Is there a fishing expedition going on?

Having read the Commission letter through it is clear that the game has moved to a different pitch.  The key issue is not the 1991 transfer pricing arrangement or its subsequently revision in 2007.  Yes, there was little objective basis for the 65/20 margins used and there was no reference to the arm’s length principle and the arrangement seemed to be reverse engineered, but there is nothing in the EC letter to say that the margins used were wrong and led to taxable income figures that were significantly out of line if a more careful and objective approach was taken in line with OECD standards (which weren’t introduced here until 2010). 

There is no doubt the 1991 advance pricing arrangement (APA) was put together in a pretty arbitrary manner as indicated by the minutes and notes taken by the Revenue official but that was as much the nature of the regime at the time rather than any special or preferential treatment to Apple.  The detailed nature of the records kept suggest it was not unusual.

Can it be argued that similar arrangements were not put in place for other companies?  APAs on a cost-plus basis for entities that engage in the activities attributed to the Apple’s Irish operations are not unusual. 

Apple Operations Europe:
– the "manufacture of a specialised line of personal computers."
-  providing "shared services to Apple companies in Europe, the Middle East and Africa (EMEA) region, including payroll services, centralised purchasing and a customer call centre."

Apple Sales International:
– the "procurement of Apple finished goods from third-party manufacturers"
– the "onward sale of those products to Apple-affiliated companies and other customers"
– "logistics operations involved in supplying Apple products from the third party manufacturers to Apple-affiliated companies and other customers."

Manufacturing, shared services, procurement and logistics are not high-profit activities.  The Commission can argue that the 65/20 cost-plus margins in the 1991 APA and the updated margins in the revised 2007 agreement were "wrong" but they are unlikely to result in a material difference to the amount of tax Apple would have had to pay in Ireland.  In monetary terms, any finding here would be relatively insignificant.

It is pretty clear that the issue has moved on and that these transfer pricing arrangements are no longer central.  The key issue is Apple’s intellectual property, or more precisely, the location of Apple’s intellectual property.

If we look at the five items requested by the Commission in June letter published this week none of them relates to the pricing agreements.  The information requested was:

– Provide the financial accounts of ASI and AOE for the period 2004-2013, in particular the P&L accounts.
– In the case of ASI single out in the P&L the amount of passive income each year and specifying if such passive income comes from Ireland.
– Provide the number of full time equivalent employees (hereinafter “FTE”) of ASI and of AOE over the same period (each end of reporting period).  Provide the FTE of the Irish branch of ASI and of AOE for the same period (each end of accounting period).
– Provide the cost sharing agreement between Apple Inc., ASI and AOE in all its variations since 1989 until the last modification.
– Describe in detail the type of intellectual property covered by the cost sharing agreement.

It is clear the Commission are focusing on the ASI subsidiary as a whole and not just its Irish branch.  The key issue is whether any of the intellectual property rights held by ASI are located in Ireland.   Last year’s US Senate report contained a good deal of information on ASI. The post continues below the fold with a a selection of quotes relating to ASI, and its parent AOE, in the Senate report.

The first is Apple Sales International (ASI), an entity that has acquired certain economic rights to Apple’s intellectual property.

Apple entered into a cost-sharing agreement with two of them, Apple Operations Europe (AOE) and its subsidiary, Apple Sales International (ASI). Under the terms of the cost-sharing agreement, Apple’s Irish affiliates shared Apple’s research and development costs, and in exchange, were granted the economic rights to use the resulting intellectual property.

Apple Inc. is the sole owner of the legal rights to Apple intellectual property. Through a cost-sharing arrangement, Apple Inc. owns the economic rights to Apple’s intellectual property for goods sold in the Americas, while Apple’s Irish affiliates, Apple Sales International (ASI) and its parent, Apple Operations Europe Inc. (AOE), own the economic rights to intellectual property for goods sold in Europe, the Middle East, Africa, India, and Asia (“offshore”).

The key roles played by ASI and AOE stem from the fact they are parties to a research and development cost-sharing agreement with Apple Inc., which also gives them joint ownership of the economic rights to Apple’s intellectual property offshore.  Although AOE and ASI jointly participate in the cost-sharing agreement with Apple Inc., the bulk of Apple’s offshore earnings flow to ASI.

