHEIMER. We have continued to do that for the last 30 

years. We have built up a lot of skills. Our systems are set up that 

way. Our processes are set up that way. Our operations are, and 

that is why we do it today. It has been unchanged for over 30 

years. 

Senator LEVIN. The result of continuing that in 2008 and 2009 

is most of your profits worldwide are now in three Irish companies 

that you control that do not pay taxes. That is the result of what 

you did in 2008. I know the origin—— 
63 

Mr. OPPENHEIMER. Thankfully, customers around the world love 

the iPhone and the iPad and they are buying them. 

Senator LEVIN. We love the iPhone and the iPad. 

Mr. OPPENHEIMER. And so do people around the world, and they 

are buying them, and we are selling—— 

Senator LEVIN. People around the world—people in Mexico and 

Canada love the iPhone and the iPad. I got one right here. My 

granddaughter even knows how to use it. All of it. 

Mr. COOK. Thank you. 

Senator LEVIN. It is a terrific instrument. That is not the question. People love it in Canada, Mexico, and in South America. But 

the intellectual property was not transferred there. 

Mr. OPPENHEIMER. And it is because it is the way we set ourselves up over 30 years ago. We have not changed. 

Senator LEVIN. I understand. As a result of the continuation of 

that process, in 2008 and 2009, most of your profits that come from 

this brilliant intellectual property, which everybody that I know of 

applauds, the continuation of that system means that most of your 

profits worldwide are sitting in three Irish companies that you control that do not pay taxes. That is the result, Okay? You can defend 

it. But that is the result. And, folks, there is a huge drain as a result. You point out, and accurately so, Mr. Cook, that 95 percent 

of the creativity that goes into those products is in California. But 

two-thirds of the profits are in Ireland. And you have made a decision, which you have a right to do, not to bring that money home. 

Mr. COOK. Senator, we are proud that all of our R&D or the vast 

majority of it is in the United States. 

Senator LEVIN. I know, but the profits that result from it are sitting in Ireland in corporations that you control that do not pay 

taxes. You ought to be proud—— 

Mr. COOK. All of the profits from all of the products we sell in 

the United States—— 

Senator LEVIN. I know that. 

Mr. COOK [continuing]. We pay taxes in the United States. 

Senator LEVIN. Oh, I know that. And all the profits that you 

make from your products that are sold in Canada are taxed in the 

United States, and all of the profits that are produced from products that you sell in Mexico and Argentina and South America, all 

of those profits you pay taxes on in the United States. But you 

made a decision. You signed an agreement that continues an earlier agreement. You signed two agreements in 2008 and 2009, and 

in those two agreements you continued to shift most of your crown 

jewels in terms of economic value, you continued that arrangement, 

with the result that most of your profits worldwide are not taxed. 

You are an American company. You are proud of it. We are proud 

of you being an American company. We are glad you are where you 

are at. But the result of these arrangements that you have continued is that most of your profit is now where we have described all 

morning, in Ireland, in these companies that do not exist anywhere 

except on the water. 

Now, of course we have to change it. Of course we have to change 

this system. But in order to change it, we have to understand it, 

not deny it. We have to understand what is going on. And what is 

going on is a huge loss of revenue to the United States because we 
64 

have these corporations—and you are the biggest one—that are 

able to shift profits to places where you, an American company, do 

not pay income tax on it. That is where we are at. And we have 

to better understand that if we are going to correct it. And that is 

our purpose here today, to shed a light on that. 

And so I hope that purpose has been achieved. We cannot continue a system, and I say this from the bottom of my heart. We 

cannot continue a system where the company, a multinational company, as phenomenally successful as yours, and deservedly so, can 

make a decision, sitting down in 2008 and 2009, as to where the 

profits are going to flow. An American company where the R&D is 

95 percent in the United States, we—you created it. I will not say 

‘‘we.’’ You created it. You got some real benefits, by the way, in 

doing that. You got R&D tax credits. You have all the benefits of 

living in this country. You have the protection of patents. 

So with all of that, you are sitting there unilaterally deciding in 

2008 and 2009 whether to continue a system where profits are 

shifted to a place where they are not available to the American tax 

man. Everyone agrees apparently we have to change this system. 

I hope everybody agrees to that. How we do it we may not agree 

to. But in order for us to change this system, we have to understand what is going on, which is that you make a unilateral decision, three Apple employees in 2008 and 2009 essentially decided 

where these profits are going to be taxed or non-taxed. 

Folks, it is not right. That is not right, to leave that decision, it 

seems to me, the way it is decided so unilaterally, that a company 

can shift its value to a place-—to a tax haven, which is what Ireland is. 

I hope we have—I know it is your intention here—and I applaud 

you for your constructive view. I do. I know it is not easy to come 

in front of a spotlight. We understand that. But it is important for 

us that have to write the laws—and you agreed, Mr. Cook, and 

your colleagues there, that we have to rewrite these laws. It is important for us that we know what is going on if we are going to 

change it in a sensible way. 

And so we are going to move to our third panel, and I want to 

again thank you, all of you, and I want to commend your company 

for the great work that you produce. 

With that, we are going to move to our third panel. Thank you. 

Mr. COOK. Thank you. 

