“I think it’s important that we tell our story,” Apple CEO Tim Cook told the Senate’s Permanent Subcommittee on Investigations today. “I’d like people to hear it from me.” That seemed a daunting task, since the story the senators wanted to hear was why Apple (AAPL) avoided paying at least $74 billion in U.S. taxes between 2009 and 2012 by shifting its intellectual property overseas. Yet over the next three hours, Cook spun a tale worthy of Mark Twain and emerged not only intact but unscathed. No one laid a glove on him.
The facts as they were framed in a report from the subcommittee were hardly flattering. Apple didn’t just avoid paying U.S. taxes, didn’t just stash its IP in Europe, but actually took advantage of international tax laws to create what are in effect stateless entities that are not required to file tax returns anywhere in the world — an achievement the subcommittee chairman Carl Levin characterized as “the holy grail of tax avoidance.” Nevertheless, besides a few tense exchanges with Levin toward the hearing’s end–exchanges that Cook mostly ducked–Apple’s representatives emerged in far better shape than they had any right to expect. And Cook, in particular, shone. I counted ten reasons why he fared so well:
1) Flattery. Cook mentioned repeatedly how much he admired the committee’s ranking member, Sen. John McCain, laughed at the senators’ tired jokes, and addressed all of his inquisitors as “sir.”
2) Reframing. Early on, McCain was the most aggressive questioner, and several times tried to get Cook to agree that Apple’s tax practices appeared to be unfair and left smaller domestic competitors, unable to avail themselves of low international tax rates, at a disadvantage. Cook, projecting earnest sincerity, gently but firmly disagreed, saying he just did not view it that way, and insisting that Apple’s tax practices were reasonable and fair.
3) Submission. In an obvious attempt to blunt criticism that the committee had unfairly targeted Apple, McCain asked Cook whether he felt that he had been “hauled” before the Senate and whether he hadn’t actually chosen to testify himself. Cook politely assented to this and added (with a straight face) what a pleasure it was for him to be present and have the opportunity to “share Apple’s story.”
4) Star Wattage. McCain lauded Cook’s “toughness” and wondered, with towel-snapping jocularity, “Why the hell I have to keep updating the apps on my iPhone all the time?” Sen. Ron Johnson lauded “your excellent products.” Sen. Claire McCaskill burbled about “the many thousands of dollars you’ve gotten from me.” Even Levin whipped out his iPhone and bragged about his granddaughter’s prowess with it. You don’t see star-struck senators when Halliburton (HAL) executives are testifying.
5) Weak Questioners. Cook had a far better grasp of tax policy–not just Apple’s taxes, but tax policy generally–that almost every member of the committee. He was well-prepared. Senators such as McCaskill, who posed vague, meandering questions, were not.
6) No Wrongdoing. It’s much easier to ace a Senate hearing when you haven’t broken the law, conducted rogue tax audits, or failed to secure a U.S. compound in the Middle East. Apple has broken no laws. And lest anyone misunderstand this, Sen. Kelly Ayotte teed up this softball for Cook: “Is there any dispute that you have complied with our tax laws?” Cook: “I’ve heard no dispute.”
7) Math is Hard. “This is kinda complicated,” McCaskill stammered, as she wound her way through a long, rambling question about whether the profits Apple earned from her “many thousands of dollars” in purchases wound up overseas. (Answer: they did not.)
8) Shared Goals. Cook repeatedly invoked the need to reform the corporate tax code, a goal shared by every senator. Cook’s written testimony proposed merely a “reasonable” tax rate on repatriated profits, but he went a bit further at the hearing, suggesting “a single-digit number” would be appropriate. The senators ate it up. “We’re living with a tax code that’s a relic of the 1960s,” Ohio Sen. Rob Portman said, all but dispensing with Cook in order to pitch his own plan for tax reform. “We need to do tax reform now.” Apple’s CFO, Peter Oppenheimer, picking up on this current, piped up with his own complaint: “The tax return I sign each year is two feet tall or greater.”
9) Media Misunderstanding. The hearing was widely billed as a clash between Apple and Congress. But the real focus of attack wasn’t Apple or Cook–it was the U.S. corporate tax code. Apple was called because the company employs a tactic that Levin is trying to highlight and change: creating offshore holding companies that avoid paying taxes because they have no tax residence. This caused some obvious discomfort for Apple. But the company itself was never the target.
10) Knowing When to Keep Quiet. The hearing’s moment of drama came at the end, when Levin grew frustrated with the Apple executives’ refusal to agree that the company had shifted its intellectual property to three Irish subsidiaries in order to avoid U.S. taxes (which it clearly had). “What is going on is a huge loss in revenue for the United States,” he said. “The purpose here today is to shed a light on that.” Levin’s smoking gun was a document Cook and two other executives had signed in 2008 laying out this arrangement. But to Levin’s mounting frustration, the Apple executives insisted that this was a pro forma continuation of practices that have been in place for three decades. As Levin worked himself into a lather, Cook fell silent and let his colleagues absorb the brunt of the criticism–establishing once again that part of being a successful CEO is knowing when to keep quiet.
