Excerpts of Apple Executives' Senate Committee Testimony on Tax Policy

Three Apple executives, CEO Tim Cook, CFO Peter Oppenheimer, and head of tax operations Phillip A. Bullock, appeared in front of the U.S. Senate Permanent Subcommittee on Investigation earlier today, testifying about Apple's tax policies.

MacRumors has a rough transcript of the hearing, while the full event is viewable on C-SPAN. The full hearing was quite long, but here are some selected excerpts from our transcript.

At the beginning of the hearing, Senators are allowed to make whatever opening statements they wish. Senator Rand Paul (R-KY) gave a spirited defense of Apple, saying he was "offended" by the hearing.

"Tell me a politician who is up here and doesn't try to minimize his taxes… Tell me what Apple has done is illegal. I am offended by a government… that convenes a hearing to bully one of America's greatest success stories… If anyone should be on trial here, it should be Congress. I frankly think the committee should apologize to Apple."

Instead of Apple executives, we should have brought in a giant mirror. This problem is solely and completely caused by our tax code. This committee should look in the mirror. "I find it abominable."

We need to apologize to Apple, compliment them for the job creation they're doing, and get on with our job and redo the tax code.

Apple CEO Tim Cook and CFO Peter Oppenheimer also made opening statements. Cook noted that Apple is responsible for creating or supporting 600,000 jobs in the United States, and disclosed for the first time the the upcoming 'Made in the USA' line of Mac computers would be manufactured in Texas, with parts coming from a wide variety of states.

Much of the hearing would focus on Apple's use of Irish subsidiaries to avoid paying U.S. income taxes on revenue generated overseas from the sale of products. Senators had accused Apple of having "sham" corporate entities in Ireland that served no purpose except for avoiding tax liability. Hitting back at that accusation, Cook said that Apple's operations in Ireland were not shell corporations, but had actual functions.

Apple has real operations, in real places, with Apple employees selling real products to real customers. We not only comply with the laws but we comply with the spirit of the laws. We don't move intellectual property offshore and use it to sell products back on the U.S. Our foreign subsidiaries pull 70% of our cash because of the rapid growth of our international business. We use this money to finance construction of Apple retail stores around the world and fund production of products. It would be very expensive to bring that cash back to the United States. Unfortunately the tax code has not kept up with the digital age. We are handicapped in relation to our foreign competitors who do not have such constraints on the free movement of capital.

Senator John McCain (R-AZ), asked Cook whether Apple's actions overseas created an unfair advantage for them compared to smaller companies that operate strictly inside the US and cannot create such overseas entities.

McCain: If you look at the 35% [corporate] tax burden, that I'm sure we're in agreement is way too high, you said the purpose of AOI [an Irish subsidiary] is to ease administrative burdens. Isn't it obvious that you are not bearing the same tax burden as if you were bearing in the United States? This gives you some advantage over smaller companies located strictly in the US?

Cook: Sir, I have tremendous respect for you. I see this differently from you. Apple is earning these profits outside the US. By law and regulation, these are not taxable in the US. AOI invests that money overseas and then the interest from those investments is taxed in the US. I see this as a very complex topic and I'm glad we're having the discussion. Honestly, I don't see it as being unfair. I am not an unfair person. That's now who we are as a company and who I am as an individual. I do not see it that way.

In a moment of levity, the 76-year old McCain expressed a concern that many iPhone owners share: "I'm out of time, but why the hell do I have to keep updating the apps on my iPhone? Why can't you fix that?" Cook responded that Apple was "looking to do better all the time."

Senator Claire McCaskill (D-MO), after praising Apple and its products, asked Cook about what's keeping Apple headquartered in the United States and why the company doesn't move overseas where the fiscal climate might be more favorable.

McCaskill: What would it cost to move out of California or move entirely to Ireland or China? What keeps you from moving on a cost analysis basis?

Cook: We're an American company. We're proud to be an American company. The vast amount of our R&D is in California. We love it there.

McCaskill: It's an intangible?

Cook: It's who we are as people. We're an American company whether we're selling in China or Egypt. We're an American company. It has never entered my mind that we would move to another country. It's beyond my imagination and I have a wild imagination. It's beyond it.

One of the major reasons for Cook's appearance in front of the committee was for Apple to put forth its own plan for corporate tax reform.

For one thing, Cook said the U.S. corporate income tax rate should be in the mid-20 percent range, while repatriation tax rates for income earned outside the U.S. should be somewhere in the single digits. Cook said that Congress should take a tip from Apple and focus on simplicity.

Apple has always believed in the simple, not the complex. You can see this in our products and in the way we conduct ourselves. It is in this spirit that we recommend a dramatic simplification of the corporate tax code. We make this recommendation with our eyes wide open, fully recognizing that this would likely result in an increase in Apple's U.S. taxes. We strongly believe that such reform would be fair to all taxpayers and would keep the U.S. competitive.

Finally, in his final line of questioning to Cook and Oppenheimer, Senator Levin went on the offensive, arguing that while Apple may not be violating the letter of the law, it was certainly violating the spirit of it.

By routing most foreign earnings to an Irish subsidiary -- a subsidiary that, in Levin's view, existed solely to avoid paying U.S. income tax -- Apple was doing a disservice to the American public by not paying their fair share.

Apple does pay U.S. income tax on earnings from the Americas (Mexico, Canada and Brazil most notably), but some two-thirds of its worldwide income eventually get routed to Irish subsidiaries.

Levin: And all the profits from Mexico and Canada and Argentina are taxed in the United States. But you made a decision to shift economic value overseas and the result is that most of your profits are not taxed. You're an American company. You're proud of it, we're proud of it. The result of these arrangements is that most of your profit is now in Ireland in these companies that don't exist. Of course we have to change this system. But to change it, we have to understand what is going on. What is going on is a huge loss of revenue to the United States. We've got these corporations that are able to shift profits to places where you don't pay income tax on it. We better understand that if we're going to correct it. That's our purpose here today. To shed a light on that. I hope that purpose has been achieved. We cannot continue a system where the company, a multinational company, is phenomenally as successful as yours and can make a decision, sitting down in 2008 as to where the profits will flow.

Where the R&D is 95% in the United States. You got R&D tax credits, all the benefits of living in this country. You're sitting there, unilaterally deciding whether to continue a system where profits are shifted to a place where they are not available to the American taxman. Everyone agrees that we need to change this system. In order for us to change this system, we've got to understand what is going on. You make a unilateral decision, three Apple employees in 2008, essentially decided where these profits will be taxed or not taxed. It's not right. That is not right. To leave that decision, it seems to me, the way it is decided so unilaterally, that a company can shift its value to a tax haven -- that's what Ireland is -- I know its your intention and I applaud your view. I know its not easy to come in front of the spotlight. It's important for us to write the laws. You agreed Mr. Cook that we need to rewrite these laws. Thank you for coming.

Following the testimony of Apple's executives, representatives from the US Treasury and the IRS appeared and largely confirmed that Apple's activities appeared to be entirely legal.

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