Author: Seamus Coffey

Available here.

This year the DEW, kindly sponsored by the Dublin Chamber of Commerce, will be held at the River Lee Hotel in Cork City on Friday and Saturday, the 17th and 18th of October. This year’s programme is here.

All bookings and reservations for the event can be made from here.

This is the 37th DEW annual conference and will begin with a number of parallel sessions on Friday afternoon.  Over the two days there will presentations across a range of topics from 35 people including policymakers, academics, commentators and members of the business community. 

On Friday evening Jerry Dwyer of Clemson University will give a plenary session on ‘quantitative easing’ while the final session on Saturday will be a panel discussion on ‘fiscal policy for the long haul’ and will include a contribution from Robert Watt, Secretary-General of the Department of Public Expenditure and Reform. 

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 document is here.

There is a lot in it and the extracts here just focus on one element of it: a 1991 transfer pricing agreement that was done on a cost-plus basis, i.e. the profit attributed to the Irish operation was based on the costs incurred by the Irish operation.  This is not an unusual transfer pricing basis and, as expected, the amounts involved are relatively small, i.e. not billions.

The quirk is the structure of the agreement. For example the 1991 agreement for Apple Operations Europe was  [from paragraph 31]:

According to that ruling, the net profit attributable to the AOE branch would be calculated as 65% of operating expenses up to an annual amount of USD [60-70] million and 20% of operating expenses in excess of USD [60-70] million.

In the notes of a meeting (attendees not provided) it was said that (paragraph 37):

Following further discussions it was agreed that, subject to receiving a satisfactory outcome to the capital allowance question, to accept a mark-up of 65% of the costs attributable to the Irish branch. In addition it was agreed to accept a mark-up of 20% on costs in excess of $[60-70]m in order not to prohibit the expansion of the Irish operations.

On the two margins applied the Commission notes the following (paragraph 63):

Second, the margin on branch costs agreed in the 1991 ruling, as described at recital (31), is either 65% or 20% depending on whether the operating costs are below or above USD [60-70] million. According to the excerpt at recital (37), the reduction of the margin after a certain level above USD [60-70] million would have been motivated by employment considerations, which is not a reasoning based on the arm’s length principle. In particular, the two margins of 20% and 65% are relatively far apart and, should the margin of 65% effectively constitute an arm’s length pricing, the margin of 20% would be unlikely to fall within the same range of pricing, while applying the same degree of prudence.

There are other elements as well including transfer pricing for some intellectual property that can be explored in the document.