Apple CEO Tim Cook testified Tuesday before the Senate Permanent Subcommittee on Investigations, following that panel’s report that Apple has avoided tens of billions of dollars in U.S. tax liability through complex, lawful multinational structures. Cook was the latest head of a major technology company to face Senate scrutiny for its corporate tax behavior, after the same panel summoned Microsoft and Hewlett-Packard executives in September 2012.

Just as his competitors did before the same Senate panel last fall, Cook defended his company’s tax strategies as both legal and in his shareholders’ interests. Cook’s endorsement of corporate tax reform was more specific than the broad support Microsoft executive Bill Sample offered last year. But his support for lowered rates, closed loopholes, and doctrinaire reforms is unlikely to take the heat off the eye-popping tax behavior that inspired the hearing.

The panel’s investigation found, with Apple’s cooperation, that the company’s three Ireland-based subsidiaries “have no tax jurisdiction at all,” as The Guardian explains, allowing it to shelter tens of billions in sales from not just U.S. but all taxation.

The complex arrangement includes three subsidiaries, based ostensibly in Ireland, which appear not to be designated as tax resident anywhere, the committee said. A source on the committee called them “iCompanies – I for imaginary, invisible”.

The commitee said that the arrangement, described by one senator as “the epitome” of tax-avoidance schemes, allowed Apple to pay only very small amounts of tax on much of its overseas profits, thanks to the Irish companies that exist “nowhere” for tax purposes. […]

One of those Irish affiliates, Apple Sales International (ASI), reported sales income of $74bn over four years but paid hardly any tax. In 2011 ASI had pre-tax earnings of $22bn but paid just $10m in tax, a rate of 0.05%.

Citizens for Tax Justice says Apple is holding fully $102 billion in untaxed offshore cash. The Financial Times notes Apple is careful to maintain appearances, however. It’s reported tax rate of 25.2 percent for 2012 “is an accounting entry and has no effect on the actual amount of taxes paid,” which amount to more like a 15 percent effective tax rate.

Throughout the hearing, both senators and witnesses repeatedly acknowledged that Cook and his fellow executives are indeed operating within the law. The dispute is over how policymakers should respond to a corporate tax code so riddled with loopholes and bad incentives that Apple and other multinationals behave in this way. As corporations have manipulated the flaws in that tax code and payroll taxes have increased, working people have replaced companies as a primary source of tax revenue:

One response to the flawed corporate code, supported by many businesses, would be to offer a tax holiday on repatriated profits currently sheltered overseas. Congress tried such a holiday before, and it was a massive failure. Cook’s rejection of this approach was heartening, but the rote ‘simplification’ of the system he repeatedly endorsed amounts to what’s known as a territorial approach, whereby loopholes are closed and the tax code is rewritten such that companies pay U.S. taxes on U.S. revenues.

For all their simplicity, such territorial systems encourage an international race to the bottom on corporate taxation, as Europe has discovered. Last week, Bloomberg’s Jesse Drucker detailed the perverse corporate tax outcomes created by European policymakers who talk about making it harder to dodge taxes but whose policies actually make it easier.

Threading the policy needle between race-to-the-bottom territorial policy, tax holiday giveaways, and the current ineffective legal web is quite difficult. But economist Alan Auerbach has one idea, explained in a paper jointly published by the Center for American Progress and the Hamilton Project, that would seem to balance both government and corporate interests. Auerbach suggests that multinational companies pay their taxes only in the countries that use their products, so that moving money across borders doesn’t alter the taxes they owe in any given country. Tim Fernholz of Quartz explains that Auerbach’s idea strips “the ability to move US profits overseas” artificially, as present law has encouraged Apple to do. With a few other tweaks, this could make it more attractive to invest in the U.S.

So far, today’s hearing has not entertained this notion of destination-based taxation on multinational activity. But it’s the sort of Gordian Knot approach to a longstanding, costly policy tangle that might appeal to the head of a company that once made “Think Different” its global slogan.

Tech companies use a variety of techniques in order to drive their tax rates down into the single digits, even as they post billions in profits. Case in point, Apple paid just 1.9 percent tax rate on its overseas profits last year, according to the Associated Press:

Apple Inc. paid an income tax rate of only 1.9 percent on its earnings outside the U.S. in its latest fiscal year, a regulatory filing by the company shows.

The world’s most valuable company paid $713 million in tax on foreign earnings of $36.8 billion in the fiscal year ended Sept. 29, according to the financial statement filed on Oct. 31. [...]

