The Senate subcommittee’s questions could not be ignored. If Apple wanted to remain successful, its leadership needed to maintain at least a façade of goodwill toward the government. That spring as hearings approached, the company cooperated with the subcommittee investigators and made Apple executives, including Cook, available for interviews. When the panel asked the CEO to testify at a hearing as well, he agreed. Better to show up willingly than to be subpoenaed.
Apple also hired a lobbyist who had founded Microsoft’s Washington office and retained O’Melveny & Myers, a law firm experienced in shepherding large companies through the minefields of regulatory scrutiny. The firm’s clients included Enron and Goldman Sachs. Among its partners was George Riley, the longtime friend of Jobs who had counseled Apple before on legal matters.
In high-profile congressional hearings such as this, where a corporation’s national reputation often hung in the balance, a company could gain strategic advantages by working closely with the committee in advance of the public grilling. Typically, the company’s lawyers or other representatives sought to limit the scope of the investigation and also to assess the lines of questioning their clients might face. Knowing in advance where the most devastating punches might land allowed the company to prep for the big moment. The committee had invited three of Apple’s executives to answer the senators’ questions—Cook, as well as the company’s chief financial officer and the head of its tax operations. In the weeks leading up to the hearing, the trio was put through intense coaching sessions by O’Melveny & Myers’s crack team. Every conceivable question and scenario was thrown at them until their answers struck the desired note—firm, yet deferential. Cook and the other witnesses needed to prepare just as they would for a court proceeding. Everything they said would be recorded. Every word could be used against them and Apple later.
A week before the hearing, Cook set the stage as he gave interviews to Politico and the Washington Post, two of the most widely read publications inside the Beltway. The committee was expected to release the findings of its investigation any day, and Apple wanted to get its side of the story out first. Instead of merely defending his company against charges of tax dodging, Cook used the interviews to pitch a simplified corporate tax law.
Everyone understood that the committee’s work was just another type of political theater. For all the senators’ blustering, the Democrats and Republicans were unlikely to agree on any legislation to close tax loopholes, especially in the midst of the capital’s toxic gridlock. Nor were they likely to follow whatever suggestions Tim Cook offered on streamlining the tax code. But by introducing his proposals ahead of the hearing, Cook increased the odds that he would appear proactive rather than defensive.
“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 told the Post. “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.”
He also planted the idea that Apple was already doing plenty for the country.
“Apple is paying approximately one million dollars an hour in just domestic income taxes,” he said. “You may not know this, but Apple likely is the largest corporate taxpayer in the U.S.”
The day before the hearing, the committee presented the results of its months-long investigation. The report charged that Apple had structured organizations and business operations to avoid paying U.S. taxes on overseas income. It alleged that Apple transferred vast amounts of its assets and profits to subsidiaries in Ireland that didn’t have a tax residence status anywhere in the world. One holding company, Apple Operations International, made up thirty percent of Apple’s total worldwide net income from 2009 to 2011 but did not pay any corporate income tax to any national government during that period. Another company, Apple Sales International, did file a corporate tax return related to its operating presence in Ireland, but the subsidiary paid little to no taxes on that amount per its agreement with Ireland. The panel suspected that both shell corporations were set up to exploit the difference between Irish and U.S. tax residency rules. While Apple claimed effective tax rates between 24 and 32 percent, that percentage included U.S. state and foreign taxes. When those were separated out, Apple’s U.S. corporate income tax was 20.1 percent, compared to the federal statutory rate of 35 percent.
“Apple sought the Holy Grail of tax avoidance,” said the committee chairman, Senator Carl Levin, in a statement released with the findings. “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.”
Senator John McCain, the ranking committee member, also accused Apple of being one of America’s largest tax avoiders, calling Apple’s tax structure “byzantine.” The two congressmen were on opposite sides of the aisle in their politics, but they were joined in their indignation. Every expectation was that the hearing would be confrontational.
On the morning of May 21, 2013, Cook arrived at the Dirksen Senate Office Building in a perfectly tailored dark suit with a white shirt and solid blue tie.
From the beginning, the senators made it clear that Apple had not broken any laws and that they were studying the company’s tactics to figure out how they could close tax loopholes and update the tax code. Even when they criticized Apple, their comments were couched with respect. Several expressed their love for the company’s products. McCain made a point of noting that Cook was “an outstanding executive” even as he accused the company of indirectly increasing the general public’s tax burden.
As with any hearing on Capitol Hill, the discussions were just as much about the politics among the senators as it was about the issue. The libertarian senator, Rand Paul, quickly rose to Apple’s defense.
“I’m offended by a four-trillion-dollar government bullying, berating, and badgering one of America’s greatest success stories,” Paul said. “What we really need to do is apologize to Apple, compliment them for the job creation they’re doing, and get about doing our job. Look in the mirror and let’s make the tax code better, fairer, and more competitive worldwide. Money goes where it’s welcome. Currently our tax code makes money not welcome in this country.”