As part of its duties, ASI contracted with Apple’s third-party manufacturer in China to assemble Apple products and acted as the initial buyer of those finished goods. ASI then re-sold the finished products to ADI for sales in Europe, the Middle East, Africa, and India; and to Apple Singapore for sales in Asia and the Pacific region. When it re-sold the finished products, ASI charged the Apple affiliates a higher price than it paid for the goods and, as a result, became the recipient of substantial income, a portion of which ASI then distributed up the chain in the form of dividends to its parent, AOE. AOE, in turn, sent dividends to AOI .

the cost sharing agreement gives ASI the rights to the “entrepreneurial investment” profits that result from owning the intellectual property.

The cost-sharing agreement is structured as follows. In the agreement, Apple Inc. and ASI agree to share in the development of Apple’s products and to divide the resulting intellectual property economic rights. To calculate their respective costs, Apple Inc. first pools the costs of Apple’s worldwide research and development efforts. Apple Inc. and ASI then each pay a portion of the pooled costs based upon the portion of product sales that occur in their respective regions. For instance, in 2011, roughly 40 percent of Apple’s worldwide sales occurred in the Americas, with the remaining 60 percent occurring offshore. That same year, Apple’s worldwide research and development costs totaled $2.4 billion. Apple Inc. and ASI contributed to these shared expenses based on each entity’s percentage of worldwide sales. Apple Inc. paid 40 percent or $1.0 billion, while ASI paid the remaining 60 percent or $1.4 billion.

The figures disclose that Apple’s Irish subsidiary, ASI, profited more than twice as much as Apple Inc. itself from the intellectual property that was largely developed in the United States by Apple Inc. personnel.

When interviewed, Apple officials could not adequately explain why ASI needed to acquire the economic rights to Apple’s intellectual property in order for each to conduct its business. In fact, prior to Apple’s reorganization in 2012, ASI had no employees. All business decisions were made by ASI’s board of directors, which was composed primarily of Apple Inc. employees and held its meetings in Cupertino, California. Apple’s CEO, Tim Cook, told the Subcommittee staff that, during his time as Chief Operating Officer of Apple, he was unable to recall any instance where the ownership of intellectual property rights affected Apple’s business operations.

Technically, as a result of Apple’s cost-sharing agreement, Apple Inc. owns all of the intellectual property rights (both legal and economic rights) embedded in the CPUs used in the Americas, and ASI owns the intellectual property economic rights for the CPUs used in rest of the world.

The Commission don’t care about the transfer pricing; they are going after the intellectual property.  ASI is a US-based company that has an Irish branch.  [Yes, it is Irish-incorporated but that is not an important factor when determining tax liabilities.]  There is nothing to indicate that it was the Irish branch that acquired ASI’s intellectual property but that is what the Commission is going for. 

It is also looking at the cost-sharing agreement between three US-based companies: Apple Inc. and its subsidiaries ASI and AOE.  It is not immediately clear what this has to do with the amount of tax Apple pays in Ireland.  The agreement pays for R&D activity that takes place in the US which generates intellectual property assets that are held in the US. 

There is an increasing resemblance to a fishing expedition.  Have a look at the transfer pricing arrangements.  They seem to be done on a fairly unsystematic basis but throw up nothing that is unusually preferential for Apple.  Throw a blanket over intellectual property and make a request for further information and see if anything turns up there.

There is nothing to indicate that Apple moved any intellectual property to Ireland.  On AOE and ASI the Commission letter says (pages 8 and 9):

No rights in relation to the IP concerned are attributed to the Irish branch of AOE.


No rights in relation to the Apple IP concerned are attributed to the Irish branch [of ASI].

So, if no IP rights are attributed to the Irish branches of AOE and ASI, and the Commission say as much, what are the fishing for?  There is nothing to indicate the R&D was paid for from Ireland; there is nothing to indicate the resultant intellectual property was held in Ireland; there is nothing to indicate the income earned by the IP flowed to Ireland.

When talking about AOE, ASI (and also AOI) Sen. Carl Levin said:

In short, these companies’ decision-makers, board meetings, assets, asset managers, and key accounting records are all in the United States. Their activities are entirely controlled by Apple Inc. in the United States.

If these companies have IP assets in Ireland then we are really at the races (the billions) but there is no need for Apple to transfer these IP assets to Ireland with the resultant risk that the income earned by those assets could be subject to Irish tax [and note that this income could be subject to the 25% rate rather than the 12.5% rate].  All Apple needs to do to defer the US corporate income tax is to hold the IP in Irish-incorporated companies; it does not have to actually move the IP to Ireland.

