Republican Senator Charles Grassley of Iowa said new acting IRS Commissioner Daniel Werfel was the one who asked for Lerner’s resignation.

An IRS spokesman declined to comment on Lerner’s status, citing privacy concerns. However, an internal memo supplied by the agency named Lerner’s replacement.

An aide to Grassley said Werfel spoke with Grassley’s office on Thursday afternoon and conveyed the information.

A bipartisan chorus in Congress had been calling for her to go. Democratic Senator Carl Levin and Republican Senator John McCain had written to Werfel earlier on Thursday calling for her to be removed.

The move comes one day after Lerner refused to answer questions during a House of Representatives panel hearing into why workers in a Cincinnati, Ohio, field office of the IRS in early 2010 began targeting conservative groups for extra scrutiny when they applied for tax exempt status.

Lerner oversaw the tax-exempt division.

Lerner’s lawyer, William Taylor, did not immediately respond to a request for comment.

“From all accounts so far, the IRS acting commissioner was on solid ground to ask for her resignation,” Grassley said in a statement.

He also said that Lerner “shouldn’t be in limbo indefinitely on the taxpayers’ dime.”

On Wednesday, Lerner denied she had done anything wrong, but asserted her constitutional right against self-incrimination.

House Oversight and Government Reform Chairman Darrell Issa has accused Lerner of providing “false or misleading information” to his committee on four occasions last year.

Lerner was the official who first publicly acknowledged the targeting by responding to a planted question about the topic at an American Bar Association conference on May 10.

The admission came before a Treasury Department inspector general report found that workers in the Cincinnati office used “inappropriate criteria” such as the terms “Tea Party” and “Patriots” to target the applications of conservative groups for intense scrutiny.

Werfel, a White House budget official who officially started at the IRS on Wednesday, announced Lerner’s replacement in an employee memo on Thursday.

Ken Corbin, a deputy director in charge of the wage and investment division, will take over as acting director of the tax exempt organizations unit, Werfel said, without acknowledging Lerner.

Werfel himself took over for Acting Commissioner Steve Miller, who was fired by President Barack Obama over the controversy last week.

(Reporting By Kim Dixon and Rachelle Younglai; Editing by Karey Van Hall and Tim Dobbyn)

* Push on corporate tax rules goes global. Howard Schneider – The Washington Post. A global effort to tighten corporate tax rules is gaining momentum as politicians in Europe and the United States take aim at American tech giants whose savvy use of international tax laws has provoked a public backlash. Link    

* Europe pushes to shed stigma of a tax haven. Andrew Higgins – The New York Times. There is relentless pressures being piled on opaque money centers around the world amid a sweeping global assault on tax evasion and the secrecy that enables it. Link    

* Tax fairness top agenda at European summit. Gebriele Steinhauser and Sam Schechner – The Wall Street Journal. Faced with public outrage over tax-evasion scandals at a time of austerity budgets, European leaders pledged Wednesday to ensure that everybody—from high rollers to big multinationals—pay their fair share to cash-strapped governments. Link 

* From Google to FedEx: The incredible vanishing subsidiary. Jessica Holzer – The Wall Street Journal. Some of the biggest U.S. companies, including Google Inc. and FedEx Corp. have quietly removed hundreds of offshore subsidiaries from their publicly disclosed financial filings over the past several years. Link 

* Google defends taxes in face of Labour onslaught. Elizabeth Rigby – The Financial Times. Eric Schmidt defended Google’s tax practices on Wednesday and said the internet group would continue to invest in the UK “no matter what” after Ed Miliband, Labour leader, criticised the company for going to “extraordinary lengths” to avoid paying tax. Link

* CBO report: The pros and cons of carbon tax. Ryan Tracy – The Wall Street Journal. Instituting a carbon tax could help reduce the deficit and “produce incremental benefits” for the environment, but could also raise the cost of many goods and services, the nonpartisan Congressional Budget Office said in a report Wednesday. Link    

* Apple tax critics avoiding the truth. USA Today editorial. Apparently it has come to the attention of certain U.S. senators that Apple Inc. has been abiding by the law and acting in its shareholders’ best interests. Link    