Levin responded icily.
“You’re of course free to apologize if you wish.”
Apple had always considered itself to be a progressive company, and Cook’s personal politics were more aligned with Levin’s than Paul’s. But if the CEO saw the irony of the situation, he didn’t show it.
Apple had released the prepared remarks the previous day in response to the committee’s report, but Cook read it again so his words could be recorded in the Congressional Record.
The CEO sounded a patriotic note, emphasizing the contributions that the company had made to the U.S. economy. He mentioned how Apple’s U.S. workforce grew fivefold to fifty thousand in the last decade and reminded the senators of the company’s plans for a Mac product line in the country. He also explained that the overseas cash funded the company’s foreign operations.
“We pay all the taxes we owe—every single dollar,” Cook said before throwing Levin’s words right back. “We don’t depend on tax gimmicks.”
He quoted his favorite line from President Kennedy, “To whom much is given, much is required,” to stress his certainty that he and Apple were doing their part for the country. He also formally presented his tax proposal: a revenue-neutral code that lowered corporate income tax rates and set a reasonable tax on foreign earnings. Cook even managed to connect the simplicity of his plan with Apple’s philosophy in developing products: We believe in the simple, not the complex.
“We make this recommendation with our eyes wide open, realizing this would likely increase Apple’s U.S. taxes. But we strongly believe such comprehensive reform would be fair to all taxpayers, keep America globally competitive, and would promote U.S. economic
growth.”
So far Cook was performing his role superbly. The main spectacle was the question-and-answer session in which the senators were given the chance to grill Apple’s executives. But for all of the drumbeating they had done before the hearing, here too the senators seemed to waver between adoration and condemnation. Whatever behind-the-scenes discussions had taken place between the two sides in advance of this day, Apple had been successful in shaping the debate. There was little mention of how the company had overstated its effective U.S. income tax rate by including state and foreign taxes into the calculation.
Before McCain began his questioning, he congratulated Cook for his successes. “I think you’d have to be a pretty smart guy to do what you do and a pretty tough guy, too,” he said before asking Cook if he felt bullied or harassed by the committee. McCain’s tone was mild, even friendly.
“I feel very good to be participating in this and I hope to help the process,” Cook replied earnestly as he leaned forward. “I’d really like for comprehensive tax reform to be passed this year and any way that Apple can help do that, we are ready to help.”
Cook told the committee that he had come willingly.
“I think it’s important that we tell our story and I’d like people to hear it directly from me.”
“So you were not dragged before this committee?” asked McCain.
“I didn’t get dragged here, sir,” Cook said with a grin.
“You don’t drag very easily, I understand,” the senator said as Cook laughed heartily.
When McCain became serious and asked if Apple had an unfair tax advantage, Cook gently disagreed.
“No, sir, it’s not the way that I see it and I’d like to describe that.”
The CEO explained how Apple was paying all the taxes it owed for income generated in the United States.
In the end, McCain drew back his fire.
“What I really wanted to ask was why the hell I have to keep updating the apps on my iPhone all the time and why you don’t fix that?”
“Sir, we’re trying to make them better all the time,” Cook told him, grinning again.
Throughout the questioning, Cook took care to address each senator respectfully, addressing them as “Sir” or “Senator,” in the case of the women. He thanked them for asking questions and stressed their shared values and mutual love for their country. He also validated the senators’ questions and opinions at every possible chance.
“How important do you think it is that we change the tax code to ensure that this remains a good place for investment?” asked Senator Kelly Ayotte.
“I think it’s vital to do,” replied Cook. “I think it’s great for America to do. I think we would have a much stronger economy if we did that. I think it would create jobs and increase investment. And so I put my whole weight and force behind it.”
When Ayotte suggested that more jobs and investment could also result in increased tax collections, Cook readily agreed.
“I think that’s a very excellent point . . . all ships rise with the tide.”
While the coaching he had received was evident, the senators also saw a glimpse of the sharp, analytical mind that drove Cook’s subordinates to achieving excellence. Though it was unlikely that the longtime Apple executive had been directly involved in the nitty-gritty of Apple’s tax strategy, he had absorbed every last detail by this time. The senators, who had a much more general grasp of the picture, were no match.
Cook was also careful to maintain an open, friendly, and noncontroversial demeanor. Though all three Apple executives went out of their way to exhibit deference, any responses that could be remotely construed as combative or challenging were given by his chief financial officer, Peter Oppenheimer, and tax strategy chief, Phillip Bullock.
When Senator Rob Portman mentioned how Samsung’s global tax rate was about the same as Apple’s, it was Oppenheimer who stepped in to point out that Apple was at a bigger disadvantage because it was not able to freely move its capital back to its home country like Samsung could because of the high U.S. tax burden.