Senator LEVIN. We are now going to move to our third panel. We 

call our witnesses: Mark Mazur, Assistant Secretary for Tax Policy 

at the Department of Treasury; Samuel Maruca, the Director of 

Transfer Pricing Operations of the Large Business & International 

Division at the Internal Revenue Service. We appreciate both of 

you being with us here today, and we look forward to your testimony. And I think you both know our rules, that under Rule VI 

all witnesses who testify before the Subcommittee are required to 

be sworn, so we would ask you if you would please stand and raise 

your right hand. Do you swear that the testimony you are about 

to give here today will be the truth, the whole truth, and nothing 

but the truth, so help you, God? 

Mr. MAZUR. I do. 

Mr. MARUCA. I do. 
65 

1The prepared statement of Mr. Mazur appears in the Appendix on page 139. 

Senator LEVIN. One minute before the red light comes on, you 

are going to see the light change from green to yellow, which will 

give you an opportunity to conclude your remarks. The written testimony will be printed in the record in its entirety, and we ask that 

you limit your oral testimony to no more than 10 minutes. 

Mr. Mazur, we will have you go first. 

TESTIMONY OF MARK J. MAZUR,1 ASSISTANT SECRETARY FOR 

TAX POLICY, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, D.C. 

Mr. MAZUR. Thank you, Chairman Levin. I appreciate the opportunity to testify on the issue of the potential shifting of profits offshore and between foreign companies and countries by U.S. multinational corporations. 

Obviously this is a complex subject that has numerous tax policy 

issues, and it also brings up issues relating to tax accounting and 

tax administration. I hope to address some of the most important 

ones today. 

The geographic allocation of profits earned by multinational enterprises historically has been challenging and has become more 

difficult with the rise of globalization. In my prepared testimony, 

I offer a stylized example of the way that this shifting could occur. 

The basic point, though, is if you have a multistep process that 

takes place over a number of jurisdictions where decisions are 

made to develop and market a product around the world, each of 

these steps is important for ensuring that the product is profitable, 

but the important question arises: Where is that income earned? 

And presumably some sliver of income goes to each of those steps 

in the process for a successful marketing of a product, but it is not 

obvious what the appropriate geographic allocation should be. 

However, our Tax Code requires that the income be allocated to 

various subsidiaries based on an arm’s-length standard, one that 

would exist if you have unrelated parties who charge each other for 

goods or services provided. But when parties are related and there 

is not a very well defined market, it may be very difficult to determine the arm’s-length price that should prevail in those transactions. 

And it is important to realize this is not just a U.S. problem. Virtually every country with a corporate income tax faces the challenge of determining what share of a global enterprise’s income is 

part of that country’s tax base. 

Multinational corporations under current law are able to shift 

profits offshore and between subsidiaries using various organizational structures and transactions. In some cases a U.S. company 

transfers rights to intangible property to an offshore affiliate. 

These can occur through various constructs including cost-sharing 

arrangements. Under this type of an agreement, the foreign subsidiary is required to pay the U.S. parent an arm’s-length price for 

any existing intangible property or other resource. And thereafter, 

the subsidiary contributes a portion of the costs of the shared research and development activities of the intangible. And then they 

share in anticipated benefits from that. 
66 

In theory, up front, the payment that is made for the intangible 

property originally contributed, combined with the reduction in the 

U.S. parent’s tax deductions, should result in no anticipated riskadjusted loss of tax revenue to the United States. However, there 

is considerable controversy whether this result is actually achieved 

in fact. 

There are a number of ways that U.S. multinationals may shift 

profits, including moving intangible property through various 

transactions that will not result in recognized income in the United 

States. Some taxpayers have taken the position that certain intangible assets are not subject to the arm’s-length transfer pricing 

rules, as one example. 

What I want to do is spend a moment or two talking about the 

overall context. Changes in the U.S. corporate tax rates—both in 

absolute terms and relative to the rates of our major trading partners—have changed the economic incentives greatly over the last 

few decades. Before the 1986 Tax Reform Act, the United States 

and other developed countries had relatively high tax rates, and 

they were roughly similar. After the 1986 Tax Reform Act, the 

United States was a relatively low-tax jurisdiction. Since then, 

however, other countries have reduced their corporate tax rates, 

and now the U.S. corporate rate is among the highest in the developed world. 

A higher statutory rate can encourage companies to shift income 

and production to lower-tax jurisdictions, especially in a global 

marketplace. The immediate gain from shifting a dollar is the difference in statutory tax rates, and while there may be costs to 

managing operations and earnings that were shifted, the multinational firm may be better off from having done so. So that is the 

role of tax rates. 

There is also, though, the role of accounting treatment. U.S. multinationals are concerned not just about the tax treatment of their 

earnings but also about the financial accounting treatment of their 

earnings. There is a presumption under U.S. Generally Accepted 

Accounting Principles (GAAP) that deferred income taxes should be 

recognized in the financial statements for the same period in which 

the earnings are generated because these rules presume that the 

earnings will be repatriated back to the United States or remitted 

back to the U.S. parent at some point in time. However, this presumption can be overcome by the firm either permanently investing abroad or saying that they will permanently reinvest the earnings abroad. And then you have a situation where the deferral of 

earnings offshore offers not just the tax benefit, the deferral of the 

tax that will be due, or a lower effective tax rate paid over time, 

but also a higher earnings for financial statement purposes. And so 

financial income reporting rules may also add to the incentive to 

shift earnings. 

Estimates of how big this issue is vary all over the lot. There are 

some estimates that are less than $10 billion a year, some estimates greater than $80 billion per year. The estimates try to account for all the possible ways of doing profit shifting between 

shifting intangibles, shifting risk, and using debt to shift income 

around. But the point of all these estimates is that you need to 
67 

have a set of assumptions about behavior, profitability and so on 

to generate these estimates. 