Anyway, it is clear the game has moved on to the intellectual property, but similar to the transfer pricing arrangements it seems unlikely to catch much. 

I wonder how Apple feels about the EU Commission rummaging through its US affairs.  It would be interesting to know how the co-operation with this investigation has been since this request for the information about the IP was made in June.  It would have been pretty easy for the Department of Finance to co-operate with the requests for information on the transfer pricing arrangements – that would mostly have been available from the Revenue Commissioners. 

However, they won’t have had the financial accounts for AOI and ASI and they definitely don’t have all the cost-sharing agreements Apple Inc. has entered with its US-based subsidiaries or have the details of the US-held IP that resulted from them.  The Irish government cannot give information that it does not have and we don’t know if Apple is willing to provide it.

32 replies on “Is there a fishing expedition going on?”

@Seamus Coffey

You are probably (as distinct from possibly) on the ball …

There is simply ‘no-way’ that Apple Inc. will provide the EU Commission with specific detail on its ‘global business strategy’ wrt Intellectual Property (IP), brand, and other intangibles …

Congress will huff an puff but do zilch …

If you are on the ball, then this will be the 2nd time that the EU/EZ has used Ireland as a test-tube case – the first, of course, being Angela’s/Financial_System motivated horrendous Austerity Experiment …

We, The Citizenry, are not only being ‘farmed’ – we are also being played.

How to strike back?

@ Seamus Coffey

Is there a fishing expedition going on? Is there a conspiracy?

Of course you can find one if you try.

Your post has lots of speculation but piecing together a system of Byzantine complexity presumably requires a lot of information to rule out and in what is relevant to establishing a valid network.

Apple’s share of profits it reports in the US is lower than the share of its sales even though its high cost activity is in the US – wonder why?

It also exaggerates its effective US tax rate in its accounts.

It may seem inconsequential but for example how Apple with margins of over 40% on its iPhones can arrange a loss of €18m on revenues of €268m in its retail outlets in Germany, is also part of untangling the system.

“I wonder how Apple feels about the EU Commission rummaging through its US affairs.”

Check with BNP Paribas – at least the eurocrats will not threaten to ban Apple from EU markets.

@ Seamus Coffey

I haven’t disputed that most of the IP is in the US.

This is a red herring issue and as I said above, the EC can request information related to IP to check the validity of allocation of profit and R&D charges.

Tim Cook’s own explanation wasn’t very convincing.

“Apple reports virtually all its profit in the United States” – so you say but Apple doesn’t say that and it’s main Irish company has been both offshore and onshore when it suits.

Apple Inc.: “The foreign provision for income taxes is based on foreign pre-tax earnings of $30.5 billion, $36.8 billion and $24.0 billion in 2013, 2012 and 2011, respectively.”

Apple took advantage of lax or zero Irish and US regulation to avoid having addresses for it’s Irish offshore companies in a law firm’s office in Hamilton, Bermuda such as Google.

So no need for routing funds via Amsterdam.

As I said elsewhere AOI, the principal Irish company and leading foreign subsidiary, was tax compliant before it became ‘stateless’ and this sham arrangement to you means that although about 61% of Apple’s revenues come from overseas, most of its profits are “reported” in the US.

In effect this arises from engineered losses in many of its foreign markets and rather than wondering what Ireland may gain in back tax, other countries that have been scammed, may well ask for paybacks.

As Prof John Kay said: “It is disingenuous for companies to claim they pay the tax legally due when their assessments are based on accounts that defy economic and business realities.”

@ MH,

The only country being scammed here is the US and most of it is of its own making. Of course, Apple’s accounts defy business reality. The accounts are a sham but the EC is investigating Ireland; not Apple.

The EC have shone the spotlight on Hollyhill but have come up with little. They are now turning to Cupertino. It is not clear that this is within their remit.

We can crib about Ireland’s residency rules but they cannot confer preferential treatment. This is a competition investigation not a tax investigation.

The point about Google and Bermuda is useful because we can see the effect of that arrangement in Ireland’s economic statistics. The sums in Apple are even larger yet we do not see the effect of them.