Only at the very end did questioning become tense. Levin asked Cook if he was correct in his understanding that Apple had signed an agreement in 2008 that effectively shifted much of the economic rights to its intellectual property—its crown jewels—to Ireland by keeping the overseas profits there.
“I think we ought to get a straight answer on this,” said Levin.
Cook interrupted him. “I would disagree with your characterization.”
“Well, you signed the agreement in 2008, didn’t you? Don’t you work for Apple?”
Oppenheimer tried to step in for his boss, but Levin refused to let go.
“Mr. Cook, you signed that agreement, did you not, in 2008?”
“I signed the 2008 agreement, yes.”
“You were working for Apple at that time?”
“I’ve been working for Apple for fifteen years, sir.”
“Three people working for Apple signed this agreement,” Levin concluded. “Mr. Cook, I couldn’t disagree with you more. Of course you shifted something—the most valuable thing you have—the economic rights in your intellectual property.”
A few minutes later, Levin asked Cook, “Is it true you told our staff you’re not bringing the hundred billion home unless we reduce our tax rates? Is that accurate?”
“I don’t remember saying that,” Cook said, evading a straight answer for the first time.
Levin pressed him again. “Is it true?”
Cook’s voice grew testy. “I said I don’t remember saying that.”
“No, I’m saying is it true that you’re not going to bring them home unless we reduce our tax rates?”
After the third time, Cook paused and looked up from the corner of his eyes as if he were rapidly sifting through his mind for the right answer. “I have no current plan to bring them back at the current tax rate.”
“All right,” said a frustrated Levin. “Is that the same way as saying unless we reduce our tax rates, you’re not bringing them home? Is that the same way?”
“No, I don’t think it’s the same, sir.”
“How is it different?”
“Your comment sounds like it’s forever and I’m not projecting what I’m going to do forever because I have no idea how the world may change.”
The session ended with the senator launching into a monologue about the need to change the tax code.
“We’re proud of you being an American company. We’re glad you’re where you’re at, but the result of these arrangements that you’ve continued is that most of your profit is now where we’ve described all morning, in Ireland, in these companies that don’t exist anywhere except on the water. . . . Of course we’ve got to change this system, but in order to change it, we’ve got to understand it, not deny it.”
Still, when the reviews of Cook’s performance came in, they were almost unanimous. He had outdone himself. He had remained calm and controlled. He had shown himself to be authoritative yet respectful. Most importantly, he had held his ground even when Levin tried to bait him. By doing so, he had dominated the hearing and averted a headline-making showdown. Cook had even impressed the senators. In a complete about-face from his position before the hearing, McCain’s spokesman told reporters that the senator didn’t want regulators to punish Apple.
At the witness table on Capitol Hill, Cook had finally shown himself to be the CEO that he could be. He might not have Jobs’s dynamism, but he exhibited a different kind of gravitas and wit. Sitting across from the senators in his tailored suit, he looked like he belonged. He was one of them. He had done what’s right.
As positive as the reactions were in the immediate aftermath, the hearing took some more shine off of Apple’s mystique. The company may have had the legal right to set up the tax structure the way that it had, but in the end, Apple had made a self-serving decision to keep most of its cash overseas to avoid paying taxes. It was no more than what many other com
panies did, but Apple stood out because of its immense success and its claim that it existed to make the world a better place.
On the same day, George Packer, a journalist for the New Yorker, published a book in which he discussed the changing ethos in America, where individuals are out for themselves and “winners win bigger than ever, floating away like bloated dirigibles, and losers have a long way to fall before they hit bottom, and sometimes they never do.”
In interviews, Packer singled out Apple as one of the worst offenders because the company pretended to be otherwise. “Apple styles itself as a lifestyle, almost as a revolution. This slogan from the nineties Think Different suggested that Apple is like Gandhi or like King. It’s a liberating movement,” he told San Francisco’s public radio station KQED. “Apple is a company . . . they are just another company.”
Within a few days, Apple was in the hot seat yet again. The Justice Department’s case accusing Apple of masterminding a monopoly to increase digital book prices was set to go to trial on June 3.
According to the government, the case was straightforward price-fixing. Before Apple opened its digital bookstore, publishers had sold books to retailers at a wholesale price. But when Amazon sold many of the books at a loss to shore up their dominant position, the publishers had schemed together to stop the price erosion. Apple was accused of serving as the “ringmaster” by brokering a deal that allowed the publishers to dictate the price in its digital bookstore in exchange for a 30 percent cut of the revenues. The assurance of having a major retail partner then allowed the publishers to impose the same agency agreement on their other retailers. Apple also inserted a most-favored-nation clause requiring that prices in other stores, like Amazon’s, be matched in Apple’s bookstore. As a result, book prices rose. The government had plenty of evidence showing the communications that took place among the publishers as well as between them and Apple. All five publishers that had been named in the suit had already settled and had agreed to terminate the existing agency agreements.
Haunted Empire: Apple After Steve Jobs Page 34