Washington Hotline – May 29, 2013

Will Apple Pay Tax on $100 Billion?

On May 21st, Apple Inc. CEO Tim Cook testified before the Senate Homeland Security and Government Affairs Permanent Subcommittee on Investigations. He advocated reform of the corporate income tax and a “reasonable tax” on foreign earnings.

Committee Chair Carl Levin (D-MI) questioned Cook regarding his company’s substantial overseas holdings. Apple has worldwide operations and the majority of its cash reserves are maintained overseas in order to avoid U.S. taxation.

Levin stated, “Today the subcommittee will focus on how 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 the taxes.”

Levin particularly was concerned about the use of overseas companies to avoid taxes. Apple has created Apple Operations International, Apple Sales International and Apple Operations Europe to manage overseas operations. Levin stated, “Apple has sought the Holy Grail of tax avoidance, offshore corporations that it argues are not, for tax purposes, resident in any nation.”

The ranking member of the committee is Sen. John McCain (R-AZ). He agreed with Levin that the Apple strategy enabled the company to shift profits offshore to low-tax jurisdictions. McCain noted, “Today, Apple has over $100 billion, more than 2/3 of its total profits, stashed away in an offshore account. That is over $100 billion that are not currently subject to U.S. corporate income taxes and, therefore, cannot be used to ease the deficit or help invigorate the same American economy that fostered the creation of this large corporation in the first place. As the shadow of sequestration encroaches on hard-working American families, it is unacceptable that corporations like Apple are able to exploit tax loopholes to avoid billions in taxes.”

Apple CEO Tim Cook did not respond to Levin’s question whether or not he would repatriate part or all of the $100 billion. Cook recommended a substantial corporate tax reform with a federal tax rate for corporations established in the “mid 20’s.” He also suggested that Apple would be open to bringing overseas profits home if the repatriation tax were in “single digits.”

Cook indicated, “I think we would have a much stronger economy if we did that.” He also suggested that domestic jobs and investment would increase with major corporate tax reform.

In preparation for the hearing Apple submitted a summary of its current business and policies. The Apple statement described its various operations.

1. Job Creation – Apple has created over 50,000 direct jobs and indirectly created another 550,000 in related engineering, manufacturing, logistics and software companies in the US.

2. Large Tax Payments – Apple is one of the largest taxpaying U.S. companies with $6 billion in taxes in 2012 and an estimated $7 billion in federal taxes in 2013. The Apple tax rate is over 30% on its U.S. income.

3. Cost Sharing – The Apple business policies with overseas companies create many US positions. Most of the research and development for Apple products takes place in the United States.

4. Corporate Tax Reform – Apple believes that a simplification of the tax system would allow free movement of capital back to the U.S. and increase employment. Tax reform also is likely to increase the total taxes paid by Apple.

Acting IRS Commissioner Pledges 30-Day Review

Acting IRS Commissioner Danny Werfel has initiated a comprehensive 30-day review of the agency. The review is in response to questions that have been raised by both the House and Senate about the lack of IRS objectivity in handling applications for Sec. 501(c)(3) and Sec. 501(c)(4) organizations.

Werfel acknowledged the need to “act as responsible, fair and impartial stewards of the taxpayer dollars.” He indicated that he is willing to work together with Congress to ensure future operations are appropriate.

Werfel sent a message to all IRS employees and stated, “We must keep our eyes on our critical missions of fair application of the tax laws and effective operation of the systems that fund our government. That mission, and your work, are of critical importance. With that in mind, in the coming days, I plan to begin a review of our operations, processes and practices to focus on how we deliver on our mission today and how we can make improvements in the future. The American people expect the IRS to operate efficiently, effectively, transparently and with the utmost accountability to the taxpayer. And where that is not the case, we will take swift actions to correct it.”

Rep. Darrell Issa (R-CA) is Chair of the House Oversight and Government Reform Committee. He stated that Acting Commissioner Werfel will have an opportunity to explain the 30-day review in a future hearing before his committee.

Editor’s Note: Commentators who have experience with the IRS indicate that Acting Commissioner Werfel has a difficult task to accomplish. The IRS is a massive organization. Werfel does not have extensive background with the IRS and it will be very challenging to conduct a complete review in the scheduled 30 days.

Corbin to Head IRS Exempt Organizations

Acting IRS Commissioner Danny Werfel has appointed Ken Corbin as the Acting Director of Exempt Organizations for the IRS. Werfel noted on May 22nd that Corbin is currently Deputy Director, Submission Processing, Wage and Investment Division of the IRS. He supervises 17,000 IRS employees in that effort. Previously, Corbin was the Austin Field Director of the IRS Processing Center and supervised 4,000 employees who processed 5,000 electronic and 10,000 paper returns each year.

Werfel stated, “In his new role, Ken will lead an organization of 900 exempt organization employees responsible for a range of compliance activities, including examining the operational and financial activities of exempt organizations, processing applications for tax exemption, providing direction through private letter rulings and technical guidance and providing customer education and outreach to the exempt community.”

Applicable Federal Rate of 1.2% for June — Rev. Rul. 2013-12; 2013-23 IRB 1 (16 May 2013)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2013. The AFR under Section 7520 for the month of June will be 1.2%. The rates for May of 1.2% or April of 1.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2013, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.

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