Some studies assume that the rates of return are not affected by 

income shifting or profit margins are not affected by income shifting. Others try to estimate statistical relationships. The point here 

is that while there are a range of estimates, they tend to be relatively large in absolute dollar terms. 

I want to change gears a little bit and look at some of the specific 

tax rules. Subpart F is a section of the Tax Code that is intended 

to limit income shifting to low-or no-tax jurisdictions. It generally 

focuses on passive and mobile income, and the idea is that that 

type of income will be taxed currently in the United States. That 

is, the tax on that income is not deferred. 

Subpart F goes back to the 1960s. The Kennedy Administration 

proposed to end deferral. Subpart F was Congress’ response to that. 

It was a more modest step toward ending deferral, and it focused 

on types of income that were more easily shifted. 

However, Subpart F today may not being doing what it was intended to do 50 or so years ago. It is possible for taxpayers to use 

hybrid entities and hybrid instruments in order to avoid some of 

the aspects of Subpart F. Hybrid entities would be entities that are 

considered a corporation in one jurisdiction and a non-corporate entity in another. Hybrid instruments would be a financial instrument that is considered debt in one jurisdiction and equity or preferred stock in a different one. This type of situation effectively allows multinational firms to arbitrage tax rules by having different 

results in two different countries. 

The Administration has several proposals to address this situation, both proposals contained in the annual budget submission and 

in the President’s Framework for Business Tax Reform. 

I want to focus a moment on the Framework. It was really intended to provide a multi-pronged approach to reduce the incentives for companies to shift income and shift investment to low-tax 

countries, also to put the United States on a more level playing 

field with our international competitors, and to help slow the global 

race to the bottom on corporate tax rates. The underlying principle 

of the President’s Framework for Business Tax Reform was that 

the United States should become a more attractive place to create 

and retain high-quality jobs. 

Among other things, the President’s Framework would impose a 

minimum tax on the income earned by foreign subsidiaries of U.S. 

multinationals. If a U.S. multinational had a subsidiary in a lowtax country paying a low effective tax rate, the minimum tax would 

kick in. That income would be taxed currently at the minimum tax 

rate. That would provide a balance by limiting the opportunities to 

shift profits to low-tax jurisdictions and place U.S. multinationals 

on a more level playing field with their local competitors. 

The President’s Framework for Business Tax Reform also would 

incorporate many of the international tax proposals in the President’s fiscal year 2014 budget that would discourage U.S. multinationals from shifting profits—and specifically profits related to 

intangible property offshore. One proposal that is important is the 

excess returns proposal. This would provide that if a U.S. firm 

transferred intangible property to a related foreign affiliate subject 
68 

1The prepared statement of Mr. Maruca appears in the appendix on page 146. 

to a low foreign effective rate and where there is excess income 

shifting, the U.S. firm would be taxed currently on the amount of 

excess shifting abroad. This would eliminate a large part of the incentive for inappropriate shifting of intangibles. 

There are a number of other proposals in the President’s budget 

that also would focus on the situation where income from intangibles is not appropriately taxed in the United States. 

And the last point I want to make has to do with the work that 

the Treasury Department has been doing with the Organisation for 

Economic Co-operation and Development to analyze profit shifting. 

We are actively participating in the OECD’s project on base erosion 

and profit shifting, and it is an indication where a multilateral set 

of steps really is necessary to address this problem in the worldwide context. 

Thanks for your attention. I would be happy to answer any questions. 

Senator LEVIN. Thank you very much, Mr. Mazur. Mr. Maruca. 

TESTIMONY OF SAMUEL M. MARUCA,1 DIRECTOR, TRANSFER 

PRICING OPERATIONS, LARGE BUSINESS & INTERNATIONAL 

(LB&I) DIVISION, INTERNAL REVENUE SERVICE, WASHINGTON, D.C. 

Mr. MARUCA. Chairman Levin, thank you very much for the opportunity to appear and speak on tax compliance and tax administration issues related to the shifting of profits offshore by U.S. multinationals. 

The IRS takes very seriously the need to ensure that U.S. multinational corporations are abiding by the U.S. tax laws and paying 

their fair share of tax. Over the past few years, we have been working to enhance our approach to international tax enforcement in 

general and to income shifting in particular. We have been refocusing our enforcement efforts to be more strategic by viewing 

taxpayers through the prism of their tax planning strategies and 

allocating our limited resources to cases presenting the highest 

compliance risk. 

We have been aligning our resources and training our employees 

in key strategic areas, including income shifting, deferral planning, 

foreign tax credit management, and accessing profits accumulated 

offshore. 

Further, to better manage our collective knowledge in strategic 

international compliance areas, we have formed 18 what we call 

‘‘International Practice Networks,’’ which are focused on integrating our training and our data management with our overall 

strategy in this area. 

With respect to transfer pricing, the IRS is charged with ensuring that taxpayers report the results of transactions between related parties as if those transactions had occurred between unrelated parties. Under this standard, the results of the transaction as 

reported by the taxpayer are compared to results that would occur 

between unrelated taxpayers in comparable transactions under 

comparable circumstances. 
69 

Now, establishing an appropriate arm’s-length price by reference 

to comparable transactions is relatively straightforward for the 

vast majority of international commerce. But enforcing the arm’slength standard becomes much more difficult in situations in which 

a U.S. company shifts to an offshore affiliate the rights to intangible property that is at the very heart of its business—what may 

be referred to as the company’s ‘‘core intangibles.’’ In fact, over the 

past decade, applying Section 482 in these types of cases has been 

our most significant international enforcement challenge. 