* Here comes the sun. Joe Nocera – The New York Times opinion. Apple CEO Tim Cook spent Tuesday claiming that the sun was setting when it was actually rising, and, predictably, by the time the hearing had ended, most of the senators were agreeing with him. Link

* iDodge: Apple’s new killer product. Robert Shrimsley – The Financial Times opinion. Apple has found itself under fire for its tax-avoidance techniques which include the use of offshore havens, channelling profits through low-tax regimes such as Ireland. Link

* Remaining silent on the IRS. David Firestone – The New York Times opinion. Lois Lerner, the director of exempt organizations for the Internal Revenue Service, asserted her Fifth Amendment rights this morning when asked to testify before a House committee. Link

The frustration on Capitol Hill seemed to reach a crescendo on Wednesday when Lois Lerner, the Internal Revenue Service official who first acknowledged the targeting – and the day’s star witness before a House panel – refused to testify.

Lerner, whom lawmakers have accused of providing false information to Congress because she did not tell them about the problems in the office she leads before revealing them at a lawyers’ conference on May 10, told lawmakers that she had done nothing wrong.

She then invoked her constitutional right not to incriminate herself, and declined to answer questions.

“I have not broken any laws. I have not violated any IRS rules or regulations, and I have not provided false information to this or any congressional committee,” Lerner told the House Oversight and Government Reform Committee.

“Because I am asserting my right not to testify, I know that some people will assume that I have done something wrong. I have not,” she said.

The scene marked the latest in a series of failed attempts by lawmakers to pry details from high-level IRS officials about who precisely was responsible for targeting conservative groups that have sought tax-exempt status since 2010.

The scandal over what a Treasury inspector general called “inappropriate” targeting of groups with names that included terms like “Tea Party” and “Patriot” by the IRS has become a distraction for Democratic President Barack Obama as he pursues an ambitious second-term agenda.

And as Republicans in Congress seek to determine whether the White House might have had a hand in encouraging the extra scrutiny of populist groups that seek lower taxation and less government, the scandal has fueled Republicans’ portrayals of an indifferent, overreaching federal bureaucracy.

The Justice Department has opened a criminal probe into the targeting scandal.

On Wednesday, former IRS Commissioner Douglas Shulman, who unlike Lerner had appeared at a Senate hearing on Tuesday, again was asked who was behind the targeting done in the IRS office in Cincinnati, Ohio.

And again, Shulman said that he had no names to provide. Like outgoing acting IRS commissioner Steven Miller, whom Obama has fired, Shulman also rejected accusations that he had misled or lied to lawmakers about the matter.

“I answered truthfully based on the information that I had at the time,” Shulman said.

Shulman’s answers did not satisfy many lawmakers. “Either there was a cover-up or an extreme lack of curiosity on your part,” said Republican Representative Mark Meadows from North Carolina.

House Oversight Chairman Darrell Issa released documents including internal emails between Cincinnati workers and Holly Paz, an IRS director in Washington who led an internal review of the matter in 2012. They seem to confirm the Treasury inspector general’s conclusion that low-level employees came up with the controversial criteria.

“This is criteria the screening group came up with,” Cindy Thomas, a Cincinnati-based IRS employee wrote to Paz in a June 2, 2011 email.

‘THAT’S NOT THE WAY IT WORKS’

Issa and lawmakers on both sides of the aisle became exasperated that the officials on Wednesday provided so few answers about the scandal and whether there was a cover-up.

Lerner is seen as central to the scandal because she was alerted in June 2011 that the partisan criteria were being used, and she ordered them changed. They were then changed back in January 2012 to focus on the policy positions of organizations, but is it not clear who changed them.

Issa and other Republicans also questioned whether Lerner technically waived her Fifth Amendment right against self-incrimination by reading an opening statement declaring her innocence.

Republican Trey Gowdy of South Carolina demanded that she stay to answer questions, drawing applause from the crowd in the hearing room. “You don’t get to tell your side of the story and then not be subject to cross-examination. That’s not the way it works,” Gowdy said.

