Apple Inc came under fire on Tuesday at a Senate hearing over an investigation that alleged the U.S. high technology icon has kept billions of dollars in profits in Irish subsidiaries and paid little or no taxes to any government.
"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," said Senator Carl Levin.
Apple Chief Executive Tim Cook was slated to testify to the subcommittee at the hearing, along with other senior executives of the company.
As chairman of the Senate Permanent Subcommittee on Investigations, Levin frequently dives into complex tax issues. His latest probe targets one of America's most successful companies, with a powerful global brand.
Offshore tax avoidance by multinational companies has become a high-profile issue. Cash-strapped governments worldwide are increasingly focused on wringing more tax revenue from corporations that often have interests in many countries and easily shift capital and assets across national borders.
The Levin inquiry comes at a turbulent time in tax circles, with the U.S. Internal Revenue Service under investigation over targeting by IRS agents of conservative political groups.
The impact of that controversy and Levin's allegations on the potential for a thorough overhaul of the U.S. tax code were hard to predict. 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.
Levin urged closing "unjustified tax loopholes" like those he said Apple used to avoid $9 billion in U.S. taxes in 2012.
"Closing these kinds of unjustified loopholes could provide hundreds of billions of dollars to reduce the deficit and avert damaging budget cuts," said Levin, a Democrat, at the hearing.
"We should close them and dedicate the revenue that generates to these important priorities, whether or not we reform the overall tax code," he said.
Senator John McCain praised Apple as an American business success story, but he said that Apple's corporate tax strategy "reflects a flawed corporate tax system."
The former Republican presidential nominee said, "It is a system that allows large multinational corporations to shift profits offshore to low-tax jurisdictions.
"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."
Subcommittee staffers said on Monday that Apple was not breaking any laws and had cooperated fully with the inquiry.
On Monday, Apple said in a comment posted online that it does not use "tax gimmicks." It said the existence of its "Apple Operations International" unit in Ireland does not reduce Apple's U.S. tax liability and the company will pay more than $7 billion in U.S. taxes in fiscal 2013.
At the hearing, Levin's subcommittee issued a 40-page memorandum focused on explaining allegations that Apple used three subsidiaries with no "tax residency" in Ireland, where company executives manage those companies.
The main subsidiary, a holding company that includes Apple's retail stores throughout Europe, has not paid any corporate income tax in the last five years, the subcommittee said.