Transfers of a company’s core intangibles outside of a corporate 

group rarely occur in the market, so comparable transactions are 

difficult, if not impossible, to find. In some cases the IRS has had 

to resort to other valuation methods not based on market benchmarks, which are often referred to as ‘‘income-based methods.’’ 

Under these methods, the IRS typically has to conduct an ex ante 

discounted cash-flow analysis. Evaluating underlying assumptions 

about projects cash-flows and discount rates after the fact is a complex undertaking. 

Moreover, a business’ core intangible property rights are by their 

nature high-risk, high-reward assets, and it is often difficult to assess the extent of the risk and by whom it is borne. 

The IRS has been attuned to this issue for many years and has 

devoted substantial resources to enforcement in this area. We are 

now redoubling our efforts. In 2011, a new IRS executive position, 

in which I am the first to serve, was created to oversee all transfer 

pricing-related functions, to set an overall strategy in the area, and 

to coordinate work on our most important cases. In building a new 

function devoted exclusively to tackling our transfer pricing challenges, we have recruited dozens of transfer pricing experts and 

economists with substantial private sector experience to help us 

stay on the cutting edge of enforcement and issue resolution. We 

are working closely with exam teams in the field to ensure the best 

case selection and development possible. 

I would like to briefly address the issue of cost sharing. The IRS 

has worked with the Treasury Department over the last several 

years to adopt revised regulations on cost sharing. These new rules 

clarify a number of issues that were contentious under the prior set 

of cost-sharing regulations and better define the scope of intangible 

property contributions that are subject to taxation in connection 

with cross-border business restructurings. While to date the IRS 

has had limited experience in auditing transactions covered by 

these new regulations, early anecdotal information indicates that 

the regulations have had a positive impact. 

However, concerns remain that we are considering and following 

very closely. Some taxpayers are taking the position that a costsharing arrangement, or other transaction taxable under Section 

482, has, in fact, been preceded, either explicitly or implicitly, by 

the incorporation or reorganization transfer of core intangibles. In 

these cases, the taxpayers assert, among other positions, that foreign goodwill and going concern, which are exempted from tax 

under the regulations, are the most valuable elements in these 

transactions. In response, we are now training our agents to address these issues and to challenge taxpayers’ positions where appropriate. 
70 

The IRS has been and continues to be vigilant and forceful in addressing compliance issues we have seen in regard to income shifting activities of United States and foreign-based multinationals. 

Based on a recent survey, as of May 9, 2013, we estimate that we 

are currently considering income shifting issues associated with approximately 250 taxpayers involving approximately $68 billion in 

potential adjustments to income. 

Mr. Chairman, thank you again for this opportunity to testify on 

the IRS’ efforts to enforce the tax law as it applies to multinational 

companies. Although enforcing and administering international tax 

law will present challenges for us well into the future, the agency 

has made great strides in recent years, and this is a tribute to our 

strategic focus and to the highly dedicated and professional men 

and women of the IRS. I would be happy to respond to any questions you may have. 

Thank you. 

Senator LEVIN. Thank you very much, both of you. 

Mr. Maruca and Mr. Mazur, do you agree that Subpart F of the 

Tax Code was designed to stop tax haven abuse, that it was supposed to stop these controlled foreign corporations from converting 

deferrable active income that is not easily movable into non-deferrable—i.e., taxable—passive income that is easily shifted into a tax 

haven for tax avoidance? 

Mr. MARUCA. I would agree, Mr. Chairman, as originally conceived that was the purpose of Subpart F. But over the years, there 

have been numerous exceptions and exceptions within exceptions. 

And that circumstance, together with the check-the-box rules, as 

well as the interaction of our law and foreign law, create multiple 

different opportunities, if you will, to avoid the reach of Subpart F 

as it was originally conceived. 

Senator LEVIN. And would you agree that the original conception, 

Mr. Mazur, of Subpart F was to do what I just described? 

Mr. MAZUR. I think I would characterize the original characterization of Subpart F is to prevent the shifting of passive income 

abroad, yes. 

Senator LEVIN. The shifting of passive income. I think it also, 

was it not, because it covered dividends that were made to corporations, for instance, that if those dividends came from a corporation 

and the income was active income in the first corporation, that 

when it shifted it in the form of a dividend or a royalty, that then 

became passive income, which under Subpart F was intended to be 

taxed. 

Mr. MAZUR. I think the general idea was to focus on mobile income, passive income, sweep that up into the U.S. tax base, active 

income could be deferred, yes. 

Senator LEVIN. Active income deferred, passive income was not 

supposed to be deferred. Is that correct? 

Mr. MAZUR. Basic rule, yes. 

Senator LEVIN. And that is the basic rule, and the passive income included dividends and royalties. Is that specified? 

Mr. MAZUR. Sir, it’s harder to say on that one because if you look 

at the role of Subpart F to prevent shifting passive income out of 

the U.S. tax base, then that would be correct. Over the years the 
71 

focus has mostly been on the U.S. tax base, not so much on the foreign-to-foreign tax base. 

Senator LEVIN. I am talking about the original intent. 

Mr. MAZUR. The 1962 intent, sir? 

Senator LEVIN. Yes. 

Mr. MAZUR. Hard to say, but you are probably right. 

Senator LEVIN. Okay. In your written testimony, I think you 

make reference to regulations that were issued in March 1998 that 

would have modified the check-the-box regulation, restored an antideferral regime, but that in 1998—excuse me, that subsequent to 

1998 those regulations were withdrawn. Is that correct? The 1998 

regs were withdrawn? 