Lerner has hired high-powered Washington attorney William Taylor to help defend her against accusations from Issa that she provided “false or misleading” information to Congress last year about the IRS’ treatment of conservative groups.

Taylor, of the law firm Zuckerman Spaeder, told Reuters in an interview on Wednesday that there was no point in Lerner agreeing to answer lawmakers’ questions at the hearing.

“Why should she go up there and confront people who have already decided she has done something wrong?” Taylor said.

After conferring with aides, Issa dismissed Lerner from the hearing but said he might call her to testify in the future.

CONGRESS IN THE DARK

At Wednesday’s hearing, frustrated lawmakers repeatedly criticized former IRS chief Shulman and J. Russell George, the Treasury inspector general who published a watchdog report on the practice last week, for not alerting Congress to the practice earlier.

Democratic Representative Stephen Lynch of Massachusetts warned their failure to be more forthcoming could force the appointment of a special prosecutor to look into the scandal.

Issa noted that the IRS internal review uncovered the policy of scrutinizing conservative groups in May 2012 and that top officials, including Miller, were made aware of the findings but did not alert Congress for nearly a year.

He also questioned why George’s investigators looking into the targeting allowed IRS officials to be present during interviews with subordinates, and he criticized the inspector general for waiting 10 months to give the committee information on the targeting.

George said it would have been “impractical for us to give you partial information that may not be accurate.”

Shulman repeated testimony he gave at the Senate hearing on Tuesday that he did not know the full details of the targeting for two years after it started in 2010. Issa told Shulman, “If you didn’t know, you were derelict in your duty.”

Representative Elijah Cummings of Maryland, the ranking Democrat on the panel, criticized Shulman for not correcting congressional testimony he gave in March 2012 denying that targeting was occurring, after learning the results of the IRS internal review in May 2012.

“Why didn’t you ever come back to the Congress to explain that you were mistaken?” Cummings asked.

“I didn’t have all the facts, I didn’t know what was on the list, exactly how it was used,” Shulman said. He later acknowledged he “would have answered differently” in March 2012 if he had known what he did in May 2012.

Cummings also said the panel would like to hear from Daniel Werfel, the White House budget official who started on Wednesday as the new IRS head after Obama fired Miller last week.

Werfel is conducting a 30-day review of the IRS and is due to report back to Obama about how to correct failures that led to the targeting and how to hold IRS staff accountable for inappropriate actions.

(Additional reporting by Casey Sullivan; Writing by John Whitesides; Editing by Karey Van Hall and Tim Dobbyn)

“I have not done anything wrong. I have not broken any laws,” Lois Lerner, head of the IRS tax-exempt unit, told the House Oversight and Government Reform Committee.

“I have not violated any IRS rules or regulations, and I have not provided false information to this or any congressional committee,” she said. “Because I am asserting my right not to testify, I know that some people will assume that I have done something wrong. I have not.”

That Lerner chose to give an opening statement before asserting her Fifth Amendment right against self-incrimination angered some lawmakers.

Republican U.S. Representative Trey Gowdy from South Carolina said Lerner had effectively waived her Fifth Amendment right and demanded that she stay to answer questions.

House Oversight Chairman Darrell Issa, a California Republican, also said Lerner appeared to have waived her right, but dismissed her from the hearing as photographers surrounded her as she left.

Lerner is at the center of a scandal over the tax-collection agency’s use of search terms like “Tea Party” and “patriots,” to select groups for additional scrutiny.

The political firestorm over the scandal has undercut President Barack Obama’s second-term agenda as the president tries to negotiate a budget deal with Republicans and push a comprehensive immigration reform bill through Congress.

Lerner made the IRS targeting public on May 10, sparking investigations by three congressional committees and the Department of Justice.

Congressional investigators have said Lerner was the Washington official who learned in June 2011 that workers in a Cincinnati, Ohio, office were using inappropriate criteria and ordered them changed.

Issa has accused Lerner of providing “false or misleading” information to Congress last year about the IRS’ treatment of conservative groups seeking tax-exempt status.

