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San Francisco - Apple will argue for a comprehensive corporate tax reform that will levy a "reasonable tax" on foreign earnings and is not dependent on a company's revenue when it goes before a Senate panel on Tuesday to explain its offshore tax practices.
In prepared testimony released by the company and submitted ahead of Apple Chief Executive Tim Cook's hearing on Tuesday before the Senate Permanent Subcommittee on Investigations, Apple denied it employed "tax gimmicks" like using Cayman Islands bank accounts or shifting intellectual property abroad.
It also said the existence of its subsidiary "AOI" in Ireland - which has been criticised as a way to shift money from the United States - does not reduce Apple's US tax liability.
Tuesday's hearing is the second to be held by Senator Carl Levin, a Michigan Democrat and chairperson of the subcommittee, to examine how the weaknesses of the US corporate tax code is helping large companies avoid paying taxes on offshore earnings.
Cook, in his first Senate testimony on the issue as CEO, will face lawmakers' queries over his company's overseas cash holdings and tax bills.
The hearing comes as lawmakers globally are closely scrutinising the taxes paid by multinational companies. In Britain, Google faces regulatory inquiries over its own tax policies, while Hewlett-Packard and Microsoft have been called to Capitol Hill to answer questions about their own practices.
US-based multinationals do not have to pay US corporate income tax on foreign earnings as long as the earnings do not enter the United States. Accounting rules also let the companies avoid recognising a tax expense if management intends to keep the earnings indefinitely re-invested overseas.
Key issue
In the submitted testimony, Apple said any tax reform should favour lower corporate income tax rates regardless of revenue, eliminate tax expenditures and implement a "reasonable tax on foreign earnings that allows free movement of capital back to the US."
"Apple recognises these and other improvements in the US corporate tax system may increase the company's taxes," it said, adding that it expects to pay over $7bn in taxes to the US Treasury in its current fiscal year.
Large US companies boosted their offshore earnings by 15% last year to a record $1.9 trillion, avoiding hefty tax bills by keeping the profits abroad, according to research firm Audit Analytics.
Corporate tax reform is a key issue for Apple as its offshore cash piles up, with sales outside of its home country accounting for two-thirds of the company's $43.6bn in revenue during its fiscal second quarter. Over $102bn of Apple's total $145bn cash was held offshore as of the end of March.
To mollify investors, the company will borrow money to pay for an expanded $100bn cash return program for its investors, rather than repatriate its overseas cash at the present tax rate of 35%.
Apple said in the testimony that it was able to borrow money for that program at a cost of less than 2%, which makes the interest rate on the debt lower than the dividend yield on the company's shares.