On what basis could other countries ask for paybacks? Just because a country has Apple customers doesn’t mean Apple owes corporate income tax to that country. Apple owes corporate income tax to the US and has engineered a structure that allows it to avoid paying a large part of it (around half). If anyone has granted state aid to Apple it is the US.

Lot of good stuff in your post Seamus, I note in particular your point in relation to location of IP assets.

I think many would ascribe Apple’s market-leading success and advantage to their design aesthetic and brand – key attributes selling to consumers and backed up by slick marketing and advertising. Apple’s software and engineering IP in the traditional (technology) sense, while strong is no longer market-leading, and reflects the relatively low level of cash/turnover that they invest in it.

In this regard, is Apple much different to say Nike or Levi Strauss – who equally differentiate themselves on design and brand? Are these non-tech US companies allowed to do the same tricks with IP (not transfer pricing) to avoid paying taxes either in US or elsewhere.

re: Paragraph 45, and footnote 19 of the Commission letter:

I note that the country comparisons for APA (Advance Pricing Arrangements) information supplied, on which the commission relies on heavily in its letter, is substantiated (if that is the word) by a 2006 German Ministry of Finance report that seems to have received it information from a PWC report.
[PWC would never have produced the kind of information thay believed they were being paid to produce, would they!!! The Irish government and citizens could tell a tale about how much PWC reports are worth.] Note also the wording of the UK response in paragraph 45.

“International Transfer Pricing 2013/2014, PwC and Information on bi-or multilateral mutual agreement procedures under double taxation agreements for reaching Advance Price Agreements (“APA”) aimed at granting binding advance approval of transfer prices agreed between international associated enterprises, 5 October 2006, German Federal Ministry of Finance”

Also note the wording in table for all countries, but particularly France and Poland.

When you have the accused on the operating table, any knife will do to make an incision, even a PWC knife.

Of course, it is fishing expedition, a politically motivated one.

But could we have a few fishing expeditions on how major chemical companies have discreet non compete, nod and wink, arrangements as to which products (of the various companies) will dominate in different countries.


cf the heated debates about Airbus, state aid, and rather generous contracts to Boeing, McD & the rest from the Pentagon.

The last week on Apple has really been about PR, journalists, and politics. Compared to a few years ago it has been a totally one-sided event. In the past there would have been a stream of pundits using terms like “wealth creators”, “trickle down”, “taxation just stifles innovation” etc and a sense that the grown-ups all understood that getting tax and government out of the way the right thing to do.

The ordinary guy who half listens to this stuff on the radio or glances at a headline is no longer open to those arguments and much of the traditional PR response has been deemed not worth wheeling out.

@ Seamus Coffey

Many denizens of conventional wisdom have been shocked by the pace of movement within two years in making reform of international business tax rules inevitable.

It was taboo just a short while ago to question the setup in Ireland – jobs were at stake and 1) the EU veto on tax harmonisation 2) political gridlock in Washington DC, made change unlikely.

Just last month Joe Hockey, the conservative Australian Treasurer said the world now needs to take a global approach to go after tax cheats, who have to be left with nowhere to hide while George Osborne, his British counterpart, said technology companies “that go to extraordinary lengths” to cut their tax bills will be hit with new anti-avoidance rules.

You say: “Apple owes corporate income tax to the US and has engineered a structure that allows it to avoid paying a large part of it (around half).

Let’s see how this works.

Apple’s global profit per employee before tax in 2012 was one of the highest in the world for a listed company at $725,000 and its foreign corporate tax rate was 1.9%.

Now how could it achieve this when the effective corporate tax rate in the big foreign markets where it operated was in the 20s?

What you benignly call a “structure” when seen in the light of day was a gaming of the system that in other areas of business would be termed a fraud.

Irish shell companies that were unilaterally declared as having no tax jurisdiction were used to siphon out funds tax free from markets such as Australia and Germany.

Previously the main one operated as a tax resident company.

The cost -sharing arrangements were arranged by Apple Inc. employees with themselves.

The shell companies were presented to tax jurisdictions as normal Apple companies based in Cork and given the facts that have emerged in recent years these jurisdictions can review the basis of charges to create losses or very low profits – – some of the charges obviously cannot be justified on a commercial basis.

That is a common sense judgement.

You say: “The EC have shone the spotlight on Hollyhill but have come up with little. They are now turning to Cupertino. It is not clear that this is within their remit.”