Before Lerner’s appearance, Issa said an IRS internal review uncovered the policy of scrutinizing conservative groups in May 2012 and top officials, including outgoing acting IRS Commissioner Steven Miller, were made aware of the findings but did not alert Congress for nearly a year.

He also questioned why an inspector general looking into the targeting allowed an IRS official to be present during investigative interviews with subordinates, and criticized the inspector general for waiting 10 months to give the committee information on the targeting.

“That in fact is perhaps the greatest failing of an otherwise well-regarded inspector,” he said.

Issa said the employees in the IRS tax-exempt unit “could have and should have been a whistleblower” on the targeting.

(Writing by John Whitesides; Editing by Karey Van Hall and Doina Chiacu)

The Senate Permanent Subcommittee on Investigations has found that Apple in 2012 alone avoided paying $9 billion in U.S. taxes, using a strategy involving three offshore units with no discernible tax home, or “residence.”

Cook, in his first congressional testimony since becoming Apple CEO in 2011, said his company is a major taxpayer, handing over nearly $6 billion in cash to the U.S. government in 2012.

“We expect to pay even more this year,” Cook said. “We pay all the taxes we owe.”

But Senator Carl Levin, chairman of the subcommittee and a veteran tax sleuth, said Apple had sought “the Holy Grail of tax avoidance,” creating one Irish unit that paid no income taxes to any national tax authority for the past five years.

Levin said Apple used Ireland as a base for a web of offshore holding companies and negotiated a deal with the Irish government for a tax rate of less than 2 percent. The top U.S. corporate tax rate is 35 percent, one of the world’s highest.

Cook said Apple did not depend on tax gimmicks. “We don’t move intellectual property offshore and use it to sell our products back to the United States to avoid taxes. We don’t stash money on some Caribbean island,” he said.

In Ireland, where low corporate taxes have been an economic development tool for many years, the government said it had not made a special tax deal with Apple. If Apple’s tax rate was too low, it was the fault of other countries, deputy prime minister Eamon Gilmore told national broadcaster RTE on Tuesday.

White House spokesman Jay Carney said on Tuesday that President Barack Obama “thinks it is inexplicable that our tax code would actually be written in a way that rewards companies for taking jobs and profits offshore.”

HP, MICROSOFT PRECEDED APPLE

Subcommittee staffers said on Monday that Apple was not breaking any laws and had cooperated fully with the inquiry.

Levin’s panel has previously examined what it called tax avoidance by other U.S. technology giants, including Hewlett-Packard Co and Microsoft Corp. The senator said Apple has used similar tax avoidance strategies.

Senator John McCain praised Apple as a success story, but he said the company’s tax strategy reflected a “flawed” tax system.

“For years, Apple has opted to forego fully contributing to the U.S. Treasury and to American society by shifting profits and circumventing U.S. taxes,” McCain said.

Cook said Apple agreed with those in Congress who want to reform corporate taxes and called for changes that include lower corporate income tax rates and a reasonable tax on foreign earnings.

“Apple recognizes these and other improvements in the U.S. corporate tax system may increase the company’s taxes,” he said in prepared testimony.

Many U.S. multinationals take advantage of a tax law that allows profits earned abroad to be tax-free as long as they are not brought into the United States, or “repatriated.” Total U.S. corporate profits parked offshore rose 15 percent to $1.9 trillion last year, according to research firm Audit Analytics.

Taking advantage of this law and others, the offshore earnings of U.S. companies have risen 70 percent in the past five years, Audit Analytics said two weeks ago.

“The baldness of the Apple strategy surprises me more than anything else,” said University of Southern California Law Professor Edward Kleinbard. “European member states are going to be very angry with Apple and very angry with Ireland.”

OFFSHORE MANEUVERS

Offshore profits are typically taxed by the countries in which they are earned, but companies work hard to move offshore profits into countries with lower tax rates, like Ireland.

One way this is done is through “transfer pricing,” or the management of moving goods and services across international borders from one corporate unit to another. Sometimes companies move valuable intellectual property to a low-tax country, then bring profits derived from its use into that country through royalty payments and other structures.

