Daily Tax Update - May 21, 2013: Senate Permanent Subcommittee on Investigations Hearing on Offshore Profit Shifting

SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS HEARING ON OFFSHORE PROFIT SHIFTING:  Today, the Senate Permanent Subcommittee on Investigations has scheduled a hearing, “Offshore Profit Shifting and the U.S. Tax Code - Part 2 (Apple Inc.).”  The Subcommittee examined “the structures and methods employed by multinational corporations to shift profits offshore and how such activities are affected by the Internal Revenue Code and related regulations.”

Subcommittee Chairman Carl Levin said, “Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven.  Apple sought the Holy Grail of tax avoidance.  It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere.  We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed.”

Sen. Levin’s statement can be accessed via: Download Statement (72.6 KB)

The witnesses were:

PANEL 1

PANEL 2

PANEL 3

  • Mark J. Mazur, Assistant Secretary for Tax Policy, U.S. Department of the Treasury (Download Testimony (62.6 KB))
  • Samuel M. Maruca, Director, Transfer Pricing Operations, Large Business & International (LB&I) Division, Internal Revenue Service (Download Testimony (41.6 KB))

Mr. Harvey testified, “Apple, Inc. (Apple) is an iconic US multinational corporation (MNC) that has enjoyed extraordinary financial success. In addition to demonstrating excellence in designing, building, and selling consumer products, Apple has been very successful at minimizing its global income tax burden.”  Mr.  Harvey continued, “Although shifting income out of the US and locating it in a tax haven like Ireland are key steps in Apple’s international tax planning, Apple must also avoid the so-called “Subpart F” rules. These rules were originally designed to tax passive income earned by foreign subsidiaries of US MNCs and therefore discourage the shifting of income out of the US. However, the rules have been substantially “gutted” through adoption of (i) the check-the-box regulations, (ii) the CFC look-through rule, (iii) the contract manufacturing exemption, and to a lesser extent (iv) the same-country exception.”  Mr. Harvey recommended that (a) a global consensus be developed on how to address corporate tax havens, (b) the corporate tax rate be substantially lowered, with a VAT or other revenue source replacing the list revenue, (c) enact adequate base erosion protections if the arms’ length standard is maintained, and/or (c) consider replacing the arms’ length standard with formulary apportionment.

Mr. Shay stated, “The Apple case study adds further support to the findings from aggregate data that there is substantial shifting of profits offshore by U.S. multinationals. Apple’s income shifting strategies, including its cost sharing transfers of valuable intellectual property rights, are not unusual as evidenced in the 2010 case studies developed by the staff of the Joint Committee on Taxation and in the testimony presented in hearings by the U.K. Public Accounts Committee.  I encourage the Subcommittee to pursue reforms in the short term to adequately protect the U.S. tax base.”

Mr. Cook, Mr. Oppenheimer and Mr. Bullock from Apple testified, “Apple welcomes an objective examination of the US corporate tax system, which has not kept pace with the advent of the digital age and the rapidly changing global economy. The Company supports comprehensive tax reform as a necessary step to promote growth and enable American multinational companies to remain competitive with their foreign counterparts in both domestic and international markets.”  The Apple officials stated, “Apple is likely the largest corporate income taxpayer in the US, having paid nearly $6 billion in taxes to the US Treasury in FY2012. These payments account for $1 in every $40 in corporate income tax the US Treasury collected last year. The Company’s FY2012 total US federal cash effective tax rate was approximately 30.5%. The Company expects to pay over $7 billion in taxes to the US Treasury in its current fiscal year.”  The representatives from Apple added, “Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands. Apple has substantial foreign cash because it sells the majority of its products outside the US. International operations accounted for 61% of Apple’s revenue last year and two-thirds of its revenue last quarter. These foreign earnings are taxed in the jurisdiction where they are earned (“foreign, post-tax income”).”  The officials from Apple said that the company has created thousands of jobs in the United States, does not use “tax gimmicks” and it is “not a shell company.”

Mr. Mazur stated, “The question that arises is where the income from this product is earned. Presumably, some sliver of income should be attributed to each of the subsidiaries, but because all the steps were required to successfully market the product, the appropriate geographic allocation between the U.S. parent and each of the subsidiaries is not obvious.”  Mr. Mazur added, “The Treasury Department supports the efforts of the Organisation for Economic Co-Operation and Development (OECD) to analyze these profit-shifting issues and is actively participating in the OECD’s projects to address these issues, including the project analyzing Base Erosion and Profit Shifting. This important multilateral effort is evidence that governments around the world are wrestling with these difficult issues and trying to find ways to address inappropriate profit-shifting.”