Mr. MARUCA. I believe so, yes. 

Senator LEVIN. And is it fair to say that they were withdrawn 

because of pressure from the Hill, Capitol Hill, and business interests? Is that what the history shows here? You are familiar with 

the history. You were not here at the time, I do not think. 

Mr. MAZUR. I was not at Treasury at the time. 

Senator LEVIN. But you are familiar with the history here. Is 

that a fair statement? 

Mr. MAZUR. I think the fairer statement would be that the rules 

were proposed, they were withdrawn; there was a lot of opposition 

from the business community and from folks on the Hill. 

Senator LEVIN. That is fine. 

I believe that you indicated in your testimony that we are trying 

or you folks are trying at Treasury and the IRS to avoid a situation 

where there is shifting of revenue between the parent corporation 

and subsidiaries pursuant to agreements that are transfer pricing 

agreements, unless those subsidiaries are making payments based 

on, in your words, an arm’s-length standard. Is that correct? 

Mr. MARUCA. That is correct. 

Senator LEVIN. And the arm’s-length standard that you require 

to be followed is essentially, in your words, what unrelated parties 

would charge each other for the goods or services provided. Is that 

correct? 

Mr. MAZUR. Correct. 

Mr. MARUCA. That is correct. 

Senator LEVIN. And I think I am actually quoting from your testimony, Mr. Mazur, so—— 

Mr. MAZUR. I will take the ‘‘correct.’’ 

Senator LEVIN [continuing]. You would agree it is correct. So now 

we have heard of—just an example, we have put the spotlight on 

one example of where three Apple employees sign an agreement to 

transfer the economic rights to intellectual property to three of 

their wholly owned Irish subsidiaries. That was the example that 

we are looking at, and you have indicated that somehow or other 

it is the goal of the IRS to make sure that that payment and that 

shift of the profits, in essence, to the subsidiary is based on an 

arm’s-length standard. Somehow or other you have to figure out, if 

there were an arm’s-length deal here, what would be shifted. What 

part of the profits would be shifted? What part of the cost would 

be shifted? And that is what you are trying to do. Is that correct, 

Mr. Maruca? 
72 

Mr. MARUCA. Yes, Mr. Chairman. I cannot comment on the particulars with respect to—— 

Senator LEVIN. No, I am not asking—— 

Mr. MARUCA [continuing]. Any taxpayer, but—— 

Senator LEVIN. No, I am not asking you to comment on this taxpayer. What I am asking you to comment on, your goal is to find 

a way to apply an arm’s-length standard to a transfer pricing 

agreement. Is that correct? 

Mr. MARUCA. Yes. So we would analyze the facts and circumstances. 

Senator LEVIN. All right. Now, you also indicated, I believe, that 

you now have an ability to go back after the fact and to look at 

what the allocation of costs and profits were. Is that true? 

Mr. MARUCA. Under some circumstances, yes. 

Senator LEVIN. All right. So that now you have the ability to— 

when you have clearly a non-arm’s-length transaction, I am going 

to—it is so obvious this is not an arm’s-length that we talked about 

this morning, but I will not talk about this morning. I will just simply say: Where there is obviously not an arm’s-length transaction, 

where the parties are all working for the parent corporation but 

are signing a transfer pricing agreement between a parent corporation and a controlled foreign corporation, wholly owned subsidiary, 

that you now have the ability to pierce that, to look at that, but 

to look at it afterwards and to see whether or not, in fact, knowing 

what has taken place during the life of that agreement or when 

that agreement is in effect, whether that is a fair allocation of benefits, risks, and profit? Are we together? Or put it in your own 

words. 

Mr. MARUCA. Yes, I think our regulations do allow a retrospective look, but the way we apply our rules is we go back and look 

and see what the playing field was like when the transactions were 

struck. And if they are appropriately priced based on the information available at that time and the risks play out differently, we 

would not revisit that transaction. 

Senator LEVIN. All right. And so when the—let us assume that 

you have a series of transfer pricing agreements signed between an 

American corporation and a controlled foreign corporation and 

there was an agreement that was signed in year one and then 

there was another transfer agreement, another transfer pricing 

agreement for the same property in year two, and then in year 

three, and then in year four, do you look at the most recent agreement to see if that was in effect, had the arm’s-length standards 

met? Would you look at the most recent agreement? 

Mr. MARUCA. I think we would probably have to look at the totality of the circumstances. 

Senator LEVIN. Would that include—— 

Mr. MARUCA. That fact pattern. 

Senator LEVIN. Would that include the most recent agreement? 

Mr. MARUCA. It would include all the facts. 

Senator LEVIN. All the agreements? 

Mr. MARUCA. Yes. 

Senator LEVIN. Up to date, Okay. 
73 

Do we have or do you have an obligation to stop multinational 

corporations from shifting income to tax haven jurisdictions? Mr. 

Mazur? 

Mr. MAZUR. I think the obligation of the Treasury Department 

here is to ensure that laws that are passed are implemented in the 

way that Congress intended them through regulatory activity; and, 

second, where there are problems that arise, to propose legislative 

fixes to those. 

Senator LEVIN. Mr. Maruca, you made reference, I believe, to 

Section 482 of the Code. 

Mr. MARUCA. Yes, sir. 