Levin’s panel said Apple used a cost-sharing agreement “to transfer valuable intellectual property assets offshore and shift the resulting profits to a tax haven jurisdiction.”

Assessing taxes on these arrangements is one of the biggest challenges facing U.S. tax collectors, said Mark Mazur, assistant secretary for tax policy at the Treasury Department, who testified after Cook.

The panel also said Apple took advantage of loopholes in tax law and regulations known as “check the box” and “look through” that let some offshore units be disregarded for tax purposes, sheltering substantial profits from taxation.

Levin has unsuccessfully called for closing the “check the box” and “look through” provisions of the tax code.

The Levin inquiry comes at a turbulent time in tax circles, with the U.S. Internal Revenue Service under investigation because of the way agents handled conservative political groups’ applications for tax-exempt status.

It is not clear, however, whether that controversy and Levin’s allegations will lead to an overhaul of the U.S. tax code. Tax law writers in Congress had been inching forward on such a project before the IRS scandal erupted earlier this month. Levin’s inquiry has been under way for months.

Shares of Apple closed down 0.7 percent at $439.66 on Tuesday.

(Additional reporting by Roberta Rampton in Washington, Tom Bergin in London, Conor Humphries in Cork, Padraic Halpin in Dublin; Writing by Kevin Drawbaugh; Editing by Lisa Von Ahn and Tim Dobbyn)

The hearing marked another foray by the Senate’s most powerful investigative committee into corporate offshore tax avoidance, which is increasingly a target of many governments from the United States to Western Europe.

Senator Carl Levin, who has led several probes into offshore tax issues as chairman of the Permanent Subcommittee on Investigations, said Apple shifted billions of dollars in profits offshore to avoid U.S. taxes on a massive scale.

In 2012 alone, Levin said, Apple avoided paying $9 billion (5 billion pounds) in U.S. taxes.

Apple CEO Tim Cook said at the hearing that his company was a major U.S. taxpayer, handing over nearly $6 billion in cash to the federal government in 2012.

“We expect to pay even more this year,” Cook said in his first congressional testimony since becoming CEO in 2011.

“We pay all the taxes we owe,” he said. “We don’t depend on tax gimmicks. We don’t move intellectual property offshore and use it to sell our products back to the United States to avoid taxes. We don’t stash money on some Caribbean island.”

Cash-strapped governments worldwide are trying to wring more tax revenue from companies whose interests in many countries enable them to shift capital and assets across borders. Critics say the companies exploit tax loopholes. (Video factbox: r.reuters.com/qej38t)

MCCAIN FAULTS TAX SYSTEM

“Closing these kinds of unjustified loopholes could provide hundreds of billions of dollars to reduce the deficit and avert damaging budget cuts,” Levin, a Democrat, said at the hearing.

“We should close them and dedicate the revenue that generates to these important priorities, whether or not we reform the overall tax code,” he said.

Senator John McCain praised Apple as an American business success story, but he said the company’s tax strategy reflected a “flawed” tax system.

“For years, Apple has opted to forego fully contributing to the U.S. Treasury and to American society by shifting profits and circumventing U.S. taxes,” McCain said.

Levin’s panel issued a report saying that Apple used three subsidiaries with no “tax residency” in Ireland, where they are incorporated, or in the United States, where corporate executives manage those companies.

The main subsidiary, a holding company that includes Apple’s retail stores throughout Europe, has not paid any corporate income tax in the last five years, the subcommittee said.

The Levin inquiry comes at a turbulent time in tax circles, with the U.S. Internal Revenue Service under investigation because of the way agents handled conservative political groups’ applications for tax-exempt status.

It is not clear, however, whether that controversy and Levin’s allegations will lead to an overhaul of the U.S. tax code. Tax law writers in Congress had been inching forward on such a project before the IRS scandal erupted earlier this month. Levin’s inquiry has been under way for months.

Subcommittee staffers said on Monday that Apple was not breaking any laws and had cooperated fully with the inquiry.

Shares of Apple were down 0.2 percent at $442.10 in midday trading.

