Apple chief executive Tim Cook spent two hours before a Senate committee Tuesday defending how the computer device maker uses subsidiaries to shelter billions of dollars in cash offshore to avoid paying taxes.
Pharmaceutical companies, including the biggest multi-nationals such as Pfizer, Merck and Johnson & Johnson, use similar tactics. That was particularly evident Monday, when drugmaker Actavis announced it would spend $5 billion in stock to buy Warner Chilcutt, Plc.
Actavis bought Warner Chilcutt in part because it is "domiciled" or registered in Ireland which has low corporate taxes. (Ireland has other economic problems, but we'll leave that for others today.) But the main offices of both companies are in North Jersey and Actavis will continue to operate from Parsippany.
"Everybody loves New Jersey too much, so nobody is willing to go," Actavis CEO Paul Bisaro said when asked if there would be any management moving to Ireland. "There won't be any management relocation."
The angst of some Americans, including some senators, who pay attention, pay taxes and don't have a foreign subsidiary for use for avoiding taxes is that corporate executives are using fat profits to finance a lavish lifestyle in America while their companies pays less tax than they should because savvy accountants routed the money through an overseas subsidiary.
Apple employs “offshore tax strategies whose purpose is tax avoidance, pure and simple,” Michigan Sen. Carl Levin said, according to a Bloomberg account of the hearing. A link is here.
The New York Times reported that Villanova Law School professor J. Richard Harvey Jr., testified that he estimated that Apple’s legal maneuvering had saved the company $7.7 billion in potential American taxes in 2011. A link to that story is here. Harvey said 64 percent of Apple’s global pretax income in 2011 was recorded in Ireland, yet only 4 percent of its employees and 1 percent of its customers were located there. Apple's assertion that it does not use “tax gimmicks,” did not square with Harvey.
“Apple does not use tax gimmicks?” Harvey said rhetorically, according to the Times. “I about fell off my chair when I read that.”
In Wednesday's New York Times, a story explains that the money itself is often parked in U.S. banks, but only attributed to foreign subsidiaries in terms of accounting. A link to that story is here.
Corporate executives make no apologies for living in American towns, using American municipal services while parking company cash, figuratively, in Ireland. Indeed, they mainly complain that the U.S. tax code makes them do it. And to be fair, Wall Street and shareholders would revolt if they didn't maximize the tax benefit possibilities.
Forbes said that the five U.S. companies with the most money parked overseas to avoid taxes are Apple, Microsoft, Google, Pfizer and Cisco. Johnson & Johnson's Janssen subsidiary has offices in Pennsylvania and New Jersey. But J&J used the Janssen official home in Ireland for the largest purchase in company history, the $19.7 billion acquisition of medical device maker Synthes, to minimize taxes on the transaction.