Senator LEVIN. That section reads that, ‘‘The Secretary may distribute a portion or allocate gross income, deductions, credits or allowances, between or among such organizations, trades, or businesses if he determines that such distribution, apportionment, or 

allocation is necessary in order to prevent evasion of taxes or to 

clearly reflect the income of any such organizations, trades, or businesses.’’ 

So under Section 482, is that still the law? 

Mr. MARUCA. Yes, sir. 

Senator LEVIN. And that is the one you made reference to, I believe, in your testimony. 

Mr. MARUCA. Yes. 

Senator LEVIN. You at the IRS and the Treasury Department can 

change the allocation if you find it necessary to prevent—excuse 

me. I will put it positively. If you find it necessary to clearly reflect 

the income of such organization, trade, or businesses. Right? 

Mr. MARUCA. That is correct. 

Senator LEVIN. Okay. 

Mr. MAZUR. And one of the things that has been done, in 2009 

we issued temporary regulations related to cost sharing, and those 

were finalized in 2011. They address a particular set of problems 

that we had seen in the cost-sharing area. 

Senator LEVIN. All right. Now, we have been looking at U.S. multinationals, this Subcommittee has been looking at U.S. multinationals and their offshore entities for a number of years. This is 

the first time that we have ever come across entities that have no 

tax residence. Our experts have told us—except we heard slightly 

differently today, but at least one of our experts had told us that 

they had never heard about entities without a known tax jurisdiction. 

In either of your experiences, have you ever heard of a controlled 

foreign corporation that does not have a tax residence? 

Mr. MARUCA. Yes. 

Senator LEVIN. Mr. Mazur. 

Mr. MAZUR. No. 

Senator LEVIN. So now you have heard of one that does not have 

a tax residence. Mr. Maruca, explain what that situation was. 

Mr. MARUCA. Well, it typically arises where there is a difference 

between treatment under U.S. law and treatment under foreign 

law. So the residence rule, for example, could be different. 

Senator LEVIN. They are different. That is what happens. Here 

the question is whether—have you ever heard of a controlled foreign corporation that has no residence? 
74 

Mr. MARUCA. A controlled foreign corporation—— 

Senator LEVIN. That says it has no residence. 

Mr. MARUCA. Is a foreign corporation for U.S. law purposes. 

Senator LEVIN. Right. 

Mr. MARUCA. It is not a U.S. resident corporation. It is not a U.S. 

corporation. It does not have Irish or foreign law residency either 

because under those rules, it is not the place of organization. 

Senator LEVIN. Right. We understand. That is what we went 

through this morning. 

Mr. MARUCA. It is where it is managed and controlled. 

Senator LEVIN. Right. 

Mr. MARUCA. That is how it arises. 

Senator LEVIN. Okay. It arises—we had an example of it here 

this morning. That is exactly what happened. My question is: Is it 

a rare event that you find a controlled foreign corporation that does 

not have a tax residence? 

Mr. MARUCA. That I could not say. 

Senator LEVIN. Well, from our perspective, from what we have 

seen, it is rare. And, Mr. Mazur, I guess you have never even seen 

one. 

Now, the next question relates to a shell entity that is incorporated in a foreign tax jurisdiction. Can it be disregarded for U.S. 

tax purposes if the entity is controlled by its parent to such a degree that the shell entity is nothing more than an instrumentality 

of its parent? And here I will refer to a legal principle that was described by the IRS in a letter ruling in 2002. Did you follow the 

question? Mr. Mazur, let me ask you first. Did you follow the question? 

Mr. MAZUR. No. 

Senator LEVIN. If a shell entity is incorporated in a foreign tax 

jurisdiction, can it be disregarded for U.S. tax purposes if that entity is controlled by its parent to such a degree that the shell entity 

is nothing more than an instrumentality of its parent? 

Mr. MAZUR. I believe it is possible, yes. 

Mr. MARUCA. I would be happy to respond to that, Mr. Chairman. 

Senator LEVIN. Okay. 

Mr. MARUCA. It is possible, there are circumstances under which 

we have been successful in disregarding incorporations or other arrangements, contractually or otherwise, between related parties. 

However, those circumstances are fairly narrow under our common 

law. So, for example, if you have a company that is duly organized 

and existing, it has capital, it has assets, and it takes business 

risk, in those circumstances it is extremely difficult to succeed in 

disregarding the existence of that entity or the transactions it engages in. 

Senator LEVIN. Now, is that true even if the assets are totally 

controlled by the parent? 

Mr. MARUCA. Well, there is a difficult—— 

Senator LEVIN. It has no employees, for instance. It has no employees. 

Mr. MARUCA. There is a difficult issue—— 

Senator LEVIN. AOI has no employees. 
75 

Mr. MARUCA. That is a difficult issue that we confront fairly regularly where the management and control is in one corporate entity 

and the funding and business risk is in another. We have rules 

that allow us to apply our transfer pricing valuation principles in 

that context, but it is typically a pricing question and not a question of whether that entity is a sham or can be disregarded. 

Senator LEVIN. So if it is a sham entity, has no employees, all 

of its assets are controlled by the parent, its directors are the parent’s directors, the meetings are held on the telephone and never 

held in an offshore location, there is no there there, would those 

be factors that you would look at to determine whether or not, in 

fact, the shell entity is nothing more than an instrumentality of its 

parent? 

Mr. MARUCA. Those would definitely be factors. But there are 

other factors. 

Senator LEVIN. Other factors as well. I understand. Cost-sharing 

agreements are supposed to be arm’s-length or meet arm’s-length 

standards. Is that correct? 

Mr. MARUCA. They are supposed to meet the requirements of our 

regulations, yes. 