(Writing by Kevin Drawbaugh; Editing by Lisa Von Ahn)

“Apple effectively shifts billions of dollars in profits
offshore, profits that under one section of the tax code should
nonetheless be subject to U.S. taxes, but through a complex
process avoids those taxes,” said Senator Carl Levin.

Apple Chief Executive Tim Cook was slated to testify to the
subcommittee at the hearing, along with other senior executives
of the company.

As chairman of the Senate Permanent Subcommittee on
Investigations, Levin frequently dives into complex tax issues.
His latest probe targets one of America’s most successful
companies, with a powerful global brand.

Offshore tax avoidance by multinational companies has become
a high-profile issue. Cash-strapped governments worldwide are
increasingly focused on wringing more tax revenue from
corporations that often have interests in many countries and
easily shift capital and assets across national borders.

The Levin inquiry comes at a turbulent time in tax circles,
with the U.S. Internal Revenue Service under investigation over
targeting by IRS agents of conservative political groups.

The impact of that controversy and Levin’s allegations on
the potential for a thorough overhaul of the U.S. tax code were
hard to predict. Tax law writers in Congress had been inching
forward on such a project before the IRS scandal erupted earlier
this month. Levin’s inquiry has been under way for months.

Levin urged closing “unjustified tax loopholes” like those
he said Apple used to avoid $9 billion in U.S. taxes in 2012.

“Closing these kinds of unjustified loopholes could provide
hundreds of billions of dollars to reduce the deficit and avert
damaging budget cuts,” said Levin, a Democrat, at the hearing.

“We should close them and dedicate the revenue that
generates to these important priorities, whether or not we
reform the overall tax code,” he said.

Senator John McCain praised Apple as an American business
success story, but he said that Apple’s corporate tax strategy
“reflects a flawed corporate tax system.”

The former Republican presidential nominee said, “It is a
system that allows large multinational corporations to shift
profits offshore to low-tax jurisdictions.

“For years, Apple has opted to forego fully contributing to
the U.S. Treasury and to American society by shifting profits
and circumventing U.S. taxes.”

Subcommittee staffers said on Monday that Apple was not
breaking any laws and had cooperated fully with the inquiry.

On Monday, Apple said in a comment posted online that it
does not use “tax gimmicks.” It said the existence of its “Apple
Operations International” unit in Ireland does not reduce
Apple’s U.S. tax liability and the company will pay more than $7
billion in U.S. taxes in fiscal 2013.

At the hearing, Levin’s subcommittee issued a 40-page
memorandum focused on explaining allegations that Apple used
three subsidiaries with no “tax residency” in Ireland, where
company executives manage those companies.

The main subsidiary, a holding company that includes Apple’s
retail stores throughout Europe, has not paid any corporate
income tax in the last five years, the subcommittee said.

In a 40-page memorandum released a day before Apple CEO Tim
Cook is scheduled to testify before Congress, the Senate’s
Permanent Subcommittee on Investigations identified three
subsidiaries that have no “tax residency” in Ireland, where they
are incorporated, or in the United States, where company
executives manage those companies.

The main subsidiary, a holding company that includes Apple’s
retail stores throughout Europe, has not paid any corporate
income tax in the last five years.

The subsidiary, which has a Cork, Ireland, mailing address,
received $29.9 billion in dividends from lower-tiered offshore
Apple affiliates from 2009 to 2012, comprising 30 percent of
Apple’s total worldwide net profits, the report said.

“Apple has exploited a difference between Irish and U.S. tax
residency rules,” the report said.

Apple said in a comment posted online on Monday it does not
use “tax gimmicks.” It said the existence of its subsidiary
“Apple Operations International” in Ireland does not reduce
Apple’s U.S. tax liability and the company will pay more than $7
billion in U.S. taxes in fiscal 2013.

Subcommittee staffers said on Monday that Apple was not
breaking any laws and had cooperated fully with the
investigation.

CODE OVERHAUL SOUGHT

Tuesday’s hearing is the second to be held by Senator Carl
Levin, a Michigan Democrat and chairman of the subcommittee, to
shed light on the weaknesses of the U.S. corporate tax code.
Levin has sought to overhaul the code in Congress.