This distinction is irrelevant and the focus will be how $37bn in foreign profits (Apple’s data) could be moved around via likely questionable charges from Irish shell companies to cut the tax liability to 1.9%.

It will be grand was the prevailing attitude and now US companies will fear that Brussels could get transcripts of meetings on tax.

There is certainly a huge discrepancy between actual profit and declared taxable profit: The profit margin on Apple products sold is approximately 37-38%, as can be seen from their annual accounts. 60% of global Apple sales are vectored through Ireland and the declared taxable income there, accounts for a profit margin below 0.2%! (see footnote on page 17 of EC letter).

I think the EC have a pretty good case but the real scandal is how the US Check-the-Box rule and Irish law combine to allow tax avoidance on such a scale:

Apple Operations International, Apple Operations Europe and Apple Sales International are incorporated in Ireland but have no liability to pay any tax. The US Check-the-Box rule allows a foreign corporation to not exist for tax purposes, so there are no reciprocal tax treaties and the corporation is not eligible for tax anywhere in the World! This allowed Apple to avoid tax on $44bn of earnings in the 3 years before May 2013!

@ JR

The entire motivation of the EU is political. Complaining about the fact is the equivalent of a swimmer complaining that the water is wet. It is no accident that the three countries in the firing line – Luxembourg, Netherlands and Ireland, in that order – are the three with the most “imaginative” tax policies which other countries view as predatory largely because they cannot match them (but are busy trying to do so e.g. the UK “patent box”). What matters is whether their actions are within agreed treaty and legislative agreements between the countries that make up the EU.

The bottom line is what the countries of the EU have signed up to in the matter of taxation. The answer is; not very much. If and when there is agreement that a common fiscal framework be constructed i.e. on a federal basis, the situation might change. There is no sign of this happening.

As SC points out, the only approach allowable by the Commission in the present instance is in the context of competition. This cannot be pushed into areas where the countries of the EU have not given it a remit.

Since last Friday the AAPL share price is essentially flat and has marginally outperforemd the S&P500. Those clever people who run valuation models on the company have had 3 days to factor in x multi billion payouts to somebody to reduce the EV of AAPL and or the PV of its future cash flows. Thus far nothing!

Maybe they don’t read the FT or maybe they are not as smart as we think or maybe they think that all the hyper-ventillation by internet bloggers is not worth a “bucket of warm spit” to misquote John Nance Garner


Why confine the “hyper-ventilation” to internet bloggers (which presumably do not include those advocating a deep breath and calm)? The treatment by the English-language media – including in Ireland – has been almost totally “breathless”.

“Those clever people who run valuation models on the company have had 3 days to factor in x multi billion payouts to somebody to reduce the EV of AAPL and or the PV of its future cash flows…”

My understanding is that it is “Ireland” who is being investigated. A fine, if any, would be “Ireland’s” to pay. We have not been very adept at recouping mega-millions in other instances, where it matters. Specifically past private investors in banks, and the proposed ‘selling’ back of future bank profits to the private sector with no liability attaching for bail-out monies.

Perhaps the clever people who do valuations realize that once a sucker, always a sucker as far as Ireland is concerned. Be in no doubt that the EC Commission think that way.


“The Commission wishes to remind Ireland that Article 108 (3) of the Treaty on the Functioning of the European Union has suspensory effect, and would draw y our attention to Article 14 of Council Regulation (EC) No 659/1999 35 , which provides that all unlawful aid may be recovered from the recipient.”

From MH.

Also if AAPL had to disgorge “billons” it would also have to stop doing whatever it was doing so driving up its tax rate. So in theory the stock price would have to be down big time. But no it is down about 1% since Friday


yes, there has been a enough hot air expended on this topic to run the undersoil heating in the K-club.

@ Seamus Coffey

“What does Apple do in Australia and Germany that means it should pay corporate income tax there? Seriously.”

Seriously what?

Foreign companies shouldn’t pay tax?


The interesting and the Commission is targeting the most tax competitive countries.

How low should taxes on business and dividends go in a time of stagnant pay?

The Dutch corporate tax rate is 25%.

Maybe the internal market rules didn’t envisage that a company like
Google could book all its EU sales in one country and then transfer most of the profits tax free to Bermuda?

@ tullmcadoo

Apple has more than $164bn in cash – it’s not going to run short anytime soon.