Senator LEVIN. Is the purpose of your regulation that they meet 

arm’s-length standards? 

Mr. MARUCA. Yes. 

Senator LEVIN. Mr. Mazur. 

Mr. MAZUR. Roughly consistent with arm’s-length standards, yes. 

Senator LEVIN. Roughly consistent? 

Mr. MAZUR. Consistent with arm’s-length standards, yes. 

Senator LEVIN. Arm’s-length standards. 

Mr. Mazur, if a transaction is only done for tax reasons, is it appropriate for the IRS to disallow such a transaction when it does 

not have a business purpose but is being done to shift profits to 

avoid tax? 

Mr. MAZUR. There are some situations where the economic substance is the appropriate standard, but often we look at the legal 

standards here, and if there is risk that is shifted or some 

other—— 

Senator LEVIN. If there is what? 

Mr. MAZUR. Risk that is shifted or some other attributes that are 

shifted, those transactions may be respected for tax purposes. 

Senator LEVIN. All right. And that might be true even if a company has no employees? 

Mr. MAZUR. Again, it is a facts and circumstances situation, and 

the question really comes down to, I think, as Mr. Maruca brought 

up, the pricing that is at issue here. 

Senator LEVIN. And the pricing, when you look at the facts and 

circumstances, is it also the value of what is transferred? 

Mr. MAZUR. Yes, and as pointed out, if you transfer property in 

year one and you are looking at a situation in year ten, you look 

at the totality of the facts and circumstances over the entire timeframe. 

Senator LEVIN. All right. Of the entire—— 

Mr. MAZUR. Of the entire timeframe. 
76 

Senator LEVIN. Timeframe, all right. And you look at the fact 

that it is totally in the control of the parent as to what the content 

of that agreement is? Is that a fact that you look at? 

Mr. MAZUR. I think one of the things that you are pointing out 

is the most difficult areas to look at transfer pricings are where you 

have related parties and you do not have an active market for the 

goods or services that are being transferred. Those are the most 

difficult, and that is where the tax administrator has the most difficult time trying to assess what the arm’s-length standard should 

be. 

Senator LEVIN. Now, when the company has a consolidated financial statement which it issues and consolidates all of its profit 

in a financial statement—it does not pay taxes on the profit, but 

it consolidates it for its financial statement—is there a risk that is 

really being transferred away from the parent when the world 

looks at that consolidated financial? 

Mr. MAZUR. I think there is a risk of how well each of the entities will do on that transfer. You are right that if you look at the 

financial statements, they sweep up all the multinational firm’s income from wherever it is earned and group it together. But for tax 

purposes, you have sometimes a different outcome. 

Senator LEVIN. And if all of the money, all of the assets belong 

to the parent, they totally control the parent, you are still going to 

act as though the controlled foreign corporation has somehow or 

other risked its assets, even though its assets totally belong to the 

parent. You are still looking at that aspect. 

Mr. MAZUR. We typically would respect that, yes. 

Senator LEVIN. Okay. Now, there is a statutory rate in the 

United States of 35 percent. Is the effective rate different typically 

for companies than 35 percent? 

Mr. MAZUR. Sure, sure—— 

Senator LEVIN. Do you know what the average effective rate is 

for corporations in the United States? 

Mr. MAZUR. It would be in the mid–20 percent range, 27-ish percent range, something like that. 

Senator LEVIN. Different from the statutory rate. 

Mr. MAZUR. Different from the statutory rate for a number of 

reasons. 

Senator LEVIN. And is it true that a number of corporations pay 

no taxes at all? 

Mr. MAZUR. There is a wide range of effective tax rates in the 

United States from very low to very high. 

Senator LEVIN. So that many corporations, including many of our 

most profitable corporations, pay no taxes. Is that correct? 

Mr. MAZUR. I cannot answer the exact number, sir. 

Senator LEVIN. I did not say exact—— 

Mr. MAZUR. Even—— 

Senator LEVIN. I said ‘‘many.’’ 

Mr. MAZUR. There are several million corporations in the United 

States, many of which are very small, those pay no tax. So that is 

true—— 

Senator LEVIN. I was talking about our most profitable. 

Mr. MAZUR. The larger ones—— 
77 

Senator LEVIN. Have you seen the study that shows that 30 of 

our most profitable corporations over a period of 3 years recently 

paid no taxes? 

Mr. MAZUR. I have seen that study, sir, yes. 

Senator LEVIN. Do you—— 

Mr. MAZUR. I think part of what you are seeing in a study like 

that would be first the effect of the recession on lowering profits 

for a number—— 

Senator LEVIN. No. I said ‘‘highly profitable corporations.’’ 

Mr. MAZUR. Lowering of profits for tax purposes—— 

Senator LEVIN. No. I said ‘‘highly profitable corporations.’’ 

Mr. MAZUR. Lowering of profits for tax purposes; and, second, we 

had bonus expensing and—bonus depreciation and expensing for a 

number of years, which would have reduced the taxable income for 

those companies for those years. Presumably that income gets 

picked up in the future when they are unable to claim those depreciation deductions. 

Senator LEVIN. All right. But you are familiar with that study? 

Mr. MAZUR. I am familiar with the study, yes. 

Senator LEVIN. And that study showed that those companies had 

$160 billion in profits for those 3 years. Do you remember—— 

Mr. MAZUR. I do not remember that number, sir. 

Senator LEVIN. All right. Mr. Mazur, is the transfer of economic 

rights a way to shift tax liability? 