Lawmakers globally are closely scrutinizing the taxes paid
by multinational companies. In Britain, Google faces regulatory
inquiries over its own tax policies, while Hewlett-Packard Co
and Microsoft Corp have been called to Capitol
Hill to answer questions about their own practices.

Corporations must pay the top U.S. 35-percent corporate tax
on foreign profits, but not until those profits are brought into
the United States from abroad. This exception is known as
corporate offshore income deferral.

In submitted testimony ahead of Tuesday’s hearing, Apple
said any tax reform should favor lower corporate income tax
rates regardless of revenue, eliminate tax expenditures and
implement a “reasonable tax on foreign earnings that allows free
movement of capital back to the US.”

“Apple recognizes these and other improvements in the U.S.
corporate tax system may increase the company’s taxes,” it said.

Large U.S. companies boosted their offshore earnings by 15
percent last year to a record $1.9 trillion, avoiding hefty tax
bills by keeping the profits abroad, according to research firm
Audit Analytics.

TAX SCRUTINY

Apple also uses two conventional offshore tax practices
typical of multinational companies’ tax-avoidance strategies,
the report said.

Multinational corporations value goods and services moving
across international borders from one corporate unit to another.
Known as “transfer pricing,” these moves are frequently managed
to reduce corporations’ global tax costs.

Apple’s tax structure highlights flaws in the U.S. corporate
tax code so that Congress “can effectively close the loopholes
used by many U.S. multinational companies,” Arizona Senator John
McCain, the subcommittee’s top Republican, said in a statement
on Monday.

Levin, who announced he will retire at the end of 2014,
introduced legislation in February to close tax loopholes. At a
news conference on Monday, Levin said his bill should pass
independent of any broader tax reform push in Congress.

McCain, the top Republican on the subcommittee, told the
joint news conference he would co-sponsor Levin’s bill, the
first Republican to support the bill. He called Apple’s tax
practices “egregious, and (a) really outrageous scheme.”

Similar legislation has been introduced in the House of
Representatives.

Government tax officials from the Internal Revenue Service
and Treasury Department also are scheduled to testify before the
subcommittee on Tuesday.

In a 40-page memorandum released a day before Apple CEO Tim
Cook is scheduled to testify before Congress, the Senate’s
Permanent Subcommittee on Investigations identified three
subsidiaries that have no “tax residency” in Ireland, where they
are incorporated, or in the United States, where company
executives manage those companies.

The main subsidiary, a holding company that includes Apple’s
retail stores throughout Europe, has not paid any corporate
income tax in the last five years.

The subsidiary, which has a Cork, Ireland, mailing address,
received $29.9 billion in dividends from lower-tiered offshore
Apple affiliates from 2009 to 2012, comprising 30 percent of
Apple’s total worldwide net profits, the report said.

“Apple has exploited a difference between Irish and U.S. tax
residency rules,” the report said.

Ahead of Tuesday’s hearing, Apple said on Monday it does not
use “tax gimmicks” and that the company will pay more than $7
billion in U.S. taxes in fiscal 2013.

Apple defended the main subsidiary highlighted by the
subcommittee’s report, saying it does not reduce Apple’s U.S.
tax liability, the company said in a comment posted online as
part of Tuesday’s prepared remarks.

Subcommittee staffers said on Monday that Apple was not
breaking any laws and had cooperated fully with the
investigation.

CODE OVERHAUL SOUGHT

Tuesday’s hearing is the second to be held by Senator Carl
Levin, a Michigan Democrat and chairman of the subcommittee, to
shed light on the weaknesses of the U.S. corporate tax code.
Levin has sought to overhaul the code in Congress.

In September, the subcommittee scrutinized the offshore tax
structures of Microsoft Corp and Hewlett-Packard
. Committee staffers said they did not find similar
subsidiaries set up for stateless tax bills at those two
companies.

Apple also uses two conventional offshore tax practices
typical of multinational companies’ tax-avoidance strategies,
the report said.