@ MH

Constantly mixing up topics simply detracts from these exchanges. The point is that the Commission is there to represent the “general interest” of the EU and if it has a view that “imaginative” tax planning by certain countries is going outside the the agreed competition rules, it has an obligation to intervene. That the view is widely shared by other EU countries is obviously an important element of the overall picture. It will be for the new commissioner in charge – from Denmark – to oversee the pursuit of the various dossiers. And to ensure that the Commission stays within its remit.

@ MH,

Foreign companies shouldn’t pay tax?

Companies should pay tax where they generate their profits. All companies. All profits. All tax.

So again. What does Apple do in Australia and Germany that means it should pay corporate income tax there?

bit off thread – but important …

IBEC’s Myth Debunking is Just Bunk September 30, 2014, Michael Taft

IBEC has published a paper entitled ‘Debunking Irish income tax myths’

At its core it contains misleading, highly selective and ultimately disingenuous arguments. In short, it is bunk. Let’s go through one of their main arguments and see where they are misinforming the debate.What IBEC Doesn’t Want you to Know – the ultra-low-tax on Employers

IBEC bangs the tax-cutting drum because they want to keep out of the debate the fact that employers and businesses (their members) pay ultra-low tax rates compared to other EU countries.

[…] Irish employers pay the lowest rate of social insurance in the EU – only ahead of Denmark which doesn’t have a social insurance system. Employers’ PRSI would have to nearly treble to reach the EU-average – or an extra €8 billion. Now you know why we don’t have the public services and income supports that other countries have.

Important in terms of upcoming budget ….

@Seamus Coffey

“If anyone has granted state aid to Apple it is the US.”


Nowhere did I suggest that AAPL would run short of cash. I was pointing out that the market has not applied a haircut to the share price based on the requirement that it disgorges some of past it’s past profits or earns less in future due to a higher tax rate.
The clever people who own most of AAPL shares seem relaxed about this.
Strange given the hyper ventilation of the commentariat.

@ Seamus Coffey

So again. What does Apple do in Australia and Germany that means it should pay corporate income tax there?

This is ostensibly a serious question but repeating it again seems a stupid to me.

So in respect of Australia, Apple Pty Ltd sells the firm’s widgets and is a highly profitable operation and while Apple has a world price, there are variations and the price of the iPhone 6 (ex-sales tax) is 9% higher than the US market price.

Apple Pty Ltd has annual revenues of about A$5bn, transferred A$2bn to the Irish company Apple Sales International in 2013 to cover a charge for “intangibles” and reports a net margin of less than 2%.

The Australian Tax Office (ATO) thinks the level of the transfer to ASI is a scam and it has been aggressively investigating 8 e-commerce firms since 2013 and it has sought information from clients such as banks, retailers and telcos to test claims made by the companies.

The Australian Financial Review reports that the ATO is expected to put its staff members permanently in the offices of companies such as Apple and Google and it is also expected to issue new assessments for several of the eight e-commerce companies by early 2015, covering the past four tax years.

Complaints that have been made to the US Treasury by companies have had no impact as the government strongly supports the ATO.

In summary, Apple’s foreign sales net margin in 2012 was 39% but in Australia, it was less than 2% as was the total foreign tax rate.

Two years ago, I bet you didn’t expect that the FT would be reporting something like this 😯 😥 :

Danny McCoy, chief executive of Ibec, the employers’ lobby, says: “We are defending ourselves all the time over something that brings no benefits whatsoever to the vast majority of Irish companies.” He says it is “inevitable” that measures such as the Double Irish will be closed down. “If you know you are going to have to close it down, do it.”

I made the same point before most people heard of these schemes.

@ tullmcadoo

I like Apple’s products and for the next decade at least it has some key advantages and it does not have to be No 1 in smartphones:

1) It is one of the small number of companies that can sell at a world price (in China where state media was criticising Starbucks’ prices, apparently the customers were happy that prices were high)

2) Apple meets two of Warren Buffett’s key criteria a) a high moat b) “a durable competitive advantage.”

@ MH,

Do you really think that if an independent retailer was selling Apple devices in Australia they would be able to do so at a margin of 40%? Come on.

If the ATO thinks the margins are incorrect they can challenge them at any time they wish. They don’t need an aggressive investigation. They have all the documents. But there are two sides to every transfer pricing agreement. If the other side is in another country a challenge can come from that end.

