Full Witness List (and streaming info) for Senate Hearing on Apple Tax is Out

ImageThe Senate’s Permanent Subcommittee for Investigations has published the full witness list for next week’s hearings into Apple’s tax system, and it seems to be focused on transfer pricing.  We already knew that Apple CEO Tim Cook would testify, but the witness list also includes CFO Peter Oppenheimer and Head of Tax Phil Bullock.

In addition to the three Apple executives, the PSI will hear from two Law Professors and from two IRS representatives(including an expert on Transfer Pricing).  The list of witnesses is on the PSI web site, here.

Transfer pricing is the system by which related entities buy and sell from one another, and the requirement in the tax code is that the transfer price must be equivalent to the price that two unrelated parties would reach in a negotiated setting.  For example, when a company manufactures a product in the US but sells it to a subsidiary in Europe (for ultimate resale by the European subsidiary to an end customer), the price should be what that company would sell the same product to an unrelated distribution partner.

This is important because the transfer price allocates how much profit is made by each of the related entities, which means how much tax is paid in each jurisdiction.  In our simple example, it would determine how much profit (and tax bill) the company had in the US and how much profit (and tax bill) in the European subsidiary.

Of course, the huge problem is that it is very difficult to prove what a price would be between unrelated parties when there are no such transactions.  The company has incentives to find evidence that sets the transfer price to have maximum profits in the country with the lower tax rate and minimum profits in the country with the higher tax rate, because that results in the lowest blended tax rate.  The IRS (and tax authorities in other nations) have incentives to argue for a transfer price that results in higher profits (and thus a higher tax bill) in their own country.

Transfer pricing is a huge issue for all companies that expand to international businesses.  I have had to deal with transfer pricing as a CFO and as a COO, and many times as a board member.

The hearing is scheduled to start at 9:30 am Tuesday, May 21.  CSPAN will be streaming it live, it will be available here.  Later, replays should be available from the Subcommittee and from CSPAN: here and here.

I plan to be glued to CSPAN that morning.


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