Multinational corporations value goods and services moving
across international borders from one corporate unit to another.
Known as “transfer pricing,” these moves are frequently managed
to reduce corporations’ global tax costs.

Corporations must pay the top U.S. 35-percent corporate tax
on foreign profits, but not until those profits are brought into
the United States from abroad. This exception is known as
corporate offshore income deferral.

Apple’s tax structure highlights flaws in the U.S. corporate
tax code so that Congress “can effectively close the loopholes
used by many U.S. multinational companies,” Arizona Senator John
McCain, the subcommittee’s top Republican, said in a statement
on Monday.

Levin, who announced he will retire at the end of 2014,
introduced legislation in February to close tax loopholes. So
far, the bill does not have any Republican co-sponsors. Similar
legislation has been introduced in the House of Representatives.

Government tax officials from the Internal Revenue Service
and Treasury Department also are scheduled to testify before the
subcommittee on Tuesday.

More than a week after a mid-level IRS employee apologized publicly for IRS agents’ use of terms such as “Tea Party” and “patriots” to target groups’ applications for tax-exempt status, Congress was preparing for two days of hearings on the matter.

Lois Lerner, chief of the IRS tax-exempt unit, was scheduled to testify on Wednesday to a Republican-controlled investigative committee of the House of Representatives, along with other officials. Lerner’s apology for the IRS targeting on May 10 at a legal conference in Washington set off the furor.

President Barack Obama fired acting IRS Commissioner Steven Miller on Wednesday. Some lawmakers, both Democrats and Republicans, are calling for Lerner to go next, as the scandal continues to unfold, distracting Obama from his second-term legislative agenda.

U.S. Representative Sander Levin called for Lerner’s resignation on Friday, saying she had recently testified to a House subcommittee and failed to disclose what she knew about the targeting. “This is wholly unacceptable,” he said.

Levin is the top Democrat on the House Ways and Means Committee, which writes tax law and oversees the IRS.

Republican Vern Buchanan, another member of the panel, last week called for Lerner to be dismissed.

Joseph Grant, acting commissioner for the IRS tax-exempt and government entities division and Lerner’s boss, said last week that he will retire.

“I don’t see how Lois makes it. It’s saddening to me,” said Philip Hackney, assistant law professor at Louisiana State University who worked until 2011 at the IRS with Lerner. “She is nonpartisan; I say that with great confidence.”

A woman who answered the phone at the IRS exempt organizations division last week said Lerner was on leave.

She canceled an appearance on Saturday at the Western New England University School of Law.

TWO HEARINGS AHEAD

Lerner was scheduled to testify on Wednesday to the House Oversight and Government Reform Committee alongside Deputy Treasury Secretary Neal Wolin, former IRS Commissioner Douglas Shulman and Treasury Department Inspector General for Tax Administration J. Russell George.

On Tuesday, George, Miller and Shulman were set to testify before the Democrat-controlled Senate Finance Committee.

As the IRS scandal as widened, Republicans have focused on what officials knew about the targeting and when they knew it. George’s watchdog group, known as TIGTA, last week called the targeting inappropriate in an investigative report.

The report showed that the targeting got under way in mid-2010. In 2011, Lerner was told about how the practice was being handled at a Cincinnati field office. She halted the use of the controversial key words, but lower-level employees by January 2012 had resumed using them.

The TIGTA report found no evidence of political motivation for the targeting or of any White House involvement.

Still, at the first congressional hearing on the matter last Friday, Republicans made clear they are looking beyond the IRS.

“This appears to be just the latest example of a culture of cover-ups and political intimidation in this administration,” Republican House Ways and Means Chairman Dave Camp said on Friday.

Democratic Senate Finance Committee Chairman Max Baucus and top committee Republican Orrin Hatch on Monday requested documents on possible White House involvement and sought nearly 300 tax-exempt status applications delayed by the targeting.

Baucus and Hatch also asked for documentation of any disciplinary action taken, and whether some lawmakers’ calls for the IRS to crack down on tax-exempt groups played any role.

(Additional reporting by Nanette Byrnes and Susan Heavey; Editing by Kevin Drawbaugh and Doina Chiacu)