And anyway the ATO isn’t really investigating TP margins; they are investigating the circumstances in which companies have permanent establishments, i.e. a taxable presence, in Australia. The definition of PE is set out in bilateral tax treaties that Australia has signed so again there isn’t a lot they can do on their own unless companies are breaching existing rules.

Apple’s retail operation in Australia should have comparable margins to other retailers. It is odd to suggest that Apple is engaged in a scam by not declaring a 40% margin for retailing when no other retailer would have a margin anywhere close to that. A margin different to comparable retailers would be illegal under Australian law. Are you suggesting that Apple should break the law?

The issue with IP is not necessarily the margins applied to it; the issue is locating IP in jurisdictions where the companies have no real presence. This will hopefully be addressed by the BEPS project.

The “double-irish” is a sub-set of the same problem. The profits end up in no-tax jurisdictions where the companies have no presence. The problem I see for Ireland making a move against it is that any change will, at best, be limited in its effectiveness. A change might be announced in a move against the “double-irish” but the effectiveness of such schemes is unlikely to be reduced. There is nothing Ireland can do about the zero percent rate in Bermuda or the deferral provisions in the US tax code. If the tax profession and business lobbyists are recommending a change we can be sure that the last thing that will result will be these companies paying more tax!

What is needed is internationally-agreed changes to the principles of transfer pricing, to the definition of permanent establishment and to the linking of profits with substance. Hopefully we are moving towards that but there is a long way to go yet.

@ Seamus Coffey

Apple itself says it has a net foreign profit of 39-40% – I didn’t suggest retail should have such a margin but creating a loss in its own stores operations across Germany is questionable??

Just wondering: Apple’s own companies that are national distributors should report about 2% margin (that’s what Apple’s target is in Australia) and China where the product is assembled, and US should get the biggest shares?

Google? Pay most corporate tax in US and so on.

These companies would still want to hire people with education, rely on public security and so on.

You ask if I want Apple to break the law but you tend to cherry pick the issues you respond to.

The good thing is that Pascal Saint-Amans and his team at OECD have avoided getting bogged down in a myriad of minor issues.

@ MH,

Profit margins of Carphone Warehouse for the last three years

2011: 3.8%
2012: 4.1%
2013: 3.7%

The margins are tight so a loss would not be that unusual if there was once-off factors.

If this is a question: “Apple’s own companies that are national distributors should report about 2% margin (that’s what Apple’s target is in Australia) and China where the product is assembled, and US should get the biggest shares?” my answer is that retailing and manufacturing electronic devices are not very profitable activities. Innovating, designing, branding and marketing a product that people are willing to pay way over the cost of is where the value for the company is created. Apple should declare most of its profit where ever that happens.

Not sure what education and public security have to do with it. If countries want to collect tax from the sale of these products they can use sales taxes.

Pascal Saint-Amans is doing great work but let’s see if he can get it over the line.

@ Seamus Coffey

Comparing Carphone Warehouse a struggling reseller that is mainly a price taker in a UK market with many of them as well as carriers, with the operation of Apple as the national distributor, which is a very different type of operation, is ridiculous.

CW and Dixons had to hook up in midyear and recently a carrier with staff of over 5,000 collapsed.

Turning from the micro stuff, the reality today is that the big picture was missed by Irish policy makers and their cheerleaders.

When policy makers only take advice from people who agree with them and never consider downside scenarios, trip-ups are inevitable.

@ MH,

Can you provide us with the names of some successfull resellers in this market? Maybe the problems for CPW and the like is the price Apple charges them when providing them with Apple products to sell. Are you suggesting Apple should charge its in-house retail division a different price to the one it charges independent resellers? Your position on many of these things lacks consistency.

This week’s “trip-up” was a 1991 transfer pricing agreement that was put together in a haphazard and poor fashion. I’m not sure what current policy makers could do about something that happened 23 years ago. Apart from the 1991 agreement there is little else the EC letter finds objectionable. That is perhaps why they are still fishing.

@ Seamus Coffey

There is a misunderstanding here and it’s better to leave it.

1) I’m referring to Apple UK covering distribution, retail, marketing, support etc as I did in respect of Apple Pty Ltd, Australia – not one area.

2) On the big picture, I was thinking of FDI policy not 1991.

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