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If you’ve ever had to go to court for something, then you know how scary it can be. Imagine getting a notification from the U.S. Government that want to have a “meeting” with you over a $100 billion cash stake and some things you’ve been doing that doesn’t make them happy. Well that’s exactly what happened to Apple this month. Here’s a snippet of the hearing agenda:

Apple Tax Hearing

However the CEO of Apple, Tim Cook, doesn’t seem to worried about the Senate hearing. But a profit shifting hearing is nothing to be relaxed about. Profit shifting is when a company routes its profits into another country which doesn’t collect taxes. It’s estimated that $1.5 trillion U.S. company profits are outside of the United State’s taxing power.  Apple happen to hold more than $100 billion in offshore accounts. They also route more than 70 percent of their profits through countries that have little to zero tax rates.

Profit shifting is also possible at a more local level. For example: different states in America have different corporate taxes. If your company is based in a higher tax state, but you route your profits through a lower tax state, then you are effectively shifting your profits. Apple is also doing this. Their headquarters is located in Cupertino, California (which has a 8.84% corporate tax rate), but they move their profits to Nevada (which has zero corporate taxes).

What Tim Cook Will Try to Pull

The U.S. government certainly isn’t a fan of these type of behaviors. Especially from big companies like Apple. The government sees this as tax avoidance and is bent on getting their point across, along with some fines. However Tim Cook sees it as a perfect opportunity to educate consumers as well as the government on the US tax system.  In an interview with the Washington Post he said:

“When you combine state and federal, Apple is paying approximately $1 million an hour in just domestic income taxes,”

“You may not know this, but Apple likely is the largest corporate taxpayer in the U.S.”

So instead of walking into the hearing and figuring out a way to minimize the government fines that could come out of this, Cook actually wants to walk in there and ask for a break. He is basically saying “Hey, even though we shift more than 70% of our profits, we still end up paying the most taxes in the U.S., give us a break man.”

It also seems like he will be using recent plans to manufacture Mac products in the U.S. as a way of sucking up to the government.

“Apple has a very strong moral compass, and we believe in really good corporate citizenship,” Cook said. “You can see this in the number of jobs we create in the U.S. and how much we invest in the U.S.”

This is the equivalent of saying “Look. We’ve been shifting a lot of our profits into offshore accounts. We get that. But that’s allowed us to make U.S. manufacturing more affordable; and everyone loves U.S. manufacturing. You should love us for giving it a try.”

More Faulty Reasons Making it Okay To Shift Profits Overseas

Cook explains that the current tax rate in America is just too high for Apple’s liking. This direct statement which he made to the Washington Post seems to suggest that he can justify tax avoidance if he believes the tax rate is too high:

“If you look at it today, to repatriate cash to the U.S., you need to pay 35 percent of that cash. And that is a very high number,” Cook said in an interview Thursday. “We are not proposing that it be zero. I know many of our peers believe that. But I don’t view that. But I think it has to be reasonable.”

This isn’t the first time that U.S. companies are accused of tax avoidance. Consider the 2012 Microsoft and HP fiasco. The difference between Microsoft and HP shifting profits is that they both denied tax avoidance. Apple on the other hand, backed by Cook’s beliefs, seems to be very open about its overseas operations. Apple has $145 billion in cash, but analysts estimate that only $45 billion is available in the United States. This is certainly no small feat to deny. What’s Cook going to say at the hearing? “We’re not avoiding taxes… We’re just moving more than 60% of our profits into oversea accounts because… well… umm… well… because the U.S.’s tax rates are too high and unreasonable.”

Will The Government Let it Slide?

Apple is only investing $100 million in American manufacturing plants. The argument that “We’re shifting profits to create American jobs” just doesn’t add up. If they are shifting billions of dollars each year, then $100 million is pocket change. Now here is something even more interesting to consider: If Apple truly believes that getting a tax break will let them create American jobs, then why didn’t it ask the government for a tax break earlier on?

Which scenario seems more legitimate?

  1. Apple has been shifting more than 40 percent of profits overseas. They approach the government asking for a tax break in return for creating American jobs.
  2. Apple has been shifting more than 70 percent of profits overseas. When they get called into a hearing by the government they mention “Oh yeah… The profit shifting thing. We think that’s improving our chances our creating American jobs. We’re going to keep on doing it.”

Obviously the second scenario is just a tad bit more suspicious. It seems a lot like an excuse as opposed to a helpful incentive on fixing the U.S. economy.

Another interesting thing is that Apple has been failing to maintain its Foxconn arrangement’s in China. Workers are still committing suicide and they are still being overworked. The solutions involved playing music on the assembly line to relax workers, hiring over 2,000 singers, gym trainers, dancers, psychiatrists, and wrapping the factory in nets.

Photo from Wired.com

Photo from Wired.com

You might be asking yourself “Why nets?” Well that’s a perfectly good question with a terrible answer. The nets were put up around Foxconn to deter workers from committing suicide. Instead of giving their workers breaks and reducing work hours, Foxconn’s solution involve playing music on assembly lines and making sure no one can kill themselves while on Foxconn property.

A good question to ask ourselves is whether Apple is voluntarily choosing to move their manufacturing plants into the US; or whether they are just being pushed out of China.

On the other side of the world, in the U.S., Apple is met with tax avoidance hearings. At these hearings it might seem like Apple should be praised for its job creation and tax avoidance. But should they really be praised? Is Apple moving their factories into America to create jobs or are they just creating an excuse for avoiding taxes and failed oversea factories?

Leave your comments below regarding your thoughts on Apple’s future as a company, as a brand, and as a U.S. tax payer.

Article written by Octavian Ristea.