Will Apple Get Crushed During the Senate Hearing?

Apple Inc. (NASDAQ:AAPL) Chief Executive Officer Tim Cook will be facing the U.S. Senate to answer questions about funds the company has been keeping offshore in a subsidiary in Ireland.

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The Senate’s Permanent Subcommittee on Investigations was formed to identify and close loopholes in U.S. tax law that allow companies to avoid paying U.S. taxes by keeping money overseas. Apple’s main Irish subsidiary includes Apple’s retail stores throughout Europe, and it has not paid any corporate income tax in the last five years. The Subcommittee has also targeted Microsoft Corp. (NASDAQ:MSFT) and Hewlett-Packard Co. (NYSE:HPQ) for using similar strategies to avoid paying U.S. taxes.

Democratic Senator Carl Levin of Michigan, the chairman of the Subcommittee, said, ““Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars while claiming to be a tax resident nowhere.” Both Cook and Apple Chief Financial Officer Peter Oppenheimer are to answer questions about the company’s tax practices before the Subcommittee.

Under largest scrutiny is Apple affiliate Apple Operations International, which received a net income of $30 billion between 2009 and 2012. AOI filed no corporate tax return and didn’t pay income taxes at all. According to the report, if Apple brought the $40.4 billion in earnings outside the U.S. — on which it hasn’t paid taxes — back to the States, it would owe $13.8 billion in taxes.

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While the report accuses Apple of having “exploited a difference between Irish and U.S. tax residency rules,” Cook is adamant that the company does not use “tax gimmicks” and argues for a change in U.S. tax policy, which he believes is outdated in the face of a changing global economy. In a statement posted online on Monday, Cook also pointed out that Apple will pay $7 billion in taxes in 2013 and the company is one of the biggest taxpayers in the U.S.

The Subcommittee has not accused Apple of breaking any laws. Lawmakers are looking to find a bipartisan agreement  on how to tax companies that earn outside the U.S. and how to make corporate tax code more fair in general. Cook is sure to give his two cents on the matter during the hearing.

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