By Patrick Temple-West and Kevin Drawbaugh
WASHINGTON (Reuters) - Apple Inc Chief Executive Tim Cook made no apology on Tuesday for the iPad maker saving billions of dollars in U.S. taxes through Irish subsidiaries and told lawmakers that his company backs corporate tax reform, even though it may end up paying more.
The Senate Permanent Subcommittee on Investigations has found that Apple in 2012 alone avoided paying $9 billion in U.S. taxes, using a strategy involving three offshore units with no discernible tax home, or "residence."
Cook, in his first congressional testimony since becoming Apple CEO in 2011, said his company is a major taxpayer, handing over nearly $6 billion in cash to the U.S. government in 2012.
"We expect to pay even more this year," Cook said. "We pay all the taxes we owe."
But Senator Carl Levin, chairman of the subcommittee and a veteran tax sleuth, said Apple had sought "the Holy Grail of tax avoidance," creating one Irish unit that paid no income taxes to any national tax authority for the past five years.
Levin said Apple used Ireland as a base for a web of offshore holding companies and negotiated a deal with the Irish government for a tax rate of less than 2 percent. The top U.S. corporate tax rate is 35 percent, one of the world's highest.
Cook said Apple did not depend on tax gimmicks. "We don't move intellectual property offshore and use it to sell our products back to the United States to avoid taxes. We don't stash money on some Caribbean island," he said.
In Ireland, where low corporate taxes have been an economic development tool for many years, the government said it had not made a special tax deal with Apple. If Apple's tax rate was too low, it was the fault of other countries, deputy prime minister Eamon Gilmore told national broadcaster RTE on Tuesday.
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Subcommittee staffers said on Monday that Apple was not breaking any laws and had cooperated fully with the inquiry.
Levin's panel has previously examined what it called tax avoidance by other U.S. technology giants, including Hewlett-Packard Co and Microsoft Corp. The senator said Apple has used similar tax avoidance strategies.
Senator John McCain praised Apple as a success story, but he said the company's tax strategy reflected a "flawed" tax system.
"For years, Apple has opted to forego fully contributing to the U.S. Treasury and to American society by shifting profits and circumventing U.S. taxes," McCain said.
Cook said Apple agreed with those in Congress who want to reform corporate taxes and called for changes that include lower corporate income tax rates and a reasonable tax on foreign earnings.
"Apple recognizes these and other improvements in the U.S. corporate tax system may increase the company's taxes," he said in prepared testimony.
Many U.S. multinational take advantage of a tax law that allows profits earned abroad to be tax-free as long as they are not brought into the United States, or "repatriated." Total U.S. corporate profits parked offshore rose 15 percent to $1.9 trillion last year, according to research firm Audit Analytics.
Accounting rules also let the companies avoid recognizing a tax expense if management intends to keep the earnings indefinitely reinvested overseas. Taking advantage of these laws, the offshore earnings of U.S. companies has risen 70 percent in the past five years, Audit Analytics said two weeks ago.
"The baldness of the Apple strategy surprises me more than anything else," said University of Southern California Law Professor Edward Kleinbard. "European member states are going to be very angry with Apple and very angry with Ireland."
Offshore profits are typically taxed by the countries in which they are earned, but companies work hard to move offshore profits into countries with lower tax rates, like Ireland.
One way this is done is through "transfer pricing," or the management of moving goods and services across international borders from one corporate unit to another. Sometimes companies move valuable intellectual property to a low-tax country, then bring profits derived from its use into that country through royalty payments and other structures.
Levin's panel said Apple used a cost-sharing agreement "to transfer valuable intellectual property assets offshore and shift the resulting profits to a tax haven jurisdiction."
The panel also said Apple took advantage of loopholes in tax law and regulations known as "check the box" and "look through" that let some offshore units be disregarded for tax purposes, sheltering substantial profits from taxation.
Levin has unsuccessfully called for closing the "check the box" and "look through" provisions of the tax code.
The Levin inquiry comes at a turbulent time in tax circles, with the U.S. Internal Revenue Service under investigation because of the way agents handled conservative political groups' applications for tax-exempt status.
It is not clear, however, whether that controversy and Levin's allegations will lead to an overhaul of the U.S. tax code. Tax law writers in Congress had been inching forward on such a project before the IRS scandal erupted earlier this month. Levin's inquiry has been under way for months.
Shares of Apple closed down 0.7 percent at $439.66 on Tuesday.
(Writing by Kevin Drawbaugh; Editing by Lisa Von Ahn and Tim Dobbyn)