Mr. Maruca testified, “The IRS takes very seriously the need to ensure that U.S. multinational corporations are abiding by U.S. tax laws and paying their fair share of tax. Over the last few years, we have been working to enhance our approach to international tax enforcement in general and to offshore profit shifting in particular. We have been refocusing our enforcement efforts to be more strategic by viewing taxpayers through the prism of their tax planning strategies and allocating our limited resources to cases presenting the highest compliance risk.”  Mr. Maruca said that the IRS’s approach to income shifting challenge “is evolving” and said the IRS has “worked with the Treasury Department over the last several years to adopt revised regulations on cost sharing.”  He also said that concerns remain in this area and they are “now training our agents to address these issues and to challenge taxpayers’ positions where appropriate.”  Mr. Maruca added, “The IRS has been, and continues to be, vigilant and forceful in addressing compliance issues we have seen in regard to U.S. multinationals. . . . Although enforcing and administering this section of the tax law will present challenges for the IRS into the future, the agency has made great strides in recent years, and this is a tribute to strategic focus and to the highly dedicated and professional men and women of the IRS.”

The Subcommittee’s report and exhibits in conjunction with the hearing be accessed here.

BAUCUS PLEDGES TO INVESTIGATE APPLICANTS FLAGGED BY IRS EMPLOYEES:  At a Senate Finance Committee hearing today, Chairman Max Baucus (D-Mont.) said high-ranking IRS officials should have taken “firm action – including potentially transferring or firing employees – to end the screenings of conservative groups’ applications for tax exemptions.”  According to his press statement, “Senator Baucus said further investigation must look into the hundreds of applications that were flagged by IRS employees but did not use political screening terms.  He also said Congress must reform the nation’s tax laws pertaining to 501(c)(4) ‘social welfare’ organizations to prevent such behavior from reoccurring.”

“We need to understand how and why this targeting occurred.  We need to know who was involved and who was responsible, and we need to install new safeguards to ensure this targeting never happens again,” Senator Baucus said.  “There are countless political organizations at both ends of the spectrum masquerading as social welfare groups in order to skirt the tax code.  Once the smoke of the current controversy clears, we need to examine the root of this issue and reform the nation’s vague tax laws pertaining to these groups.”

The press statement added, “Senator Baucus said further investigation must uncover who is responsible for the IRS’s reported behavior and why the controversial  actions of the “determinations unit” of the IRS’s Cincinnati office were allowed to reemerge after IRS officials in Washington attempted to end them. . . . On Monday, Senators Baucus and Hatch sent a letter to Acting IRS Commissioner Steven Miller as part of the Finance Committee’s formal independent investigation to request additional documents that would shed light on the scope and origin of the IRS’s behavior and ask how the IRS plans to guarantee it does not happen again.”

MISCELLANEOUS GUIDANCE RELEASED:
Notice 2013-35 requests comments on whether the changes that have occurred in bank regulatory standards require amendment of regulations and whether applying the conclusive presumption regulations as currently formulated is still consistent with the principles of section 166.  The Notice also requests comments on the types of entities that should be permitted to apply a conclusive presumption of worthlessness on debt instruments they hold.  Comments received will determine whether the existing conclusive presumption regulations should be revised, and the content of any such revisions.   

TAX BILLS INTRODUCED MAY 20:

1. [113rd] H.R.2054 : To amend the Internal Revenue Code of 1986 to prevent the avoidance of tax by insurance companies through reinsurance with non-taxed affiliates.
Sponsor: Rep Neal, Richard E. [MA-1] (introduced 5/20/2013)      Cosponsors(1) 
Committees: House Ways and Means 
Latest Major Action: 5/20/2013 Referred to House committee. Status: Referred to the House Committee on Ways and Means.


2. [113rd] H.R.2056 : To amend the Internal Revenue Code of 1986 to extend the work opportunity credit to certain recently discharged veterans, to improve the coordination of veteran job training services between the Department of Labor, the Department of Veteran Affairs, and the Department of Defense, to require transparency for Executive departments in meeting the Government-wide goals for contracting with small business concerns owned and controlled by service-disabled veterans, and for other purposes.
Sponsor: Rep Schwartz, Allyson Y. [PA-13] (introduced 5/20/2013)      Cosponsors (43) 
Committees: House Ways and Means; House Veterans' Affairs; House Armed Services; House Small Business; House Education and the Workforce 
Latest Major Action: 5/20/2013 Referred to House committee. Status: Referred to the Committee on Ways and Means, and in addition to the Committees on Veterans' Affairs, Armed Services, Small Business, and Education and the Workforce, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.


3. [113rd] S.991 : A bill to amend the Internal Revenue Code of 1986 to prevent the avoidance of tax by insurance companies through reinsurance with non-taxed affiliates.
Sponsor: Sen Menendez, Robert [NJ] (introduced 5/20/2013)      Cosponsors (None) 
Committees: Senate Finance 
Latest Major Action: 5/20/2013 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.