Apple may pay some income taxes on its profit to the country in which it sells its products, but it minimizes them by using various accounting moves to shift profits to countries with low tax rates. For example the strategy known as “Double Irish With a Dutch Sandwich,” routes profits through Irish and Dutch subsidiaries and then to the Caribbean.

Apple is actually getting better at reducing taxes on its overseas money, as it paid a 2.5 percent rate on those earnings last year. The fact that these foreign earnings are not being taxed by any country, as Citizens for Tax Justice explained, likely means that “instead of being earned by real, economically productive operations in developed countries, [these] are actually U.S. profits that have been shifted overseas to offshore tax havens such as Bermuda and the Cayman Islands.”

If Apple actually paid the U.S. corporate tax rate on that money, “the resulting $17 billion tax payment would be more than double the $8.3 billion in federal taxes that Apple has paid on its $83 billion in worldwide profits over the last 11 years.” Of course, Apple is hardly alone in using legal techniques to avoid billions of dollars in tax payments to the U.S.

Just as Apple unveils the iPhone 5, its Chinese manufacturer, Foxconn Technology, is once again plagued with labor concerns. This time, the accusation is that it forced student interns to assemble iPhones, according to the New York Times.

Chinese state media reported several schools in the eastern city of Huai’an were closed so that hundreds of students could work on assembly lines to make up for worker shortages. About 32,000 students work in Foxconn factories, and shifts can last up to 12 hours. Though the company says students are free to go at any time, interns that spoke with labor advocacy groups said that was not the case and that their teachers forced them to work there. Students were told they would not graduate unless they worked and that it was “a good way to experience corporate culture.”

Labor advocates say Foxconn is under tremendous pressure to fill huge numbers of orders for devices like the iPhone 5 and that deadlines can only be met by adding workers. And Foxconn has a long history of labor abuses, which ThinkProgress has addressed before. Multiple investigations into its practices over the last few years — some of them commissioned directly by Apple — have found “illegal amounts of overtime, crowded working conditions, under-age workers, improper disposal of hazardous waste and, in some cases, industrial accidents.”

In 2010, an undercover report found:

New employees must sign a voluntary affidavit committing to between 60 and 100 hours of overtime each month — far more than the legal limit of 36 hours.

Workers claimed they stood so long their legs swelled up and they had difficulty walking.

Employees face more serious harm than swelled legs, however. Two explosions within 7 months at Foxconn factories killed four people and injured almost 80 in 2010. Employees also face serious health risks, and 137 were injured when they were forced to clean iPads with toxic chemicals. Perhaps not surprisingly, as many as 17 Foxconn employees committed suicide over the last five years — a trend that got so bad the company chairman sought the help of an exorcist.

Though years of bad press prompted some improvements, including reduced hours and higher pay, Foxconn’s work environment apparently remains “military-like,” and Apple is still relying on it to deliver the iPhone 5 successfully.

– Greg Noth

Before the stock market opened Monday, Apple was already the world’s most profitable tech company and it was already bigger than the entire American retail market on its own. By the time the market closed yesterday, the company had another feather to add to its cap: it is now the most valuable publicly-traded company ever, as its closing $665.15 share price gave it a market value of $623.52 billion, pushing it past Microsoft’s 1999 record number (though, adjusted for inflation, Microsoft’s value at the time was higher).

While Apple’s value — and its profits — have soared, the amount the company pays in taxes hasn’t. By utilizing low-tax states in the U.S. and offshore tax havens abroad, Apple has dodged billions of dollars in taxes over the last decade, including an estimated $2.4 billion in 2011 alone. The company paid a 9.8 percent tax rate in the U.S. in 2011 but just a 3.2 percent global rate, and the percentage it pays worldwide hasn’t exited single digits for more than a decade. As this chart from the New York Times shows, the amount Apple pays in taxes has remained relatively constant even as its profits have soared:

Those low tax rates aren’t enough for Apple, which has lobbied for tax breaks both at the state and federal level. California has passed four tax breaks aimed at tech companies since the 1990s; Apple lobbied for the last of those breaks, which could cost the state as much as $1.5 billion a year. It was also part of a coalition that lobbied Congress for a massive one-time corporate tax holiday that would allow it to bring its overseas profits home at a discounted tax rate, and it has admitted sending profits overseas to avoid American taxes.

Apple-style tax dodging comes at a cost to taxpayers and other American businesses. The California Public Interest Research Group estimates that corporate tax dodging cost the average taxpayer $434 in 2010. Citizens for Tax Justice, meanwhile, found that making up revenue lost to such tax dodging would cost each American small business $2,116 a year.