Mr. MAZUR. I think the transfer of economic rights associated 

with intellectual property affects a number of things, one of which 

is possibly shifting income and risk to other places. Another is potentially shifting some potential tax liability, yes. 

Senator LEVIN. So that is one way of shifting tax liability. Is that 

correct? 

Mr. MAZUR. Possible to do it that way, yes. 

Senator LEVIN. What is the impact on U.S. tax revenue if U.S. 

multinationals can enter into cost-sharing agreements with offshore companies that they control and then direct most of the profits to those offshore companies, most of their worldwide profits to 

those offshore companies, and on top of that, if they can use offshore companies that have no tax residence anywhere, what is the 

effect on our revenue? 

Mr. MAZUR. I do not have the number for that exact fact pattern, 

but as I noted in my testimony, the estimates for profit shifting 

that come from academic economists who know this, who have 

looked at it, range from somewhere below $10 billion a year to 

somewhere above $80 billion a year. There is a wide range of estimates. 

Senator LEVIN. Mr. Mazur, the Treasury might be able to fix 

some of these problems if it would reform check-the-box, develop 

regs making it easier for the IRS to go after shell corporations that 

are used for tax avoidance, particularly those that are not tax resident anywhere. It could stop treating cost-sharing agreements that 

push money offshore as acceptable arm’s-length agreements or arrangements. 

What are the chances that the Treasury is going to take any of 

those actions? 
78 

1See Exhibit No 1a, which appears in the Appendix on page 152. 

Mr. MAZUR. I think, sir, in the Administration’s budget proposal 

there are a number of legislative options that would perhaps be 

more effective at addressing this situation. There is an excess intangibles income proposal which really would limit some of the incentives to shift intangibles abroad. There are a number of proposals that would clarify the types of intangibles that would be 

subject to Section 482. And another proposal that would look at—— 

Senator LEVIN. Are there any regulatory proposals? I think the 

ones you talk about are legislative. Are you looking at any regulatory proposals? 

Mr. MAZUR. We are always looking at regulatory—— 

Senator LEVIN. Any specific regulatory proposals to address the 

problems I have just described? 

Mr. MAZUR. None that are in the very immediate pipeline to be 

popped out in the very short term. 

Senator LEVIN. Okay. 

Mr. MAZUR. Some longer-term projects are underway, though. 

Senator LEVIN. Well, we want to thank our witnesses here. The 

hearing that we have had today was aimed at shining a light on 

how the U.S. Tax Code functions in the real world and real companies. We focused on one, but the problem exists obviously in much 

more than one company. We have had previous hearings which 

looked at two additional companies and saw how they shifted—either shifted revenue overseas and profits overseas or how they took 

funding and profits from overseas and brought them home without 

paying a tax on them when they effectively repatriated them. So 

we have looked at a number of ways in which taxes are avoided 

by some of our wealthiest companies. 

The facts are mighty clear to me that loopholes in our tax laws 

and regulations allow many companies, including Apple, to shift 

enormous amounts of income from this country to other countries 

where they pay little or no tax. I would disagree with the Apple 

witness on a number of important points. I think it is clear that 

Apple engages in tax gimmicks. Apple tries to act as though it does 

not engage in tax gimmicks. Other companies engage in tax gimmicks as well, and I will insert for the record here examples of the 

tax gimmicks that were used by Apple.1

It is also clear that Apple used cost-sharing arrangements that 

it has with offshore subsidiaries to shift income from the United 

States to Ireland, an effective tax haven, where it pays effectively 

no taxes at all. And so the real question for us is not whether these 

actions comply with the letter of the law. Others will make that decision. The question is whether we should continue to tolerate this 

state of affairs, which is doing tremendous harm to our Nation’s 

fiscal health, to our ability to protect and to serve our people, and 

to families and businesses that cannot or will not take advantage 

of these loopholes. 

We had a situation this morning where three employees of Apple, 

a tremendously creative company, sat around a table and agreed 

on what share of the world’s profits of Apple basically are going to 

come back to the United States to be taxed. They decided that they 

would shift a certain part of the jewels, the crown jewels of that 
79 

company, to a tax haven. And that tax haven received the profits 

from the sales of those products in most of the world. 

That decision was just made by three employees of the company 

unilaterally, and for our tax laws to tolerate that-—it was supposed 

to be an arm’s-length agreement to something which is just obviously not an arm’s-length agreement but which has a huge effect 

on the revenues of this country, is unacceptable and intolerable, 

and we should not continue to accept it. It is unfair, needs to 

change, and it needs to change regardless of the broader debate 

about tax reform. We should close these unacceptable, these unfair 

corporate offshore tax loopholes, not just to simplify the Tax Code, 

not just as part of tax reform and, heaven knows, not just in order 

to keep it revenue neutral when corporations’ percentage of the 

revenues coming into our Treasury is now down to 9 percent. Revenue neutrality, which is something that we heard from Mr. Cook 

today, cannot be the litmus test when we need additional revenues 

as part of a comprehensive deficit reduction program. 

But, in any event, one way or another, whether it is closing these 

tax loopholes because they are so totally unjustified and because 

they are unfair to others who do not use them or cannot use them, 

or whether it is part of a larger comprehensive tax reform, one way 

or another these tax-shifting capabilities that these major corporations have cannot continue. 

So I hope and believe that the facts that the Subcommittee has 

discovered will provide a catalyst for that change. We thank all of 

our witnesses today, and we will stand adjourned. 

[Whereupon, at 2:24 p.m., the Subcommittee was adjourned.] 

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