(Bloomberg) Apple Inc. Chief Executive Officer Tim Cook will face off against U.S. senators leveling accusations the iPhone maker has created a web of offshore entities to avoid paying billions of dollars in U.S. taxes.

Cook and two other executives—including Chief Financial Officer Peter Oppenheimer—appear at 9:30 a.m. Washington time before a Senate panel that yesterday released a report saying the company’s subsidiaries include three entities that have no home country for tax purposes.

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” Democratic Senator Carl Levin of Michigan, chairman of the Senate Permanent Subcommittee on Investigations, said at a news conference yesterday.

“Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.”

The world’s most-valuable technology company has $102 billion in offshore accounts and shifted billions in profits out of the U.S. into affiliates based in Ireland, where it negotiated a tax rate of less than 2 percent, according to a report by the panel.

The offshore entities of the Cupertino, California-based company have paid little or no tax in recent years, the report said.

Company Response
One Apple affiliate—Apple Operations International—generated net income of $30 billion between 2009 and 2012. It declined to declare a tax residence, filed no corporate tax return and paid no income taxes to any nation, the report said. AOI is Apple’s principal offshore holding company.

A hearing today will give company executives their first chance to publicly respond, while lawmakers from both parties get to grill them about tax strategies. The shares fell 0.7 percent to the equivalent of $439.61 at 10:57 a.m. in Frankfurt trading after closing at $442.93 yesterday in New York.

Cook’s appearance is unprecedented for Apple, whose co-founder and former CEO Steve Jobs never testified before Congress. In addition to Oppenheimer, Phillip Bullock, Apple’s head of tax operations, will testify.

In prepared testimony posted on its website yesterday, Apple defended its practices, saying it paid $6 billion in U.S. taxes last year and is one of the country’s largest taxpayers.

Risk, Reward
Apple’s cash is largely held in U.S. banks in dollar-denominated assets, segregated into a portion that can be used for domestic operations and a portion that can be used only for international investments, the company said. The company doesn’t use foreign subsidiaries or gimmicks to avoid U.S. taxes, said the testimony.

The company also said the Irish subsidiaries, which are cost-sharing arrangements, have helped fund Apple’s research and development activities and taken on risks, leading to bigger profits and higher-paying jobs in the U.S.

“This balance of risk and reward is precisely what was contemplated by the U.S. Treasury regulations governing cost sharing agreements,” Apple said. The company also said it supports a broader overhaul of the U.S. tax system.

Ireland has a corporate tax rate that applies to all companies, Irish Deputy Prime Minister Eamon Gilmore told reporters in Brussels today.

“Ireland has a very strong, very transparent tax regime,” Gilmore said. “There are problems in other jurisdictions. Those problems are going to have to be addressed. Any international loopholes that exist have to be closed off.”

Cozy Relationship
The committee has been examining companies that use various maneuvers to reduce their tax bills, including Microsoft Corp. and Hewlett-Packard Co.

Apple has said in filings with the U.S. Securities and Exchange Commission that it has $40.4 billion in earnings outside the U.S. on which it hasn’t paid U.S. taxes. If Apple brought that money back to the U.S., the company would owe $13.8 billion, according to the filings.

The panel’s report is designed to be a “case study” of how a company is able to pay an effective tax rate much lower than the 35 percent U.S. corporate rate, according to staff members on the subcommittee.

The bipartisan probe found Apple, through cost-sharing arrangements, has transferred offshore the profits powered by economic rights to its patents and other intellectual property—aspects like licensing and sales. At the same time, the legal rights to its patents remain in the U.S., the panel found.

No Employees
Apple’s relationship with the offshore affiliates isn’t arms’ length, the probe found.

One of the Irish entities, Apple Sales International, before 2012 had no employees, and two of its three directors are Apple Inc. employees located at its California headquarters. All 33 ASI board meetings between May 2006 and March 2012 took place in Cupertino, the report found.

ASI buys Apple’s finished products from a Chinese manufacturer, resells them at a higher price to Apple affiliates and retains the profits, the report said.

From 2009 to 2012, the ASI arrangement facilitated a shift of about $74 billion in global profits away from the U.S., the report said, and the entity paid little in taxes worldwide. In 2011, ASI’s pretax earnings were $22 billion, and it paid $10 million in taxes—a tax rate of 0.05 percent.

The report said Apple benefits from part of the so-called “check-the-box” tax regulations. Those rules allow dividends, royalties and other fees of lower-tiered subsidiaries to avoid IRS scrutiny because they can be marked as “disregarded” and no longer considered separate entities. The “passive income” paid by the subsidiaries to a higher-tiered parent company effectively disappears, the report said.

Using this method, Apple avoided paying $9 billion in U.S. taxes in 2012, the report found.

Lawmakers in both parties are seeking a bipartisan agreement on how to tax income that U.S.-based corporations earn outside the country. Democrats and Republicans on the panel say Apple’s tax maneuverings, while not illegal, will help frame the debate about how to make the corporate tax system more fair.

Senator John McCain of Arizona, the panel’s top Republican, said he and Levin are seeking to craft a bipartisan proposal that would end some of the tax benefits, although the timing of an agreement isn’t clear. He said both parties in Congress should seek to address the matter, even if it isn’t in the context of a broad rewrite of the tax code.

“When you see egregious behavior like this, why wait?” McCain said.

—With assistance from Adam Satariano in San Francisco, Richard Rubin in Washington and Jones Hayden in Brussels. Editors: Elizabeth Wasserman, Bernard Kohn

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