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Apple to argue for tax reform, defend tax practices on Tuesday

Men are silhouetted against a video screen with an Apple logo as they pose with an Apple iPhone 4 smartphone in this photo illustration take
Men are silhouetted against a video screen with an Apple logo as they pose with an Apple iPhone 4 smartphone in this photo illustration take

By Poornima Gupta

SAN FRANCISCO (Reuters) - Apple Inc will argue for a comprehensive corporate tax reform that will levy a "reasonable tax" on foreign earnings and is not dependent on a company's revenue when it goes before a Senate panel on Tuesday to explain its offshore tax practices.

In prepared testimony released by the company and submitted ahead of Apple Chief Executive Tim Cook's hearing on Tuesday before the Senate Permanent Subcommittee on Investigations, Apple denied it employed "tax gimmicks" like using Cayman Islands bank accounts or shifting intellectual property abroad.

It also said the existence of its subsidiary "AOI" in Ireland - which has been criticized as a way to shift money from the United States - does not reduce Apple's U.S. tax liability.

Tuesday's hearing is the second to be held by Senator Carl Levin, a Michigan Democrat and chairman of the subcommittee, to examine how the weaknesses of the U.S. corporate tax code is helping large companies avoid paying taxes on offshore earnings.

Cook, in his first Senate testimony on the issue as CEO, will face lawmakers' queries over his company's overseas cash holdings and tax bills.

The hearing comes as lawmakers globally are closely scrutinizing the taxes paid by multinational companies. In Britain, Google faces regulatory inquiries over its own tax policies, while Hewlett-Packard Co and Microsoft Corp have been called to Capitol Hill to answer questions about their own practices.

U.S.-based multinationals do not have to pay U.S. corporate income tax on foreign earnings as long as the earnings do not enter the United States. Accounting rules also let the companies avoid recognizing a tax expense if management intends to keep the earnings indefinitely re-invested overseas.

KEY ISSUE

In the submitted testimony, Apple said any tax reform should favor lower corporate income tax rates regardless of revenue, eliminate tax expenditures and implement a "reasonable tax on foreign earnings that allows free movement of capital back to the US."

"Apple recognizes these and other improvements in the US corporate tax system may increase the company's taxes," it said, adding that it expects to pay over $7 billion in taxes to the US Treasury in its current fiscal year.

Large U.S. companies boosted their offshore earnings by 15 percent last year to a record $1.9 trillion, avoiding hefty tax bills by keeping the profits abroad, according to research firm Audit Analytics.

Corporate tax reform is a key issue for Apple as its offshore cash piles up, with sales outside of its home country accounting for two-thirds of the company's $43.6 billion in revenue during its fiscal second quarter. Over $102 billion of Apple's total $145 billion cash was held offshore as of the end of March.

To mollify investors, the company will borrow money to pay for an expanded $100 billion cash return program for its investors, rather than repatriate its overseas cash at the present tax rate of 35 percent.

Apple said in the testimony that it was able to borrow money for that program at a cost of less than 2 percent, which makes the interest rate on the debt lower than the dividend yield on the company's shares.

(Reporting by Poornima Gupta and Edwin Chan; Editing by Gary Hill)

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